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Executives

Chris McEwan - Senior Manager, Finance

Joe Bob Perkins - Chief Executive Officer

Matt Meloy - Chief Financial Officer

Mike Heim - President and COO

Analysts

Bradley Olsen - Tudor Pickering Holt

John Edwards - Credit Suisse

Michael Blum - Wells Fargo

Justin Agnew - Robert W. Baird

Helen Ryoo -Barclays

Darren Horowitz - Raymond James

Selman Akyol - Stifel Nicolaus

Targa Resources Partners LP (NGLS) Q4 2012 Results Earnings Call February 14, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen. And welcome to the Targa Resources Year End 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode and later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

And as a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Chris McEwan.

Chris McEwan

Thank you, Operator. I’d like to welcome everyone to our fourth quarter and full year 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 the website after the call.

Speaking on the call today will be Joe Bob Perkins, Chief Executive Officer; and Matt Meloy, Chief Financial Officer. Joe Bob and Matt are going to be comparing the fourth quarter and full year 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 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, 2011 and quarterly reports on Form 10-Q.

With that, I’ll turn it over to Joe Bob Perkins.

Joe Bob Perkins

Thanks Chris. Welcome and thanks to everyone for participating. Beside Matt and myself there are several other members of the management team will be available to assist in the Q&A session.

For today’s call I’ll start off with high-level review of performance and highlights. We’ll then turn it over to Matt to review the Partnership’ consolidated financial results, its segment results and other financial matters for the Partnership. Matt will also review key financial matters related to the Targa Resources Corp. Following Matt’s comments, I’ll provide some concluding remarks and then we’ll take your questions.

We are really pleased to announce that 2012 was a record year for Targa on many fronts. Record adjusted EBITDA $515 million, record distributable cash flow of $354 million, over $540 million of organic growth CapEx, 13% distribution growth at the Partnership and 36% dividend growth at TRC.

The underlying fundamentals of our business are strong as we were able to achieve full year 2012 EBITDA within our initial guidance range, despite 25% lower NGL prices than our guidance assumptions, despite an $8 million impact from Hurricane Isaac and despite $6 million worth of transaction-related expenses for Bakken Shale Midstream acquisition.

These results included record operating margin for our Logistics and Marketing division, which was up 29% compared to 2011, driven by higher fractionation fees, record LPG export services volume, which benefits both our Logistics Assets and our Marketing and Distribution segments.

Contribution from our petroleum logistics terminals that we acquired in 2011 and increased treating fees resulting from benzene treating project placed in service early in 2012, a very good year for the Logistics and Marketing division.

We also saw continued strong producer activity across our Field Gathering and Processing segment despite the fall in NGL prices. Natural gas plant inlet volumes for our Field Gathering and Processing segment increased 12% with volumes up in all four business units, North Texas, Sand Hills, SAOU and Versado. As you will probably aware activity in our three Permian Basin business units like much of the Permian Basin is very high, driven by oil prices and improved technology.

We are also pleased to announce the closing of our strategic acquisition of Midstream assets serving producers in Bakken Shale. This $950 million acquisition closed at the end of the day on December 31st and it have no impact on our results of operations for 2012 other than the transaction costs related to the acquisition.

Going forward, we will be calling this business Targa Badlands and results will be reported in our Field Gathering and Processing segment. We’ve only owned this business for 45 days, but our people are working hard with the system of a very good transition services agreement and members of the Saddle Butte team to continue the construction projects, meet customer needs, further commercialize the facilities and integrate the businesses. This new acquisition will provide us with additional business diversity scale and long-term growth.

Badlands expands the Targa footprint into one of the fastest growing crude oil basins in the world, where we will handle crude oil, natural gas and NGLs, while adding rapidly growing fee-based EBITDA. We are excited about the long-term growth outlook for these assets and expect to invest $250 million in 2013 to bring us additional fee-based accretion in 2014 and beyond.

As mentioned previously, we spent a record $540 million of organic growth CapEx in 2012 and importantly, we placed in service projects totaling approximately $200 million of growth capital during the year of 2012.

Now for 2013 we will set another record by spending approximately $1 billion in growth CapEx and we will placed in service projects totaling over $1.1 billion of organic growth capital during 2013.

The majority of that $1.1 billion to be placed in service in 2013 will add fee-based margin and it will be online in contributing to EBITDA in the back half of the year, meaning we should exit 2013 with a much higher rate EBITDA then we have begun 2013.

Due to this large capital spending program and the timing of several major projects later to come online in the back end of 2013, we continue to expect the first half 2013 distribution coverage to be weaker than historical averages.

As we stated previously, the Badlands acquisition is expected to be dilutive to 2013 than accretive in 2014 and beyond. As we work to expand the assets, do the construction and increase the operating margin overtime.

For the first half of 2013, we expect our distribution coverage to be around 0.9 times given the impact of the Badlands acquisition on 2013. We expect distribution coverage to improve in the second half of 2013 averaging about one times for full year. We are excited about the long-term growth outlook for our businesses and expect to soon return to our long-term target coverage ratio of 1.2 times.

With high visibility and confidence on the 2014 performance and our strong balance sheet and liquidity we believer we are on right path. We also increase the Partnership’ full year 2012 distribution 13% over 2011, consistent with our original 2012 full year distribution guidance, given in the fall of 2011 as a 10% to 15% increase, a little past the midpoint.

At the TRC level, our full year 2012 dividends of $1.64 represented 36% growth over 2011. Also just past the midpoint of our original 30% to 40% growth guidance given for 2012. We continue to expect to deliver full year 2013 distribution growth of 10% to 12% at the Partnership and expect to exceed 30% TRC dividend growth for 2013.

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

Matt Meloy

Thanks Joe Bob. I’d like to add my welcome and thank you for joining our call today. Joe Bob discussed some full year 2012 records and highlights, so let’s turn our attention to Q4 results.

Adjusted EBITDA for the quarter was $131 million or $137 million excluding $6 million in acquisition fees and expenses related to our acquisition of Badlands. This compares to $146 million for the same period last year.

The decrease was primarily the result of lower operating margin in our Gathering and Processing division driven by weaker commodity prices, partially offset by a 29% increase in our Logistics and Marketing division largely due to higher LPG export activity.

Operating margin decreased 6% for the fourth quarter compared to last year. I will review the drivers of this performance in our segment review. Please note as Joe Bob mentioned, the Badlands acquisition do not contribute 2012 operating results, we will include the Badlands results beginning in the first quarter of 2013.

Gross maintenance capital expenditures were $19.6 million in the fourth quarter of 2012, compared to $24.6 million in 2011. Adjusting for the non-controlling interest portion or maintenance CapEx and certain reimbursements from TRC to the Partnership, net maintenance CapEx were $18.2 million in the fourth quarter of 2012, compared to $17.1 in 2011.

Turning to the segment level, I’ll summarize the fourth quarter performance on a year-over-year basis. I’ll start with our Gathering and Processing segment.

Field Gathering and Processing operating margin decreased by approximately 32% compared to last year, driven by lower NGL and natural gas prices, and by higher operating expenses due to additional compression and maintenance costs associated with system expansion.

These effects were partially offset by increase natural gas plant inlet volume. Please note that these segments do not include the impact of our hedging program even though the hedging program is primarily associated with this segment.

Fourth quarter 2012 natural gas plant inlet for the Field Gathering and Processing segment was 720 million cubic feet per day, a 14% increase compared to the same period in 2011.

All of the Field Gathering and Processing business units were up on volume for the quarter, as well as for the year as Joe Bob mentioned. Natural gas inlet volumes increased by approximately 19% at both North Texas and SAOU, 5% at Sand Hills and 10% at Versado. This increases were attributable to new well connects across the system and less downtime for operational issues.

For the segment, NGL prices decreased 39%, while condensate prices decreased, sorry, NGL prices decreased 39%, while condensate prices decreased 9% and natural gas prices decreased 5% compared to the fourth quarter of 2011..

Turning now to the Coastal Gathering and Processing segment, operating margin decreased 57% in the fourth quarter compared to last year. The decrease was primarily driven by lower commodity prices, less favorable frac spread and lower throughput volumes.

Volumes were up at VESCO and LOU but lower at our other coastal straddle plant, especially from the shutdown of the Yscloskey plant which previously contributed to inlet volumes for the segment but had a minimal impact to operating margin.

We are beginning to capture some of the volumes that previously went to Yscloskey at a more efficient cryogenic Venice plant and expect to substitute capture to continue to improve.

Next, I’ll provide an overview of the two segments in the downstream business. Starting with the Logistics Assets segment, fourth quarter operating margin increased 32% compared to the fourth quarter of 2011, due to higher fractionation and treating volumes and higher export volumes, partially offset by increased operating expenses drive by higher system maintenance costs.

Export activity at our Galena Park Marine terminal on the Houston ship channel increased again this quarter with LPG export volumes of 1 million to 1.5 million barrels per months currently being loaded on to small and medium sized vessels.

In the Marketing and Distribution segment, operating margin for the segment increased 25% over the fourth quarter 2011, due primarily to favorable wholesale marketing opportunities driven by regional supply conditions and increased LPG exports service activity.

With that, let's now move briefly to capital structure and liquidity. At December 31st, we had $620 million of outstanding borrowings under the Partnership’s 1.2 billion senior secured revolving credit facility due 2017. With outstanding letters of credit of $45 million, revolver availability was about $535 million at year end.

Total liquidity including approximately $68 million of cash on hand was approximately $603 million. Total funded debt on December 31st was approximately $2.4 billion or about 56% of total capitalization, and our year end compliance debt to EBITDA ratio was 3.8 times.

On October 25th, we issued $400 million note offering of 5.25 notes due May 2023. The proceeds were used to call all of our outstanding 8.25 notes due 2016, and to reduce borrowings on our revolving credit facility.

On November 15th, we issued a public offering of $10.9 million common units at $36 per share, resulting in $393 million of proceeds including the contribution by TRC to maintain a 2% GP interest. The proceeds were used to partially fund the Badlands acquisition.

On December 4th, we issued a $200 million note offering of 5.25 notes due May 2023 as an addition to our existing $400 million aggregate principal amount of 5.25 notes. The proceeds were used for general Partnership purposes, including funding a portion of the Badlands acquisition.

We’ve already had a productive start to 2013 financing activity. On January 10th, we closed on a $200 million accounts receivable securitization facility, which increases our liquidity and provides a lower cost funding source relative to other outstanding debt. As of the end of January, we had $171 million of outstanding borrowings under this facility.

Through January, we have received net proceeds of approximately $65 million from equity issuances under our at-the-Market Equity Program, which allows us to periodically sell equity at prevailing market prices.

Pro forma for the accounts receivable securitization facility and equity issued in January, our current revolver availability is approximately $770 million, leaving us with ample flexibility to fund our growth investment in 2013.

On, a debt compliance basis, which provides us adjusted EBITDA credit from material growth projects that are in process but not yet complete and makes other adjustments. Our pro forma total leverage including the financings in January 2013 was 3.5 times in the middle of our stated 3 to 4 times on a compliance basis.

Next, I’d like to make a few comments about our hedging and capital spending programs for the year. We expect operating margin to be over 50% fee based during 2013, and 55% to 65% during 2014 and beyond.

For the non-fee based operating margins, relative with the Partnership’s current equity volume from field gathering and processing, we estimate we have hedged approximately 50% of 2013 natural gas and 50% of 2013 combined NGL and condensate.

We are less hedged than in previous years, but our diversity and fee-based improvements reduce the need to hedge commodity prices to previous percentages across all commodities.

Furthermore, we did not have much appetite for hedging ethane or propane at the current market -- at the current forward prices. We did not want to lock in pricing at these levels. We may hedge more butane, the natural gasoline and we will likely hedge more natural gas and condensate.

Moving on to capital spending, we estimate approximately $1 billion of growth capital expenditures in 2013, with $1.1 billion of growth CapEx placed in service. We expect maintenance capital, net to our interest to be approximately $75 million for the year.

Next, I’ll make a few brief remarks about the results of Targa Resources Corp. On January 15th, TRC declared a fourth quarter cash dividend of $45.75 per common share or a $1.83 per common share on an annualized basis, representing an approximately 36% increase over the annualized rate paid with respect to the fourth quarter of 2011.

TRC’s standalone distributable cash flow for the quarter -- for the fourth quarter 2012 was $24.7 million and they declared $19.4 million in dividends for the quarter. At year end, TRC had $82 million in borrowings outstanding under its $150 million senior secured credit facility and $8 million in cash resulting in total liquidity of $72 million.

That concludes my review. So, I will now turn the call back over to Joe Bob.

Joe Bob Perkins

Thanks, Matt. To wrap up the final portion of our prepared remarks, I would like to review some highlights of our growth project activity.

As you know, our growth opportunities are being driven by the underlying industry dynamics of shale and resource plays development, which is increasing business for both our gathering and processing division and our logistics and marketing division.

These dynamics have allowed us to announce over $1.7 billion of growth investments to be placed in service in 2013 and 2014. $1.3 billion of that total $1.7 billion growth investments over the next few years will be providing primarily fee-based margin, which further insulate us from commodity price volatility.

So here is a quick status update on some of the growth projects currently underway that I know you are following. Our 100,000 barrel per day CBF Train 4 expansion will be placed into service in the second quarter of this year as expected.

During the course of construction, we have strategically increased selected scope to accommodate future growth, raising the total budget to $385 million from $360 million announced previously. This minor increase in expenditures significantly advantages future projects.

Our expanded international export project remains on time and on budget. We expect the project which will enable us to load in excess of 3 million barrels per month, to be in service during the third quarter of this year. When completed, we will be able to load in excess of 5 million barrels per month during the third quarter of 2014.

We have already entered into multi-year take-or-pay contracts for the majority of the capacity of the project and are seeing longer-terms for the most recent contracts. Our $200 million cubic feet a day Longhorn Plant in North Texas is expected to be placed in service in the third quarter of 2013, assuming a near-term approval of its greenhouse permit.

We believe that everything is complete on the permit and expected soon, but have been disappointed with the speed of final federal approval. We will let you know when we get to permit.

The $200 million cubic feet a day, High Plains Plant at SAOU announced in the fourth quarter of 2012 is still on track to be finished on time in mid 2014 and has all required permits. Given the level of producer activity and future focus in the Permian Basin, we're very excited about this project and the recent completions of 300 million cubic feet a day expansions to 30 million cubic feet a day expansion in SAOU and Sand Hills.

Sometimes, I can talk better than I can read. As I mentioned in my opening remarks, we are busy at work, integrating Badlands into Targa. Badlands is also an early stage growth project. In addition to our integration and commercialization efforts, we expect to spend approximately $250 million in 2013 to expand the system, and to provide additional activity to both rail and pipeline takeaway options for our producer customers and to secure further acreage dedications.

We recently completed a $35 million expansion of our sound terminal in Tacoma to greatly enhance our ability to serve the local and regional markets. The project connected the terminal to an important local products pipeline, added 225,000 barrels of storage and added ethanol and gasoline blending to the truck loading rack to increase the clean fuels available to the future sound market. At sound, we are also handling railcars of Bakken crude to Washington State in West Coast Refineries.

In addition to these announced projects, we continue to develop other projects that have not yet been officially approved by our Board, some of which are known in the industry and have been referenced in our investor materials. Those ongoing projects with some visibility include CBF Train 5, a unit train facility and others. We're still optimistic about these projects.

We expect the impact from these highly visible growth projects and others like them to provide the margin, scale and diversity that will support continued distribution growth in 2013 and beyond. Even with the acquisition of the Badlands, we continued to have substantial liquidity to fund our current announced slate of growth projects and to provide us flexibility to further expand our diversified midstream platform for even longer-term growth.

2013 will be a transformational year for Targa. We have approximately $1.1 billion in growth capital that will be placed in service and be up and running by the fourth quarter. The majority of these new projects and service will contribute the base margin.

These projects are expected to be completed at attractive EBITDA multiples, meaning that our run rate EBITDA in the fourth quarter of 2013 will be a step change from where we ended 2012 and where we are today. And this enhanced end of year 2013 EBITDA performance should result in a 2014 EBITDA growth in excess of 25% over 2013.

As I mentioned earlier in the call, we continue to expect to deliver full-year 2013 distribution growth of 10% to 12% at the Partnership and expect to exceed 30% TRC dividend growth for 2013.

So with that, we will open it up to questions and I will turn it back over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bradley Olsen with Tudor Pickering Holt. Your line is open.

Bradley Olsen - Tudor Pickering Holt

Thank you. Good morning, everyone.

Joe Bob Perkins

Hey, Brad.

Bradley Olsen - Tudor Pickering Holt

First question is about the results reported in the marketing segments. You noted in the press release this morning that a decent piece of that of the increase was a result of activities that the LPG exports have. I was hoping that you might be able to, maybe just qualitatively walk through how much of that was due to maybe contract rollover, a new higher fee structure or any market based opportunities that you guys were able to take advantage of during the quarter.

Joe Bob Perkins

Thanks, Brad. First of all, I think everybody is wondering if the first no doubt gets the first question. There's no correlation, but yours was the first when I saw this morning. I know you would like more color on that. I think the right color to provide is that things are going well in that whole segment that we have had additional margin performance coming from exports, more volumes and attractive contracts.

We also had very good performance in our wholesale division. This is a good season for wholesale and they have managed to use their assets, rolling assets like trucks and rail cars. People who are very good at responding to opportunities to meet customer needs and capture margin there as well.

Bradley Olsen - Tudor Pickering Holt

Great. Thanks. And as far as the CapEx -- the CapEx outlook that you provided, that was very helpful. And I think just kind of building on, maybe one of the comments you made about our potential unit train facility. Can you discuss in any further detail, kind of, how you're thinking about the integration of some of the coastal terminal assets that you own with the Bakken assets as you think about maybe being able to provide services on the loading and unloading side for crude by rail?

Joe Bob Perkins

Brad, you know, when others that follow us know that we actually were working on the coastal terminals well before we were working on the Bakken and those projects were getting started before hand. Now, we find we are talking to many of the same customers in different groups of the same customers about handling their supply in the Bakken and handling their linkage to the coast, east coast and west coast, that provides us insights. I don’t want to over work the synergies other than that but we’re happy to be working with customers on both ends of the pipe so to speak.

Bradley Olsen - Tudor Pickering Holt

Great. And last question for me, we’ve started hearing, I guess, in these quarterly earnings calls from some of the producers in areas like the Eagle Ford and the Permian about perhaps some discount developing in the condensate market versus the crude oil market and given the fact that you already have a logistics footprint on the Gulf Coast and already have the logistics that allow you to move export to your facilities. Do you see any potential growth opportunities for Targa, if we do see a dislocated Gulf Coast condensate market to play a role in helping provide liquidity for producers or may be even provide them with export outlets?

Joe Bob Perkins

Mike was starting to tell me what to say on that. He know it depend (inaudible) jump in here.

Mike Heim

We are working on two projects right now with both aggregators and producers with initial engineering, working then done on condensate, stabilizers to make that product more merchantable. It will be out there so that we can use our trucks and potentially use our barges up and down that Texas Gulf Coast between Dublin and Corpus Christi are deflected. It’s a very dynamic situation right now. We certainly want to help the producers make sure that they have a home for their condensate.

Bradley Olsen - Tudor Pickering Holt

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of John Edwards with Credit Suisse. Your line is open.

John Edwards - Credit Suisse

Yeah. Thanks. Good morning, everybody.

Joe Bob Perkins

Hey, John.

John Edwards - Credit Suisse

Hey, I’m just curious on the Badlands. How is that going to be reported? Will that be a separate segment or is it going to go into one of your existing segment?

Joe Bob Perkins

It’s going to go in the field gathering and processing segment.

John Edwards - Credit Suisse

Okay. All right. And then, I’m just curious on the $250 million of CapEx you identified there. Was that already inherent with the acquisition or was that projects you immediately identified when you acquired it? And then also, I was just curious what’s the outlook you expect that to grow over time?

Joe Bob Perkins

Okay. The $250 million is the same number that we announced when we announced the acquisition based on the work we had done to that point. It’s also very indicative of what we expect to spend in 2013 and if we spend more than, that’s good news. We have reprioritized those dollars, somewhat since we’ve taken ownership 45 days ago.

But it is opportunity-rich environment. We are trying to get as much done as quickly as possible for 2013. We will have additional capital expenditures in 2014. I don't have a number for that for you now but it’s of similar magnitude and probably a little bit less would be a reasonable expectation. And if it’s more, it’s a good thing.

John Edwards - Credit Suisse

Okay. That’s great. And then just, where are you now for 2013 EBITDA guidance?

Joe Bob Perkins

We did not change our guidance at all.

Matt Meloy

So it was -- before we announced the Badlands acquisition, it was $540 million to $570 million and then we raised that by 10% to 15%, which gives you a range of about $6 to $6.50.

John Edwards - Credit Suisse

Okay. All right. Great. That’s very helpful. Just last question, in terms of your, the backlog of opportunities that you’re evaluating. If you can give us any insight on that?

Joe Bob Perkins

I think the easiest way to discuss backlog, quite smiles because every time we sort of get in front of people like our Investor Day, we were talking about projects we haven’t even planned to talk about. But what is not approved by our board and that we’re working on looks a whole lot like the suite of projects that are already on our disclosure list. And the two I just mentioned, CBF Train 5, people know we’re working on.

We put in our investor material and we’ve described publicly. We’ve described that we’re working on unit train projects publicly and you can assume that we’re also working on other gathering and processing projects.

John Edwards - Credit Suisse

Okay. Great. Thank you very much.

Operator

Our next question comes from the line of Michael Blum with Wells Fargo. Your line is open.

Michael Blum - Wells Fargo

Thanks. Couple of questions for me. One, can you just talk about across your system if you're -- if you were projecting ethane in the fourth quarter and now and to the extent, you’re going to quantify that?

Joe Bob Perkins

Sure. Let me talk about what we know about ethane rejection. First of all, we have the advantage of sifting at Mont Belvieu and seeing a lot of pipes coming in. So we know that ethane rejection is going on based on decreasing the ethane content that we can absorb, okay, without pointing to any pipes. What we can -- we can conclude that certainly occurring in the Mid-Continent and Rocky Mountain. I can also say you go to our field gathering and processing plants.

SAOU, the Permian plants, North Texas, Targa is not rejecting ethane. So I can’t speak for other parties but you asked to what extent are we rejecting in our field gather and processing, we aren’t rejecting at all.

Michael Blum - Wells Fargo

Okay. And then, turning to hedging for a second, the fact that you are not hedging the ethane and propane right now. Does that imply that your view is that prices will improve this year or conversely that there is a lot of downside? And I guess, the second part of that question is given the -- you mentioned there has been fee-based component of your cash flow is increasing. Does that mean that going forward we should expect this level of hedging as kind of a new, kind of, steady state?

Joe Bob Perkins

This level of hedging that Matt just described was a mix of the various components. And we provide all kinds of disclosure by component on what our hedging looks like. But I think it’s fair to say that at the forward prices, not the current prices, I mean, we’re at $0.25 ethane right now and the forward curve on ethane isn’t very pretty. That we do believe there is more upside than downside relative to the forward price curves, okay. Not relative to current because that’s what you get to hedge at, the forward price curves.

Michael Blum - Wells Fargo

Right.

Matt Meloy

And feel the same way to a certain extent on propane. We’ve got export projects coming online this year on propane and you didn’t have much of a winter. That’s just how we view it and if you think about that’s running multiple price scenarios that is just not a whole lot of downside relative to the upside. And we’re going to be less hedged than ethane and propane than we have been in the past. We will probably be more hedged than we are today on the rest of the barrel and on condensate.

Michael Blum - Wells Fargo

Okay. That’s helpful. My last question, in the press release, you mentioned that in the fourth quarter there were some, I think, operational issues at Gulf Coast fractionators. Just wanted to an extent, you can provide any detail there and where that stands today?

Joe Bob Perkins

Everyone on the line probably knows that we don’t operate Gulf Coast fractionators and I hate to be the spokesman instead of the operator being spokesman. What we said in our material is accurate and I know that efforts are continuing. Although Targa is not operator, we are in touch with them and we even try to help provide resources at times.

Michael Blum - Wells Fargo

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Justin Agnew with Robert W. Baird. Your line is open.

Justin Agnew - Robert W. Baird

Good morning. Thanks. All questions have been answered. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Helen Ryoo with Barclays. Your line is open.

Helen Ryoo - Barclays

Thank you. Good morning. Just, starting off with the LPG question, I think, Joe Bob you mentioned that the activity was fairly robust and that the question is before -- are you pretty much maxed out on your current capacity or should we expect to see the volume, the export activity volume increasing even before the expansion comes on line in the third quarter. It does -- should it continue to benefit the logistics and marketing business?

Joe Bob Perkins

Okay. Our current activity in result is just what we can export HD5 domestic grade propane prior to this major project that’s coming on. And we’re trying to provide the ability to export as much as possible, working very hard to do that.

I would say that the activity and the interest has increased but we can only get so much across our docks and we have been pleasantly surprised by how much we have been able to give our docks. And we -- I think it’s reasonable to expect that to continue up into the first phase of the expansion coming on in the third quarter of this year.

The third quarter of this year similarly interest in activity and desire for that has increased and when it first comes on, we’ve got it contracted as much as it can be contracted and then we will be working to become even more efficient about getting more across the dock, which may open up a little bit more room for some spot cargos. It’s my understanding that the only other dock in the Gulf Coast doing that has seen similar activity and desire and demand so to speak.

Helen Ryoo - Barclays

And I guess, are you fully contracted out on your 2013 expansion and also for your…

Joe Bob Perkins

Yeah.

Helen Ryoo - Barclays

Okay. And then your ‘14 expansion I guess, your plan is to still keep not contract out the whole capacity but keep something in your own account. Is that still the plan?

Joe Bob Perkins

No. I remember that coming up, I believe, in the last call to clarifying a bit. We’re trying to contract as much as we can based on known ability to meet that demand because those are from contracts. Our ability to get stuff across the dock may allow us, may allow us to get additional spot cargos beyond what we’ve contracted. When it comes on in ‘13, it’s fully contracted. Maybe we can squeeze a little bit more across and when the additional part comes on in ‘14, it’s essentially contracted.

It maybe a little bit more that we can contract that we’re learning all the time about what we can get across the dock. We also acquired existing dock that were required some investment and were looking at plans different ways to use that dock to perhaps expand our ability to do LPG contracts. For example, maybe we handle the domestic grade propane out of Patriot while handling more international grade propane out of Galena Park.

Helen Ryoo - Barclays

Okay. And then that was the other questions, I guess the Patriot facility, would that -- is that a side where you could use as expansion of the LPG export facility, where it just -- it sounded like it maybe used a little bit differently not just forward?

Joe Bob Perkins

Well, what we said in release and what I said again today, it is a very flexible facility because it closed and it can be interconnected with the big facilities that are connected to Mont Belvieu in our grid and our storage.

At the same time, we might very well be using it for two purposes, helping out on the domestic grade propane and what originally hit our radar scope unless the opportunities associated with our petroleum logistic business in very close location to a major pipeline there.

Helen Ryoo - Barclays

Okay. All right. That’s very helpful. And then, I guess, another question I had was regarding your Longhorn plant. Is that coming online this year? And just wondering, I guess, it seems like there are some producers who are caught by activity in the interim, Barnett plant, is that affecting maybe your expectation on how quickly this plant will fill up?

Joe Bob Perkins

I think that’s the probably fair one. It’s less that it’s uneconomic in the Barnett from our perspective, yeah producers who also have Permian opportunities and that’s just going gangbusters. So maybe they are moving dollars to the Permian in lieu of North Texas for example. I believe you really have the right summary. It still going to be an attractive project for us and may just fill up slower than we had initially anticipated.

Helen Ryoo - Barclays

Okay. That’s it for me. Thank you very much.

Operator

Thank you. Our next question comes from the line of Darren Horowitz with Raymond James. Your line is open.

Joe Bob Perkins

Hey, Darren.

Darren Horowitz - Raymond James

Good morning guys. Joe Bob, just one question, as you kind of think about the bid for propylene and growing divergence between our final grade supply, final grade demand. How do you guys think about possibly adding some propylene splitting capacity or even looking at PDH in order to meet that demand. I mean you got as you just mentioned HD5 supply and it seems like you would be a natural extension of your downstream value chain. So a little color there would be helpful?

Joe Bob Perkins

We understand it. We got a lot on our play and it’s unlikely shortly in the near term that we will be integrating in that direction. Instead what we’re trying to do is to meet the needs of customers who are working in that direction. Mike, do you see any difference?

Mike Heim

Yeah. There is a number of PDH plants that have already been announced on the Gulf Coast, maybe more to come. And there is a ton of international projects. Our focus is to supply product not to get into that. We are -- that is not in our focus line that we don’t have that experience in house. We have to go out and get it.

Darren Horowitz - Raymond James

Okay. Thank you.

Operator

Our next question comes from the line of Selman Akyol with Stifel Nicolaus. Your line is open.

Selman Akyol - Stifel Nicolaus

Thanks. Good morning and I appreciate all the color. Two questions from me, first of fall in the marketing and distribution segment, you guy’s reference the timing of the third party wholesale contract settlement? I was wondering if you could get some additional detail around that so we can get a run rate?

Matt Meloy

So that’s -- we had some additional operating margin periodically really over the last year. So, on the settlement that’s hit in the second quarter before here in Q4, so it can be low.

Joe Bob Perkins

The fact is that is a settlement. And I just can’t say much more about it and did it mean to -- it’s a good question. I would be asking the some question, we’re just stuck with what we can about it.

Matt Meloy

Right.

Selman Akyol - Stifel Nicolaus

All right. Well, fair enough. And then the other question have is can you just talk a little bit about your appetite for doing other acquisitions? Do have enough, would you do just prefer to continue on internal growth or would you be looking for other acquisitions to propel 2014 and beyond?

Joe Bob Perkins

I think that our answer is really always the same on that one. We look at a lot of things. We benefit from looking at those things but in acquisitions for Targa that is accretive that nicely fits into our existing business and doesn’t overwork our current talent pool that is a needle in the haystack. And we found that with the Badlands acquisition.

We hadn’t done a major acquisition for five years when we did that. We did little acquisitions that people barely noticed that was big as our first acquisition. And the acquisitions of the three petroleum logistics terminals was a $0.25 billion which was as big as our first acquisitions and it barely hit the radar scope.

We’ll do smaller ones that will meet -- kind of have a fit but I don’t see a major acquisitions in the future. I could be surprised but it’s not a goal or an objective of ours.

Selman Akyol - Stifel Nicolaus

All right. Thank you very much.

Operator

(Operator instruction) And one moment while we wait for any further questions.

Joe Bob Perkins

I just got corrected, I misspoke again. I said 250, I should have said 150. Which was approximately the same size of the $250 million, SAOU or LOU acquisition.

Operator

And at this time, I’m showing no additional questions. So I’ll turn it back to management for any closing statements.

Joe Bob Perkins

I just want to say, thank you for your time. We appreciate your interest. If you have any follow-up questions, please feel free to contact Matt or any of us. Have a good day.

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