Targa Resources Partners LP Q3 2008 Earnings Call Transcript

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 |  About: Targa Resources Partners LP (NGLS)
by: SA Transcripts

Targa Resources Partners LP (NYSE:NGLS)

Q3 2008 Earnings Call Transcript

November 12, 2008, 11:30 am ET

Executives

Anthony Riley – Senior Manager, Finance/IR

Rene Joyce – CEO

Jeff McParland – EVP and CFO

Michael Heim – EVP and COO

Analysts

Teresa Fox [ph] – Stone Harbor [ph]

Chris [ph] – Barclays Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Targa Resources, Inc. conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) This conference is being recorded today, Wednesday, November 12th, 2008. I would now like to turn the conference over to Anthony Riley. Please go ahead, sir.

Anthony Riley

Good morning. Thank you, operator. I’m Anthony Riley, and I would like to welcome you to Targa’s third quarter 2008 conference call. And thank you for joining us.

Before we get started, I would like to mention that Targa did publish an earnings release this morning, and it is available on our Web site at www.targaresources.com. Speaking today will be Rene Joyce, Chief Executive Officer; and Jeff McParland, Chief Financial Officer. Rene and Jeff are going to be comparing the third quarter 2008 to the third quarter 2007.

Before we begin, I would like to remind you that this call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Exchange Act of 1934 as amended. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. The future results of Targa may differ materially from those expressed from the forward-looking statements contained on this call.

Many of the factors that will determine these results and values are beyond Targa’s ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future, including among other things, weather, political, economic, and market conditions; timing and success of business development efforts; and, other uncertainties. You are cautioned not to put undue reliance on any forward-looking statements.

With that, I will turn it over to Rene Joyce, our Chief Executive Officer.

Rene Joyce

Thanks, Anthony, and good morning. And thank you for participating in our call. There are several members of the management team here today, and they will be available to assist with the Q&A session. By way of agenda, we’ll start off by reviewing our third quarter and year-to-date ‘08 performance, including operational and financial accomplishments. I will then turn it over to Jeff to review our consolidated and business segment results. Following Jeff’s comments, I will update the progress on a few strategic initiatives. And finally, we will take your questions.

Third quarter ’08 gathering throughput of 1.9 billion cubic feet a day and plant inlet volumes of 1.8 billion cubic feet per day were both 7% lower than for the third quarter of ‘07. Natural gas sales of a little over 515 billion Btu per day for the three months ended September 30, ‘08 was 4% lower than the comparable period in ‘07.

Gross NGL production of approximately 100,800 barrels a day in the three month period ended September 30 were 6% lower compared to the same ‘07 period. Third quarter ’08 NGL sales were approximately 290,100 barrels per day, 12% lower than the third quarter of ‘07. Condensate sales of 3,900 barrels per day were 11% lower compared to the ‘07 period.

With regard to the performance highlights for ’08 year-to-date, gathering throughput of 2 billion cubic feet a day and plant natural gas inlet of 2 Bcf per day were 3% and 2% higher, respectively, versus the same period in ‘07. Natural gas sales of 524,900 barrels – excuse me on that. Natural gas sales of almost 525 billion Btu per day for the nine months ended September 30, ‘08 were less than 1% lower than the comparable period in ‘07.

Gross NGL production of approximately 103,000 barrels per day for the nine-month period ended September 30, ‘08 were 2% lower compared to the same ‘07 period. Year-to-date, ’08 NGL sales were approximately 298,000 barrels or 4% lower than the same period ‘07. Condensate sales of 3,800 barrels per day for the nine-month period ended September 30, ‘08 were down 3% compared to the ‘07 period.

For details on the financial results, I’ll turn it over to Jeff.

Jeff McParland

Thanks, Rene. I’d like to add my welcome, and thank you for joining our call this morning.

We reported a net loss of $20.9 million for the third quarter of 2008, compared to net income of $13.3 million for the third quarter of 2007. The $34.2 million decrease in net income is primarily due to three items, the $31.6 million pretax charge to reduce the carrying value of our NGL inventory, the $17.9 million pretax loss reserve for damage to a certain of our Gulf Coast facilities caused by Hurricanes Gustav and Ike, and an $11.8 million non-cash derivative loss.

Third quarter revenues increased by $489 million to approximately $2.4 billion, 26% higher than the $1.9 billion for the same period in 2007. Income from operations was $16.9 million for the quarter, compared to $66 million in 2007, a decrease of 74%. Third quarter adjusted EBITDA was $46.4 million, compared to $92.1 million for the same period in 2007. On a consolidated basis, capital expenditures for the third quarter totaled approximately $35 million.

Looking at our year-to-date results, we reported net income of approximately $44 million for the nine months ended September 30, 2008, compared to $36 million for the comparable period of 2007. Year-to-date revenues increased by $1.9 billion to approximately $6.8 billion, 38% higher than the $4.9 billion for the same period last year. Income from operations was $198.7 million for the nine months ended September 30, 2008, compared to $181.4 million in 2007, an increase of 10%. Year-to-date adjusted EBITDA increased 6% to $275.7 million. On a consolidated basis, year-to-date CapEx totaled approximately $94 million.

During the second quarter of 2008, we recognized a gain of $18.6 million in connection with insurance receipts in excess of the property damage receivables that was included in our purchase price allocation for the DMS acquisition in 2005. Year-to-date, we have received $48.3 million and $21.6 million related to property damage and business interruption insurance claims, respectively, most of which was in connection with the final resolution of our claims related to Katrina under our onshore property insurance program.

Let me now turn to the impact of Hurricanes Gustav and Ike, which resulted in damage to certain facilities in Louisiana and Texas, and disrupted industry operations across the Gulf Coast. As I will summarize the impacts at a high level on these remarks, please refer to our quarterly report and our earnings press release for further details. As you will see in those disclosures, all facilities have resumed operations with three exceptions. Mechanical repairs are completed at the Yscloskey straddle plant and start-up is expected late in November pending repairs to a third party’s offshore system. Repairs to our Stingray and Barracuda plants will continue onto the next year, with operations expected to resume in the second quarter.

While it is still very early in the claims process and we are, in some cases, still finalizing repair assessments and cost estimates, we currently estimate the repair costs associated with our interests in the impacted facilities to be approximately $65 million. In addition, we are still in the process of analyzing the factors affecting the amount of our business interruption claims. However, based on the information currently available to us, we believe that we could receive business interruption claims in excess of $10 million. We will recognize income from business interruption claims in the period that a proof of loss is executed with our insurers.

With that overview, I’d like to turn to a discussion of our segment results. We report our operations in four segments, first, natural gas gathering and processing; second, logistics assets; third, NGL distribution and marketing; and fourth, wholesale marketing.

Let’s start with the gathering and processing segment, which includes our gathering and processing businesses in New Mexico, Texas, and Louisiana, including those owned by the MLP, Targa Resources Partners LP. All throughput, inlet, and production volumes were down in the third quarter of 2008 relative to the same quarter last year. The lower volumes were primarily as a result of Gulf Coast natural gas processing plant shutdowns and disruptions leading up to and following Hurricanes Gustav and Ike in September.

Operating margin for the third quarters of 2008 and 2007 was $117.3 million and $108.5 million, respectively. Year-to-date gathering throughput and plant inlet volumes were up relative to the same period in 2007. Natural gas sales volumes decreased less than 1% to 543 Btu per day for the first nine months of this year. NGL sales volumes of 88,600 barrels per day were down 2% compared to 2007 levels, while condensate sales volumes decreased 4% to 5,000 barrels per day for the first nine months of 2008 compared to the same period in 2007.

Segment revenues were approximately $2.9 billion for the nine months ended September 30, 2008, up $824 million from the same period of 2007. Operating margin increased 17% to $346.7 million for the first nine months of 2008, compared to $296.7 million last year.

We refer to our assets that are involved in the fractionation, storage, treating, and transportation of natural gas liquids as the logistics assets.

Fractionation volume decreased 11% from 232,000 barrels per day for the third quarter of 2007 to 207,100 barrels a day for the third quarter this year. Third quarter 2008 revenues in this segment were $65.4 million, 25% higher than the same period in 2007. The revenue increase was primarily from higher fractionation fees due to higher natural gas prices, an increase in commercial transportation revenues due to increased barge activity, and an increase in terminal revenue due to a new connection into a common carrier pipeline.

Operating margin was $15.6 million, an increase of 26% compared to the same period last year. Operating expenses increased $9.8 million to $49.8million for the quarter. This increase was primarily from increased fuel and electricity expense due to higher natural gas prices, increased barge and trucking activity, and increased usage of third party fractionation services.

Moving to the first nine months, fractionation volumes increased 6% from 207,300 barrels per day in 2007 to 219,300 barrels per day this year. Nine months revenues in 2008 were $182.3 million, 26% higher than the same period in 2007. The revenue increase was primarily from higher fractionation fees due to higher natural gas prices, higher revenues from our low sulfur natural gasoline plant, an increase in commercial transportation revenues partially offset by lower barge activity at Galena Park.

Operating margin was $34.1 million, an increase of 19% compared to the same period in 2007. Operating expenses increased $32 million to $148 million for the nine months ended September 30, 2008. The increase is primarily due to increased fuel and electricity expense; operating expenses at our LSNG plant, which commenced commercial operations in June of last year; higher barge and truck activity as part of our maintenance cost due to the turnaround of the Cedar Bayou Fractionator; oil eventuals at the fractionator; maintenance at the Mont Belvieu Terminal; and, increased usage of third party fractionation facilities.

Our NGL distribution and marketing services segment markets our own NGL production as well as NGLs purchased from third parties.

NGL sales for the three months ended September 30, 2008 were 258,000 barrels per day, a decrease of 11% compared to the same period in 2007, primarily due to disruptions from Hurricanes Gustav and Ike. Revenues increased $331 million or 25%, to $1.7 billion for the third quarter of 2008 compared to the same period in 2007.

Operating loss for the three months ended September 30 was $25 million, down $41 million compared to the 2007 period quarter. The decrease in operating margin was primarily due to lower volumes attributable to the impact of the hurricane and to a 2008 charge of $24.1 million to reduce the carrying value of our NGL inventory.

NGL sales for the nine months ended September 30, 2008 were 258,000 barrels per day, a decrease of 4% compared to the same period in 2007. Revenues increased $1.3 billion or 40%, to $4.6 billion for the first nine months of 2008 compared to the same period in 2007.

Operating margin for the nine months ended September 30, 2008 was $15 million, down $19 million compared to 2007. The decrease in operating margin was primarily due to lower volumes attributable to the impact of the hurricane and to charges taken in 2008 of $25.8 million to reduce the carrying value of our NGL inventory.

Our wholesale marketing segment includes our refinery services businesses as well as our wholesale propane operations. NGL sales decreased by 6% to approximately 47,000 barrels per day in the third quarter of 2008. Revenues for the segment were $321 million for the three months ended September 30, 2008, an increase of 30% compared to the 2007. Segment operating results for the third quarter of 2008 – excuse me, segment operating loss for the third quarter of 2008 was approximately $5.4 million, down $8 million compared to the third quarter of 2007. The decrease is primarily due to a 2008 charge of $7.5 million to reduce the carrying value of inventory.

For the first nine months, NGL sales increased by 2% to 60,100 barrels per day in. Revenues for this segment were $1.2 billion for the nine months ended September 30, 2008, an increase of 46% compared to the nine months in 2007. Segment operating margin for the first nine months of 2008 increased approximately $2 million or 18% to approximately $13 million, compared to approximately $11 million in 2007. The increase is primarily due to higher volumes, and the $5.9 million in business interruptions insurance receipts offset by a 2008 charge of $7.7 million to reduce the carrying value of inventory.

Let me wrap up the financial overview by touching on capital structure and liquidity. At September 30, 2008, our funded debt level on a consolidated basis was approximately $1.4 billion. This level includes $640 million of debt at the MLP. This debt is non-recourse to Targa, but is consolidated along with the MLP, given our control of its general partner. Excluding the MLP debt, Targa's total funded debt was approximately $775 million.

On October 16th, 2008, we requested a $100 million funding under our senior secured revolving credit facility to increase our cash on hand in the face of the significant and continuing deterioration in the credit markets. Lehman Brothers Commercial Bank, a lender under our senior secured credit facility, defaulted on its portion of the borrowing request, which resulted in actual funding to us of $95.9 million. Proceeds from this borrowing are currently available to us as cash on hand. As a result of the Lehman default, we believe that the availability of the revolving credit facility has been effectively reduced by $10.2 million.

On the same date and for the same reason, the partnership requested a $100 million funding under its senior secured credit facility, and Lehman also defaulted on its portion of that borrowing request, resulting in proceeds to the partnership of $97.8 million, also currently available to it as cash on hand. As a result of the Lehman default, we believe that the availability of the partnership’s revolving credit facility has been effectively reduced by $9.5 million.

At October 31st, 2008 and excluding the partnership, Targa had approximately $271 million of cash, approximately $144 million of availability under the senior secured revolving credit facility, and approximately $121 million – $120 million available for the issuance of letters of credit under the Synthetic LC facility, bringing Targa’s total liquidity to approximately $535 million.

As of October 31, 2008, the partnership had approximately $130 million of cash, $313 million of availability of this revolver, bringing its total liquidity to approximately $443 million. These capital and liquidity highlights, along with our year-to-date operating results, underscored Targa’s solid financial footing, including substantial liquidity; meaningful headroom with respect to our financial covenants; no capital expenditure commitments that require external financing; and, with our earliest debt maturity in the fourth quarter of 2011, no refinancing requirements for approximately three years.

The partnership is also on solid financial footing with respect to the same elements, liquidity, financial covenants’ headroom, absence of external financing requirements, no debt maturities for over three years. And the partnership also reported solid distribution coverage for the quarter.

That wraps up the financial overview. So I’ll now turn the call back to Rene.

Rene Joyce

Thanks, Jeff. We continue to expand and to produce the acreage dedications and our gathering footprint with pipeline additions, direct connections, connections behind central delivery points, and with small pipeline acquisitions. Additionally, we are adding compression to support the producer needs across our gathering and processing systems. For example, we recently approved the $11 million in pipeline additions in North Texas to support additional Barnett Shale production near our Bryan Compressor Station in Wise County. And we should see the benefits of this project in the first quarter of next year.

We always have a number of processing and treating projects and process to improve recoveries or efficiencies. For example, an enhanced ethane recovery project and two acid gas injection wells are underway for our Permian operations.

Regarding our NGL business, we are evaluating an opportunity to expand our Mont Belvieu fractionator and potential projects to add new terminals and above ground storage to support our refinery services and wholesale propane business. The cogeneration facility at Mont Belvieu should be completed in the second quarter of ’09, and the grassroots propane storage facility supporting our West Coast business should be completed in the first quarter of ’09 also.

We received final FERC approval late this summer for the Floridian Gas Storage project, and development of that project continues.

Thank you for your time this afternoon. That concludes the formal part of the call. We will now open it up for your questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) Our first question is from the line of Teresa Fox [ph] with Stone Harbor [ph]. Please go ahead.

Teresa Fox – Stone Harbor

Thank you. Could you explain your wholesale reduction in carrying volume for your inventory, please? And one more after that.

Jeff McParland

Yes. We carry our inventories at basically a lower of cost for market method. And the value of those inventories purchased for most of the third quarter were purchased at cost above the prices across the end of the quarter and into the first part of October.

Teresa Fox – Stone Harbor

How big was the – sorry. How big was that price listed?

Jeff McParland

Pardon me?

Teresa Fox – Stone Harbor

Could you quantify that price list?

Jeff McParland

The prices in October, on a weighted average barrel basis were probably something and roughly to $0.70 area. And the purchases in the first part of the quarter would have been almost double that amount.

Teresa Fox – Stone Harbor

Oh I see. You’re going–

Michael Heim

Ter, it’s Michael. I’d say it’s fair value.

Jeff McParland

Those are very broad scoped numbers. But if you were to look at – and that’s saying the price – or propane price at OPUS or natural gasoline price, you could see that kind of a movement, reductions of 40% to 60%, and various NGL components across the front end of the third quarter into the October timeframe.

The dislocation in prices is of a greater magnitude than the precipitous drop in West Texas proved over the same period as NGL prices have moved further south and dislocated from the relationship to group.

Teresa Fox – Stone Harbor

Okay. And could you refresh our memory? How much is the floating in gas projects again? How much do you intend to invest?

Rene Joyce

That would be about a $600 million project.

Teresa Fox – Stone Harbor

Okay. Thank you.

Operator

Thank you. And our next question is from the line Gary Stromberg with Barclays Capital. Please go ahead.

Chris – Barclays Capital

Hey, good morning, guys.

Rene Joyce

Good morning, Gary.

Chris – Barclays Capital

This is actually Chris [ph] on the call, actually. But for hurricane disruptions for the third quarter, can you quantify that impact EBITDA for the quarter? And how much of that is expected to kind of continue into the fourth quarter related to Stingray and Barracuda operations that have been disrupted?

Jeff McParland

We didn’t put math to our foregone revenue impact for the – for the disruption to our operations. The Stingray and Barracuda plants are peaked, as you know, are coastal straddles, which is in turn a piece of our gathering and processing segments. They were down through the first quarter. But we don’t have visibility in our disclosures on how to isolate the exact impact of those two plants.

Chris – Barclays Capital

Okay. And for 2009, what are CapEx expectations, excluding the NGLS?

Jeff McParland

Generally, our capital expenditures, and this is – speaks to both NGLS as well as the parent on a stand-alone basis. We expect to consider – to have to continue at approximately the same run rates we’ve communicated for the full year this year. We may see some increase in the maintenance expenditures and certain of the parent business.

Rene Joyce

Yes. The biggest project that we’ve got, as I mentioned, is the coal generation facility, which is a $24 million project. And a lot of those dollars will be spent early, first part of next year. Generally, the remaining expenditures would be as we’ve experienced in the past, unless we, as I’ve said, develop a project like the expansion of the Belvieu fractionator.

Chris – Barclays Capital

How about the Florida project, is that included in that?

Jeff McParland

Oh that, it’s not. No, that’s not included in that. Like I said, that project is still being developed. We’ve got some significant hurdles to get over. And that’s primarily being appropriate contracts with the utilities that will utilize that. Until we get to that point–

Michael Heim

We don’t have good visibility.

Jeff McParland

Yes. That’s the best way to describe it. We don’t have visibility on that project yet.

Rene Joyce

The capital expenditures that we have planned for ’09 are well within the cash flow that TRI should generate in ’09.

Chris – Barclays Capital

Okay. And during the third quarter, were there any repurchases of the hold co. debt during the quarter?

Rene Joyce

No.

Chris – Barclays Capital

And do you have the ability to buyback more and do your covenants or not?

Rene Joyce

We have investment capacity available if we wanted to buy hold co. debt at the Targa Resources, Inc. level. We do not have restricted payment capacity to the parent.

Chris – Barclays Capital

And how much is that investment basket capacity?

Rene Joyce

It’s not information that we have out there publicly. The original basket amount was, I believe, $200 million in our disclosed covenants under the senior secured credit facilities. And that amount has not been refreshed nor do we expect it to be available for refreshment.

Chris – Barclays Capital

Okay. And do you have any major covenants in the senior secured facilities at Targa or NGLS that we should be aware of, I guess? And do you expect to be closing in on any of those in 2009 or the rest of–?

Jeff McParland

We have debt EBITDA and interest coverage. Those are publicly disclosed. The level is seven and a half on a debt EBITDA basis for cent loan Target Resources, Inc. debt. And we are in a kind of two-ish area with respect to that covenants. We have substantial headroom on those financial covenants. And as I mentioned earlier, no refinancing until the revolver matures in October of 2011.

Chris – Barclays Capital

Okay. Would you all consider doing acquisitions at NGLS (inaudible) really? Or is that something you would expect to do if you did acquisitions? Do that at TRI, and then, keep them at that level, I guess.

Rene Joyce

We consider acquisitions at both levels as we’ve disclosed before. At NGLS, they will be accretive to our unit holders. And at TRI, we’re looking for – we have substantial liquidity. Both our Boards are encouraging us to be very patient because we believe there will be very attractive opportunities going forward. And we don’t need to get in a rush.

Jeff McParland

We have solid financial capacity for our continuing operations, and sufficient capacity that you could consider us as potentially having flexibility beyond that. And as Rene said earlier on our partnership call this morning, we will be very careful and very patient about competing uses for financial capacity in this uncertain market environment.

Chris – Barclays Capital

Okay. That’s it for me. Thank you.

Operator

Thank you. (Operator instructions).

Anthony Riley

All right, operator?

Operator

And there are no further questions in the queue at this time. Sir, I would like to turn it back to Mr. Joyce for any closing remarks.

Rene Joyce

Thank you, operator. To the extent anyone has follow up questions, please feel free to contact Jeff or any of us here at Targa. Thank you again for your time this morning. And we look forward to our next call.

Operator

Ladies and gentlemen, this concludes the Targa Resources, Inc. conference call. If you’d like to listen to a replay of today’s conference, please dial 303-590-3000, or you can dial 800-405-2236, and then the access code 11121587 followed by the pound sign. AT&T would like to thank you for your participation. You may now disconnect.

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