Targa Resources Corp (TRGP) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Targa Resources second quarter 2014 earnings webcast.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Jennifer Kneale.

I'd like to welcome everyone to our second quarter 2014 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 at www.targaResources.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; Rene Joyce, Executive Chairman; 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 2014 results to prior period results as well as providing additional color on our results, business performance and other matters of interest including revisions to our 2014 financial outlook.

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, 2013, and quarterly reports on Form 10-Q. With that, I will turn it over to Joe Bob.

Thanks, Jen. Welcome and thanks to everyone for joining. Following our customary format, I will start off with a high level review of our second quarter 2014 performance highlights, then Matt will review the Partnership's consolidated financial results, its segment results and other financial matters for the Partnership. Matt will also cover key financial matters related to Targa Resources Corp.

Following Matt's comments, I will provide some concluding remarks that will include an update on our 2014 financial outlook and our outlook for growth capital projects and expenditures. Then Rene would like to say a few words about the second part of the press release concerning management changes and will add his perspectives on the business outlook. Then we will take your questions.

Our second quarter adjusted EBITDA was $226 million, as compared to $126 million for the second quarter of last year. Yes, the financial reporting accountants assure me that it really does round to $100 million as an increase over the second quarter last year. This 79% increase was driven by record quarterly operating margin in the logistics and marketing division and record quarterly operating margin in the gathering and processing division.

Logistics and marketing operating margin was 104% higher than the second quarter of 2013. And the G&P division operating margin was 42% higher.

The Field Gathering and Processing segment produced operating margin of $98 million, representing an increase of 45% versus the second quarter of 2013. This margin increase was primarily driven by the combination of a number of factors, including significantly higher oil and gas throughput volumes and significantly higher year-over-year contribution from Badlands.

Continued strong producer activity and increased throughput in other Field Gathering and Processing areas. And just beginning to benefit from the startup of commercial operations at our 200 million cubic feet per day Longhorn plant in North Texas in May and our 200 million cubic feet per day High Plains plant at SAOU in June.

The logistics asset segment produced quarterly operating margin of $109 million, up 108% compared to last year, primarily driven by higher LPG export activity and higher fractionation activity. We benefited from additional capacity from our Phase 1 expansion at Galena Park export facility completed last September and from increasing operational capabilities as we continue to complete stages of our Phase 2 expansion over this year.

In the first quarter, we completed a new pipeline between Mont Belvieu and Galena Park. Early in the second quarter at Galena Park, we added refrigeration and completed construction of another dock capable of handling VLGCs. The last piece of the Phase 2 expansion is the addition of a another deethanizer at Mont Belvieu which will be completed in the third quarter of 2014.

Operating margin from our Marketing and Distribution segment was 95% higher in the second quarter of 2014 than the same time period last year, primarily as a result of the increase in LPG export activity. Our distributable cash flow for the quarter of $175 million resulted in distribution coverage of approximately 1.4 times, based on our second quarter declared distribution of $0.78 or $3.12 on an annual basis. The Partnership's second quarter distribution represents a 9% increase compared to the second quarter of 2013.

If we look at it at the TRC level, the second quarter dividend of $0.69 or $2.76 annualized represents a 30% increase compared to the second quarter of 2013. It was a very good quarter. Since our last call, I'm happy to say that S&P recently raised our credit rating for the Partnership to BB plus, one notch below investment grade.

Before I pass it to Matt, I want to thank Rene and Roy on behalf of the management team and to thank them on behalf of our investors. As these two men retire at the end of the year, we all owe them a lot for the legacy they helped create at Targa. Speaking personally, it has been an honor and a privilege to have worked with these two men for the last 12 years or so.

I also want to thank Jim Weiland for returning to the role of Executive Chairman of both Boards. Along with the rest of the executive team and all of Targa's senior leadership, Jim and I are proud to continue the Targa legacy. That wraps up my initial comments, and I will hand it over to Matt.

Thanks, Joe Bob. I'd like to add my welcome and thank you for joining our call today.

As mentioned, adjusted EBITDA for the quarter was $226 million compared to $126 million for the same period last year. The increase was primarily the result of higher LPG export activity and fractionation activity in our logistics and marketing division, a higher contribution from Badland and higher volume throughput in our Gathering and Processing division.

Overall operating margin increased 64% for the second quarter compared to the same time period last year. I will review the drivers of this performance in the segment reviews. Net maintenance capital expenditures were $19 million in the second quarter of 2014 compared to $19 million in the second quarter of 2013.

Turning to the segment level. I will summarize the second quarter performance on a year-over-year basis and will start with the Gathering and Processing segments.

Field Gathering and Processing operating margin increased by 45% compared to last year, driven by higher natural gas inlet volumes, higher crude oil gathering volumes, and higher natural gas and NGL prices. Second quarter 2014 natural gas plant inlet volumes for the Field Gathering and Processing segment were 903 million cubic feet per day, a 13% increase compared to the same period in 2013. The overall increase in natural gas inlet volumes was due to increases in each of the following business units: 87% at Badlands, 23% in North Texas and 14% at SAOU.

Inlet volumes at Versado and Sandhills were essentially flat versus the same period last year, as a result of some operational issues, but we expect growing going forward. And as you probably know, Sandhills is essentially full, but we are taking steps to provide additional short-term and longer term capacity to handle significant activity in and around the system, including a previously discussed new pipeline now called the Midland County pipeline connecting to SAOU's new High Plains plant.

Versado is also seeing significant producer activity and growing volumes and has available processing and treating capacity for that growth. As mentioned, our Longhorn plant in North Texas began commercial operations in May, and our High Plains plant in SAOU began in June.

Producer activity in North Texas and especially the Permian Basins is exceeding our previous expectations of volume growth. Crude oil gathered increased to 84,000 barrels per day in the second quarter, a 119% increase versus the same time period last year, and highlights our continued progress in North Dakota. For the field gathering and processing segment, NGL prices increased by 12%, natural gas prices increased by 9%, and condensate prices were essentially flat in the second quarter of 2014, compared to the second quarter of 2013.

Turning now to the Coastal Gathering and Processing segment, operating margin increased 31% in the second quarter, compared to the same time period last year. The increase in operating margin was a result of new volumes with a higher GPM at VESCO including volume from Shell's Mars B development in the Gulf of Mexico and from higher GPM volumes at Lou.

For the segment, natural gas prices increased by 14%, and NGL prices increased by 2% compared to the second quarter of 2013. Given that NGL production has been 16% higher for the first half of the year, we are revising our expectation for coastal NGL production, and we now expect coastal NGL production to be higher in 2014 versus our previous estimate that NGL production would be approximately flat to 2013.

Next I will provide an overview of the two downstream segments. Starting with the Logistics Assets Segment as Joe Bob mentioned in his opening remarks, second quarter operating margin increased 108% compared to the second quarter 2013, driven by higher LPG export and fractionation activity.

For the quarter, we loaded an average 4.8 million barrels per month of LPG exports. We benefited from high international demand for both propane and butane, particularly from Central and South American markets.

Fractionation volumes increased by 35% versus the same time period last year, driven by the addition of CBF Train 4 which commenced commercial operations during the third quarter of 2013. In the Marketing and Distribution segment, operating margin for the segment increased 95% over the second quarter 2013, due primarily to higher LPG export activity and higher NGL marketing activity.

With that, let's now move to capital structure, liquidity and other matters. As of June 30, we had $495 million of outstanding borrowings under the Partnership's $1.2 billion senior secured revolving credit facility due 2017. With outstanding letters of credit of $95 million, revolver availability was about $610 million at quarter end.

Total liquidity including approximately $67 million of cash on hand was about $678 million. At quarter end, we had borrowings of $234 million under our $300 million accounts receivable securitization facility.

Through July, we have received approximately $180 million of net proceeds from at the market equity issuances, and we continue to be very pleased with the success of this program. Although we may take advantage of other equity offering sources, the at the market program appears to be sufficient to meet our equity needs.

Total funded debt on June 30 was approximately $3 billion or about 55% of total capitalization, and our second quarter compliance debt to EBITDA ratio was 2.8 times. For the second quarter of 2014, our operating margin was approximately 67% fee-based.

Moving on to capital spending. We now estimate approximately $780 million of growth capital expenditures in 2014. The changes to our updated capital expenditure estimates are as follows. The inclusion of spending in 2014 related to construction of Train 5, a 100,000-barrel per day fractionator at Mont Belvieu and additional CapEx to support continued strong producer activity across our field areas of operation.

We also updated our list of major capital projects under development and now have over $2 billion of projects in various stages of development in addition to the $2.6 billion in announced projects that are ongoing or recently completed. The major changes to the list are the inclusion of additional fractionation and a potential ethane export project.

Next, I will make a few brief remarks about the results of Targa Resources Corp. Targa Resources Corp's standalone distributable cash flow for the second quarter of 2014 was $29 million, and TRC declared approximately $29 million in dividends for the quarter. On July 15, TRC declared a second quarter cash dividend of $0.69 per common share or $2.76 per common share on an annualized basis, representing an approximately 30% increase over the annualized rate paid with respect to the second quarter of 2013.

As of June 30, TRC had $87 million in borrowings outstanding under its $150 million senior secured credit facility and $9 million in cash resulting in total liquidity of approximately $72 million. Given the strong EBITDA performance at the Partnership, we expect our pretax distributable cash flow to continue to exceed our 27% cash tax guidance estimate for the second half of 2014 and for the rate to approximate the first half of the year. That concludes my review. I will now turn the call back over to Joe Bob.

Thank you, Matt. I will start with a summary of our outlook for the remainder of the year.

We expect volumes to exceed earlier estimates in our G&P division. In our Field G&P segment, producers remain extremely active across all our areas of operations.

Sandhills capacity limitations, as Matt mentioned, have been assisted by the near term addition of the Midland County pipeline, connecting Sandhills to SAOU with more capacity plans for the Sandhills area in the works. Versado is expected to fill faster than initially forecasted. And our Badlands operations continue to exceed our 2014 expectations.

We are likely to see natural gas volumes continue to increase as we support our producer customers in complying with North Dakota's updating flaring restrictions. In our Coastal G&P segment, we're benefiting from additional higher GPM volumes that were not included in our initial forecast for 2014, and as Matt said, we now expect 2014 NGL production to be even higher than 2013.

Our downstream businesses are performing very well on all fronts, especially with respect to our export services. During the second quarter of 2014, at Galena Park, we added refrigeration or pumping capacity and completed another dock ahead of schedule as part of our Phase 2 international expansion project, providing incremental capacity and operational efficiencies for effective capacity.

Our people also did a great job installing and ramping up the equipment and learning how to effectively operate increasing capabilities on the fly. Phase 2 is expected to be fully completed in the third quarter of 2014 with the addition of a de-ethanizer at Mont Belvieu.

Once complete, total effective export capacity for Targa will be approximately 6.5 million barrels per month of propane and/or butane. Those of you who watch our export capability numbers closely will notice that this new effective capacity is larger than our previously published 5.5 to 6 million barrels per month, with our effective capacity revised higher as we became more comfortable with our operational capabilities.

Outlook for export services is robust, and we continue to see high levels of activity and are benefiting from strong demand for our services. Since the first quarter, we've continued to add contracts as well as contract length. That leads us to a revised financial outlook.

Given our strong performance through the first and second quarters of 2014, across our businesses and the very positive outlook for business performance for the rest of the year, we are revising our financial outlook for the year. We are now estimating 2014 adjusted EBITDA with a range of $925 million to $975 million based on what we see today.

With respect to our Partnership distribution growth expectations for 2014, we are clearly on track to be on the high end of our original 7% to 9% growth expectations. At the TRC level, we can say that we're very confident with our original expectation that dividend growth will be more than 25% for 2014.

Moving to the status of our major growth projects, as Matt mentioned earlier, we're now including Train 5 in our capital expenditure estimates for 2014. We have Board approval and have started construction. Train 5 should be completed in mid-2016 and is expected to cost approximately $385 million.

Given strong activity in our Field G&P segment, the majority of Train 5's capacity will be utilized to fractionate Targa volumes, and the rest will serve third party volumes under both existing and future fractionation service agreements. Earlier this year, we said that the timing and nature of additional fractionation at Mont Belvieu might be dictated by volumes coming from the Utica Marcellus via the proposed Utica Marcellus Texas pipeline joint venture between Kinder Morgan and MarkWest. That is still the case.

If UMTP is a go, then the needs of UMTP shipper customers will impact the timing and the specifics of the fractionator designs for Train 6 and potentially Train 7. Similarly, if UMTP does not go in the near future, other growing customer needs will determine timing and fractionator design. As Matt mentioned earlier, additional potential fractionation is now included in our list of major capital projects under development, and we're also now including a potential ethane export project on the list.

Engineering is complete for another dock in demethanizer to support a potential ethan export project, and discussions are ongoing with several potential customers that are interested in having another ethane export provider located in the Houston ship channel. So that list of major capital projects under development now has more than $2 billion worth of projects.

We are in the process of finalizing the permit details for our approved 35,000-barrel per day condensate splitter at channel view and expect to file those during the third quarter. Those permits. Although we understand why outside interest is very high and we're getting questions about it, our splitter project is not impacted by the US Commerce Department's private letter rulings in June 2014 on the export of processed condensate from two projects in the Eagle Ford.

There are logistical advantages and robust markets for the byproducts of condensate splitters positioned on the US Gulf Coast. And we continue to see demand for additional potential splitter projects associated with our facilities.

We continue to put capital to work in North Dakota on attractive projects building out our crude and natural gas gathering systems. We believe that the next $40 million a day plant in the Badlands, we call it Little Missouri 3, may be completed by year end, subject to weather and regulatory approvals. But we're hopeful.

We're already considering an additional gas plant after Little Missouri 3. And we continue to identify and pursue other smaller oil and gas projects in the Badlands.

In the Permian Basin, producers continue to grow volumes and require additional infrastructure around our assets to support their efforts. While not yet approved, and not on our announced approved list yet, another 200 million cubic feet a day Permian plant could be a near term approval and would then move from the under development list to the approved list.

Clearly, 2014 has already been another big year for Targa. I'm incredibly proud of the performance of our employees this year, and I'm excited about our opportunities for continued strong Targa performance during the rest of the year and beyond. Now I'd like to turn it over to Rene.

Thanks, Joe Bob. As you may have seen in our press release this morning, Roy Johnson and I will be retiring at the end of this year. I will remain a director of both Boards.

Roy and I have been involved in the midstream industry for more than 45 years and are exiting at a time when opportunities to grow a Company in this space have never been greater. For the first time in our careers, we believe this will be the case for a very long time. The employees at Targa are exceptional, and they are managing assets and businesses that are ideally situated to capture these opportunities.

In closing, Roy and I came up with the idea to start a midstream Company in early 2002. And one of the most important steps we took that ultimately created all this value was to quickly team up with five great individuals in Warburg Pincus. Together as a team, and with some luck from doing all this during the shale revolution, we were able to create a great Company.

On behalf of Roy and I, we want to thank them for their support and friendship, and I look forward to still playing a role in this amazing story as a director. With that, let's open the line for questions. Operator?

(Operator Instructions)

Our first question comes from Edward Rowe from Raymond James. Please go ahead.

Good morning, guys. Congrats on the quarter. A quick question on the LPG exports.

With strong spot LPG export demand, and we're seeing huge builds in pad 3 on propane inventories, could beat the ethylene cracker outages. When you think about upside the guidance, is this the case where you are able to lock additional long-term contracts at good rates or you're seeing significant spot shipper demand through 2014?

We're seeing significant demand of both types through 2014. What we said today that since first quarter when we gave you some numbers about it, we've continued to add contracts, and we've continued to add contract term, reflecting that strong demand.

Appreciate that. When you think about -- how do you balance between having the option value of having spot contracts versus getting some longer tenure contracts, given the outlook on further LPG expansion? How do you weigh that balance?

It's probably more than a balancing act. We've been increasing capacity, name plate capacity, increasing effective capacity. It's difficult to term that up until you've already proven it's there, and we're working within a conservative operational constraint to make sure that we can deliver on term contract requirements.

We're not trying to balance spot option availability. We're contracting up rapidly, and we're taking advantage of the markets to try to move as much as we can through increasing capability.

Appreciate that. Just switching gears, with your asset footprint in the Permian while most of them are within some of the oilier part of the Permian, we're seeing some growth in condensate in a portion of the Permian.

Do you see any opportunities around maybe stabilization, given your exposure within that area? That's all I had. Thank you.

Go ahead, Mike.

This is Mike. Hi. We've got discussions going on with several producers that are interested in stabilization and movement of the condensate out of the Permian to the Gulf Coast for splitting and export. So we're still working those angles, but like Joe Bob said before, we see a demand for the finished products after the split here on the Gulf Coast.

Thank you.

I should also add for folks who don't know, we have stabilizers and have had them at many of our plants already, and sometimes you're running them and sometimes you're modifying them.

Thank you. Our next question comes from Jerren Holder from Goldman Sachs. Please go ahead.

Good morning. Just want to start off wishing Rene and Roy the best on their retirements. Also, if we could probably get a little bit more perspective on the ethane exports, the key points maybe being discussed with the customers, potential size, scope, et cetera, any additional perspective.

I will refer -- this is Rene. We will refer back to where we stood with LPG exports. We were way behind enterprise both in terms of timing and capabilities, but over time we've developed a very nice long-term business around LPG exports, and we find ourselves in that situation today with ethane exports.

As Joe Bob said in his comments, the engineering is complete for the methanizer and additional export facilities for ethane. We're in conversations with a number of parties.

What's very encouraging besides the number of parties, we see a water borne market for ethane developing, though much smaller than LPGs, but it is developing for ethane. So we're optimistic that we can create a business, a long-term business around ethane exports.

Okay. Thank you. And if you could provide some color maybe on the utilization levels that some of the newer plants you put in service in May and June, how are they ramping up and where are they sitting right now?

I understand the focus on the utilization of the new plants, but I want to take a step back. The cool thing about both of those new plants is they are part of systems and even super systems now, and they are the newest, most efficient plant in those systems and super systems. So it's natural for us to move some volumes to them.

The outlook for North Texas and the outlook for the Permian, SAOU plus Sandhills is for volumes to be increasing even faster than we thought at the beginning of 2014. And that's the big picture. And then we've taken that outlook, our multiple scenarios about what's going to happen across Field G&P and put that into our revised financial outlook for 2014.

Thank you. And lastly I guess, if you could provide some perspective on your views on NGL prices.

I think some of the E&P companies out there have had a more bearish view going forward, especially as you look at the export announcements and what to expect to come online for LPG next year. What are your thoughts on NGL prices outlook?

I try not to be the NGL price forecaster. And our business in many ways insensitive or we get positives on one side of price movement and offsetting negatives on the other side of price movement, and that's a good position for Targa to be in.

Our outlook for original guidance you recall what that pricing looked like. We did multiple price scenarios including current prices as we updated 2014 financial guidance. You won't see Targa claiming to be a bear or a bull relative to the current spot markets for LPGs, natural gas or condensate.

Okay. Thank you.

Our next question comes from Brian Lasky from Morgan Stanley. Please go ahead.

Good morning, Brian.

Good morning. A quick question, Joe Bob. You talked about a little bit in terms of the implications of frac buys on your MOU with Kinder Morgan.

Could you go into a little bit of detail there about the MOU you have between yourselves and Kinder Morgan and MarkWest? Is there a certain amount of capacity you need to keep for them at some point, or is that very much where you are still in the driver's seat in terms of moving forward with that?

I don't want to go into detail about things that I've got CAs about. Our capacity, Train 5, Train 6, potentially Train 7, is available to meet the needs of customers from the Northeast, via the Kinder Morgan pipeline, and we stand ready to make that capacity available. The announcement of Train 5 is a Train 5 of particular design, and we are beginning to build it immediately, saying we need most of it for our Targa volumes but that will also serve third party volumes under existing and future contracts.

The potential for Northeast volumes would change the design of the next fracs coming on, potentially significantly. Is it a propane plus stream, or is it a propane plus a little bit of ethane stream, and that will determine the designs for which we would permit to meet the needs of shippers on the Kinder Morgan pipeline. If that project does not go forward, there's an awful lot of demand from other parts of the country and the design of the next Train beyond Train 5 would probably look more like Train 5 which has a good bit of flexibility already.

So I hope that answered your question. We see demand for fractionation being pretty robust, and I think the phrase we used in the script was that the potential go forward of Northeast liquids coming this direction would impact timing and design. But there's still a lot of demand.

You are in the driver's seat in terms of whether or not you move forward on Train 6 alone, or is your ability to move forward contingent on anything else with that JV or go into that at all?

I'm not in the driver's seat with respect to our friends at Kinder Morgan. You said that twice. I will work with them. And the going forward of 6 or 7 is likely to go forward with or without volumes coming from their pipeline from the Northeast.

Got it. And then just over back on the condensate splitter front, wonder if you can just elaborate on your thoughts about incremental splitter opportunities and how you may weigh that against potentially getting in the condensate export side of things and how you're positioned there.

We believe our facilities are nicely positioned for multiple commercial activities. Right now, we are, and that's what we said in the beginning, involved in discussions with several counterparties interested in the particular location and benefits that our facilities bring for condensate splitters to the ship channel and those byproducts coming off of condensate splitters to robust markets for them at the ship channel.

This condensate splitter that we're designing is going to generate six products. A lot of those products have a robust domestic market. Some of those products will be ideally situated for export.

And that's the same thing we're hearing from the customers we're dealing with. These splitters can be designed around the quality of the condensate coming in, and again, as domestic and international markets for these products.

At the same time, I think that there will be condensate exported. I'm not saying we won't participate in that. To have to be split on the other side of the water. That's not -- that's the way it just goes. Demand for both types.

Thank you. That's all I have.

Thank you. Our next question comes from Faisal Khan from Citigroup. Please go ahead.

Thanks. Good morning. It's Faisal from Citigroup. Just a few questions. I think you talked a little bit about this on the call, but the sequential increase in the first quarter to second quarter in the fractionation volumes I guess from [312] to [346], can you go into a little more granularity in terms of what drove that sequential increase?

We saw -- part of it was just from our Field Gathering and Processing plants.

Train 4 was ramping up also Q2 to Q2.

This is Q1 to Q2. We saw a lot of growth just from out in the Permian and from our field production really to go into. Q1 to Q2 is just continued increase for not only our volumes but also third party volumes.

Okay. Understood. And then just going back to the spot cargoes for LPG, facility in the quarter, are most of these spot cargoes X ship or FOB?

All FOB.

Okay. Makes sense. And then as you're looking at the proposed ethane facility, ethane export facility, how important do you think it is to be investment grade with these counterparties that you're dealing with? Is it not an issue, or is it a bit of a sticking point?

For the counterparties to be investment grade or for me to be investment grade.

For you to be investment grade.

I don't think us being one notch below investment grade is a sticking point for those counter parties.

I think the most important thing for these parties is the availability of ethane in our system that can supply them over the long term.

Okay. Makes sense. And then just going to more of a strategic question, I guess in your press release you put out last month, you talked about how you'd been in high level discussions with energy transfer. Can you talk about how you are thinking about M&A with the Company and whether the change, the retirement of some of the senior management here, does that have any view or influence on how you're thinking about M&A in the context of the Company?

Actually, I'm glad you asked the question because Rene, Roy, myself, want to quickly dispel any thought that their retirement is linked to those rumors in that article at all. We're managing the Company the same way we have for the last 12 years, and we're going to manage it the same way in the future with Rene on the Board, and I can speak for all of senior management on that.

There was rumors. There was an electronic article to the extent that we had to come out with a statement, strongly encouraged by the NYSE at the time.

That statement said we had been previously engaged. It was preliminary and high level. And the discussions had been terminated.

I can assure you that statement was correct. Don't really have anything else to say today about that statement or that article.

Now, you also address a broader M&A question, and first of all, Targa's always looking at potential assets and entity acquisitions, Targa acquiring assets and entities over a wide range of types, but we remain disciplined and we're not going to get frustrated by others at times, sometimes paying too much. We also have a fiduciary responsibility to consider any credible offers that are incoming.

We are focused every day on improving the long-term value of Targa Resources. By doing that management and the Boards have the appropriate context to evaluate an incoming offer.

Okay. I think that makes sense. I appreciate the clarity.

I will just add one comment. There's nothing linking the two, Roy and I leaving with the energy transfer situation. Unfortunately, it's just a function of age.

(laughter) I understand. Thank you. I appreciate the time, guys. Thanks a lot.

Our next question comes from Justin Agnew from Robert W. Baird.

Good morning. Congrats on the strong quarter.

Before you ask the question, Rene and Roy are younger at heart than most of the rest of us, so that's part of why we were laughing.

All right. Are you seeing any cost inflation either on the materials side or any of the engineering or construction work on any of your projects?

I heard on the materials side or the engineering construction. I didn't hear the first part of the phrase. Please repeat.

Any cost inflation on any of that.

Cost inflation. There are cost pressures just because there is an awful lot of activity out there. The workforce is the one we'd see the most impact on it.

The good news is, Targa is pretty good at retaining our employees and we intend to try to stay good at retaining our employees. Material costs are going up a little bit. Mike, you got more to add to that?

I would guess they're going up less than 7% to 10% per year, and we have worked with some phenomenal E&C companies that have built things on time, on budget, and we have great confidence in their continued support of Targa's growth. And we're very pleased with what we're seeing right now.

We believe it's manageable right now. But you're right, there are pressures.

Got it. And then when we think about the growth out of the Coastal G&P segment, is any of that due to an uptick in the TMS volumes or somewhere else?

No. No, somewhere else is the right answer.

We've seen some growth at Vesco from the Mars B platform coming on and volumes going through. We also had a producer customer on-shore Louisiana at Lou, some high GPM volumes there. The second quarter volumes at Lou from that are actually down from Q1, and we would expect those to tail off.

We've seen Wilcox volumes come and go along the on-shore Louisiana area that goes to Lou, spurts up and then it doesn't. I think we're going to continue to see gas well gas for the system there, just whether it's enough to make up for the decline in those volumes.

There's growing activity in the offshore prospect will be hopefully tying into the Mars platform. So there's sufficient activity that will impact these operations over the next few years.

Got it. Thanks for the color. That's it from me.

Thank you. Our neck question comes from Jeremy Tonet from JPMorgan. Please go ahead.

Hi, Jeremy.

Good morning. Congratulations on the strong beat and raise. Also, best wishes to Rene and Roy going forward many.

I was just wondering, just one follow-up question on ethane exports. I was wondering if you might be able to add any thoughts you might have on the development of this market and thoughts on if it's really just cracker feed stock displacement or could more of this be going into being used as fuel? Or just any thoughts there on how this market is developing.

I'm not going to go into a lot more detail, but our discussions with multiple customers are for multiple markets. I think that ethane to those multiple markets will develop over time. It makes sense on a global macroeconomic standpoint, and as it develops, you can lower the cost.

You don't have just back to back contracts. But that's a multiyear process. Back to back contracts will be what you see first.

And multiple uses.

Right.

Absolutely multiple user. There's customers that are going to use this to replace their own declining supplies of ethane as a feed stock, and there are locations in the world that we work with for other products that are looking at ethane as a strong source of fuel for electric generation.

Got you. That seems like that could be a pretty large market potentially. So interesting to see.

Like I said, it's developing.

Right.

We're encouraged that it can eventually end up into a sizable water borne market.

The market has to get confidence that ethane prices are going to be reasonable and that the supplies are going to be there. So they've got a significant capital investment themselves in order to create the demand for the ethane.

That's very helpful. Thank you.

Thank you. Our next question comes from Helen Ryoo from Barclays. Please go ahead.

Good morning. Congratulations on the quarter and congratulations to Rene and Roy.

Just a couple of questions. So first on the marketing segment, your margins were sequentially down on -- hello.

Yes.

Yes. Sorry. You could hear me, right?

Yes, we can.

Your margins were sequentially down on the marketing segment and the volumes were flat but your LPG export activity was higher, so I'm just curious why your marketing segment had a sequentially lower number. Is that mostly NGL price driven?

One of the first things is the seasonality in wholesale propane. I'd say that's the largest factor. Q1's usually the quarter for wholesale propane. Q2 it doesn't make much.

This Q1, if you will remember back, had some dislocations associated with pricing that probably made it more --

Even better from Q1.

Got it. And then just on fractionation, so I think -- your fractionation volumes were sequentially higher, and then I think the press release mentioned some higher reservation fee receipts.

Are you essentially receiving -- just going forward, I don't know how much excess capacity you have as the frac 4 ramps up, but are you pretty much covered with the reservation fee that the volume should not really matter, you're getting paid anyway on the full capacity? Is that the right way to think about it.

That is the right way to think about it, and that's what we built into our -- most of the scenarios of our guidance.

Okay. And then frac 5, is that the same thing? You're going to have reservation fee built in there so pretty much immediately you're going to get fully paid regardless of the actual volume of your frac?

You changed the question. Frac 5 is pretty much the same in that it will be associated with reservation fees to Targa and third party existing contracts or future contracts over time.

Then you repeated it and you said pretty much immediately. There will be some ramp-up into frac 5. There was some ramp-up into frac 4 as you will recall.

Producers don't have bottled up capacity to go from zero to whatever their quantity is. We did have several suppliers that ramped up on Train 4. Some of those came on later in 2013 than the initial volumes that came on in mid-year 2013.

Does that answer your question?

Yes, yes, it does. It seems like there was a ramp-up period, but in terms of frac 4 you're at the top for the full payment phase right now. And then for frac 5 you're going to have some a period, but you're going to essentially get fully paid regardless of the volume movement.

Yes. Over reasonable period of time, we would expect frac 5 to be similarly 90% utilization from a financial standpoint is a good way to model it.

Great. And then just lastly, going to Badlands I guess, there was Oneoak announced a pretty big plant in the Northeast McKenzie County. It seems like it's pretty close to where your assets are. But just wondering -- you have a big competitor plant in the area.

Is that good for you given maybe less flaring, it should help the volume coming into your system or does it change your thoughts around maybe more processing in that area? Could you maybe talk about that a little bit?

In the Badlands, acreage -- there are huge acreage dedications. Oneoak has more acreage dedicated to them than any other Company.

They should because they've been there. They go back before the Bakken. There's a lot of held by production acreage up there.

We don't really see that we are competing with other companies for natural gas up there for processing because we have significant acreage dedications to ourselves. Oneoak is reaching out to try to alleviate the flaring for producers over a wide area. We are looking at any new sources, but we have a growing need by the producers under contract to Targa to build additional plants.

That's very helpful. Thank you very much.

Thank you. Our next question comes from Michael Blum from Wells Fargo. Please go ahead.

Hi. Good morning everybody. Rene and Roy, congratulations on your retirement also. Pretty much everything was covered.

I just had a couple -- one clarification on the LPG export facility. Your updated statement of capacity, should we think of that the delta there as available for spot? Or that's also potentially also getting contracted now?

That 6.5 million barrels a month that you heard us describe, you should think of as available for spot and term. There's no reason we can't contract for 6.5 million barrels a month.

We speak in terms of an effective capacity which is not the 12,500 barrels per hour times 24 hours times 365 days a year. That would be 9 million barrels a month. We can refrigerate and pump 9 million barrels a month of HD5 propane and/or low ethane propane when you add it all up.

But when you factor it down for several categories, one equipment run time and efficiency, is that refrigeration always running. Two, docks and ship factors including weather, right? Scheduling and storage and product availability, which Targa has a strong advantage in.

When you take those three factors, it's not just about the pumping capacity. And rights now based on our experience and using this number for a multi-month view, we're very comfortable with 6.5 million barrels a month.

There will be spots, certainly days and weeks and even months that could exceed 6.5 million barrels per month. And that might be additional room for spot. Does that help, Michael?

Yes. Thank you. My second question is, and maybe I'm reading into this too much, but in your press release you talk about a step change in the growth in EBITDA this year.

And I certainly wouldn't argue with that characterization. I did hear your commentary on where you think distribution growth will end up for the year, but just wondering if you're thinking about a step change in the distribution as well to go in lock step with the EBITDA growth, or do you think there's no reason to really go above 9%?

You might be reading too much into our step change discussions, et cetera. Certainly, we've had very large step change in EBITDA. $750 million to $925 million to $975 million, is the result of things going well across all of our businesses.

Distributions have increased as a result of that. We're at the top of that range that we talked about, and we're certainly admitting that we're above the plus on the 25%. But we're also letting with a multi-year view and we always drive this thing with a multiyear view, we're letting coverage go up with that multi-year view, and increasing coverages in the short term create benefits in the longer term that support higher long-term distribution rates.

What we don't want to do is drive the boat with a whole bunch of steps. Ups and then perhaps flats and then more ups. We've t got a terrific record of continued increases and continued growth in increases, and I don't think you should interpret whatever word was used in step function there to imply we were going to start driving the boat differently.

Understood. Thank you very much, guys.

Thank you. And our next question comes from Chris Sighinolfi from Jefferies. Please go ahead.

Hey, good morning, guys. Thanks for the time.

Hey, Chris.

Joe Bob, just real quick, you have estimated cost of $385 million. I was just wondering is that gross CapEx or is that net for your interest?

Gross.

Gross.

Okay. Thanks. And then Matt, I know you reviewed it and I was scribbling quickly. If you don't mind, I'd ask you to review again just the cash tax rate expectation for 2H TRGP.

It's come in higher than our 27% estimate for the first half of the year. It's really been closer to about 33%-ish for the first half. And that's driven by higher TRP EBITDA which --

That's a good thing.

Which is a good thing and helps over the longer term but in the short term it creates more taxable income at TRC. Given we're revising guidance here higher again, in the second half of this year, something in line with first half seemed to be a reasonable estimate.

Okay. Great. And then the final thing I guess to rephrase Michael's question a little bit differently, Joe Bob, if I think about that new capacity targeted, let's say normal operating condition run rate of 6.5% a month, roughly what percentage today of that would be not under longer term contract would be?

In the first quarter --

I hear Rene laughing, by the way.

We anticipated the question. We also know the answer we're going to provide.

The first quarter we gave numbers. We're not trying to be hard-headed or resistant, but it's not really in our interest to give specific numbers on our contracting on a quarterly basis. We may provide some additional quantifications say at our next annual update.

What we said today was that relative to first quarter when we said that we had an average of 4.2 million barrels contracted for the remaining three quarters and where we said 2015 had a similar amount contracted. And I think we also said that we had contracts going out to 2020, what we said this time is we're continuing to add contracts with a lot of demand and we're continuing to add contract term with a lot of demand. So that's directional for you. But I know it's not what you wanted.

Okay. Thanks for the time.

I'm showing no further questions. I'd like to turn the call back over to Joe Bob Perkins for any closing remarks.

Thank you all very much for your attendance and for all of your questions. I particularly want to thank you for everybody's kind words to Roy and Rene.

If you have any further questions, please feel free to contact any of us, Jen, Matt, Rene, myself and probably have more phone numbers than that. Have a good day and have a nice weekend. Good-bye.

Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everyone have a great day.