Targa Resources Partners LP Q2 2009 Earnings Call Transcript

Aug. 6.09 | About: Targa Resources (NGLS)

Targa Resources Partners LP (NYSE:NGLS)

Q2 2009 Earnings Call

August 06, 2009; 10:00 am ET


Rene Joyce - Chief Executive Officer

Jeff McParland - Executive Vice President & Chief Financial Officer

Anthony Riley - Senior Manager Finance & Investor Relations


Darren Horowitz - Raymond James

Chris Holt - Barclays Capital


Welcome to the Targa Resources Partners second quarter 2009 conference call, on the 6 August 2009. Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation there will an opportunity to ask questions. (Operator Instructions)

I would now hand the conference over to Anthony Riley. Please go ahead sir.

Anthony Riley

Thank you, operator. Good morning everyone. I’m Anthony Riley and I would like to welcome you to Targa Resources Partners LP’s second quarter 2009 investor call. Before we get started, I would like to mention that the partnership has published an earnings release which is available on our website at www.targaresources.com.

Speaking on the call today will be Rene Joyce, Chief Executive Officer; and Jeff McParland, Executive Vice President and Chief Financial Officer. Rene and Jeff are going to be comparing the second quarter results of 2009 to the second quarter results of 2008 and then we’ll be providing additional color on our results, current performance and other matters of interest. Also we filed our second quarter 2009 10-Q with the SEC this morning.

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 Resources Partners LP may differ materially from those expressed from the forward-looking statements contained within this call. Many of the factors that will determine these results and values are beyond our ability to control or predict.

These statements are necessarily based upon various assumptions involving judgments 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.

Now, I will turn it over to Rene Joyce, our Chief Executive Officer

Rene Joyce

Thanks Anthony. Good morning and thanks to everyone for participating in Targa Resources Partners second quarter conference call. Besides Jeff and myself, there are several members of our management who will be available to assist in the Q&A session.

By way of agenda, I will start off with some performance highlights for the second quarter and then discuss the drop down transaction we announced last week. I will then turn it over to Jeff to review our financial results. Following Jeff’s comments, I will provide updates on some ongoing activities at the partnership and finally we will take your questions.

With regard to the performance highlights for the quarter, our second quarter results generated distributable cash flow of $35.6 million, which corresponds to distribution coverage of 1.35 times. We continue to be proud of our performance and record of reporting relatively clean coverage ratios.

Gathering throughput for the combined North Texas Lou and San Angelo Systems was a little over 475 million cubic feet per day, an increase of approximately 2% compared to the same period in ‘08. For the same period, plant natural gas inlet was 4% greater at almost 455 million cubic feet per day.

These increases resulted primarily from increases at our North Texas and San Angelo Systems due to higher producer volumes from new well completions, partially offset by lower volumes at our Louisiana System. At our LOU system, lower producer volumes were offset by start-up of a new discretionary volume source from a recent interstate pipeline connection.

Gross NGL production was approximately 44,200 barrels per day for the quarter, an increase of 1% over the same period in ‘08. Natural gas sales volumes were a little over 378 billion Btu per day in the quarter, a decrease of 8% over the same period in ‘08. NGL sales were higher at 39,800 barrels per day for the quarter, an increase of 2% over the ‘08 second quarter. Condensate sales were lower compared to the same period in the prior year at 3,100 barrels per day for the second quarter.

Six months results: Gathering throughput for the combined North Texas, LOU and San Angelo systems was 452.5 million cubic feet per day, a decrease of approximately 2% compared to the same period in ‘08. For the same period, plant natural gas inlet was also 2% lower at 431.6 million cubic feet per day.

For the six months ended June 30, throughput and plant inlet volumes were primarily impacted by lower producer and discretionary volumes at our Louisiana System, somewhat offset by increases at our North Texas and San Angelo systems, as well as a start up of the new discretionary volume source in Louisiana.

Gross NGL production was approximately 42,900 barrels per day for the six months ended June 30 ‘09, a decrease of 3% over the same period in ‘08. Natural gas sales volumes were approximately 366.8 billion Btu per day for the six months ended June 30, ‘09, a decrease of 11% over the same period in ‘08.

NGL sales were flat at 38,500 barrels per day for the six months ended June, 30, ‘09 compared to ‘08. Finally, condensate sales were down 500 barrels per day for the six months ended June 30, ‘09 at 3,200 barrels per day compared to ‘08.

For the three months ended June, 30 ‘09, our average realized prices including the impacts of hedges for natural gas NGLs and condensate were down 66%, 51% and 47% year-over-year respectively. For the six months ended June, 30 ‘09, our average realized prices, again including the impacts of our hedges for natural gas; NGLs and condensate were down 56%, 53% and 50% year-over-year respectively.

Now, I’d like to quickly recap the downstream transaction which we discussed last week. Jeff will walk you through the financial details of the transaction, but I’d like to review the timing and benefits of the deal from our perspective.

On July, 28 we announced that the Partnership agreed to purchase the downstream business from TRI for $530 million, foreclosing expected in the third quarter. The downstream business continued a strong performance generating $35.4 million of operating margin for the second quarter of ‘09, not including $1.7 million of equity earnings from our interest in the Gulf Coast fraction data.

This transaction is very important for the Partnership for a number of reasons. It’s immediately accretive on a distributable cash flow basis, it diversifies NGLs business and increases it scale. It differentiates the Partnership from others within the GMP space. It has primarily stably fee based income generated by unique and hard to replicate asset. It improves contract mix and reduces commodity price exposure. It provides the growth profile with strategic positions in a tightly supplied NGL logistics market and forecasted growing LPG import scenario.

As part of the transaction, Targa agreed to provide distribution support to the Partnership in the form of a reduction in reimbursement of allocated G&A expense if necessary for one time distribution coverage ratio, based on calculations at the current distribution rate for the actual number of outstanding shares, subject to maximum support of $8 million in any quarter.

The support feature will start in the fourth quarter of ‘09 and continue through and include the fourth quarter of 2011. We believe that the combined business will provide positive distribution coverage under most scenarios and support will not be necessary. However, we believe the support is important, that it demonstrates Targa’s commitment to the long time success of the Partnership.

We will continue to execute our strategy of offering all Targa’s assets to the Partnership overtime, and as Jeff will discuss, our solid financial footing and substantial liquidity will allows us to diversify the business mix going forward by adding fee based business through acquisitions and organic growth projects.

With that, I’ll turn it over to Jeff to give you details on our financial performance.

Jeff McParland

Thanks Rene. I’d like to add my welcome to everyone and thank you for joining our call today. For the second quarter of ‘09, the Partnership reported net income of $6.6 million, compared to net income of $28.2 million in 2008.

Reported net income for the quarter includes a non-cash hedge loss of $11.2 million compared to just $0.5 million in last year’s second quarter. The increase in income was also a result of lower commodity prices and higher depreciation G&A and interest expenses, partially offset by lower operating expenses.

Income from operations for the second quarter decreased to $16.6 million from $36.5 million, primarily as a result of lower prices and the non-cash hedge loss. Adjusted EBITDA for the quarter decreased to $46.9 million compared to $55.4 million, due primarily to the lower commodity price environment. Net interest expense for the quarter was approximately $10 million and maintenance capital expenditures were $2.1 million.

For the six months ended June, 30, the partnership reported net income of $4.4 million compared to $53.1 million in the same period of ‘08. Reported net income for the first half of the year includes non-cash hedge losses of $30 million, compare to $1 million in ‘08. The decrease in income was also a result of lower commodity prices and higher depreciation, G&A and interest expenses, partially offset by lower operating expenses.

Income from operations for the first half decreased, 66% to $24 million from $70.5 million in ‘08. Adjusted EBITDA for the six months ended June 30 was $92.3 million compared to a $108.2 million for the 2008 period. The decrease was primarily due to lower commodity prices and higher G&A expenses offset by lower operating expenses.

Net interest expense for the six months ended June 30 was $19.7 million and maintenance capital expenditures were $4.7 million. These results generated distributable cash flow of $69.1 million for the first half of the year, compared to $80.6 million last year.

Now let’s move briefly to capital structure and liquidity, and then I will highlight a couple of points related to the downstream transaction. During the second quarter, we repaid $40 million of the outstanding balance under our senior secured revolving credit facility using cash on-hand.

At June 30, we had 378 million in capacity available under the revolver, after giving effect to outstanding borrowings of $448 million, $13 million in letters of credit and the reduction in borrowing capacity as a result of the Lehman default.

We also had $38 million of cash-on-hand, which along with the revolver availability brings our total liquidity at the end of the quarter to approximately $416 million. Total funded debt at June 30 was approximately $657 million or about 49% of total capitalization.

On July, 6, the partnership issued $250 million of 11.25% senior unsecured notes, due 2017, at a price of just under 95, which resulted in gross proceeds of approximately $237 million. The net proceeds were used to reduce the revolving credit loan balance. On July 29, 2009 we executed a commitment increase supplement under the accordion feature of our revolver. The supplement increased the commitments under our credit facility by $127.5 million bring total commitment to $977.5 million.

As Rene mentioned last week, we announce the Partnership would require the downstream business from Targa for $530 million, consideration that Targa will include 25% of the transaction value in newly issued common and general partner units of the Partnership, which is the maximum equity component permitted under Targa’s covenant package.

The equity was valued at $15.22 per unit, which was calculated using the volume weighted average trading price for the 10 day period through and including July 17, 2009. Pro forma for drop down transaction, Targa will own approximately $20.1 million common units or about 35.9% of the total units, and approximately $1.7 million General Partnership units or 2% interest.

The remaining consideration to Targa of approximately $397.5 million will be cash, funded through borrowings under the Partnerships revolver. After giving effect to the new senior unsecured notes pro forma borrowings under the revolver at the end of the quarter would be $216.4 million. After giving effect to both the new notes and the downstream transaction, including letters of credit required for the downstream business, pro forma liquidity at June 30 would be approximately $301 million.

Turning to capital expenditures, we are revising our capital expenditures estimate down to $40 million for 2009. This updated estimate reflects cost control programs and cost savings. We estimate that maintenances capital expenditures rule account for approximately 40% of the 2009 CapEx estimate.

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

Rene Joyce

Thanks Jeff. The Partnership generated strong second quarter results with higher sequential volumes and healthy distribution coverage. Based on information available to-date, we believe as we’ve reported in prior earnings calls, that our ‘09 Texas volumes will meet or exceed those of ‘08 and San Angelo well had volume that should approximate those of ‘08.

Total ‘09 LOU inlet volume should be higher year-over-year. We look forward to closing the dropdown transaction this quarter, and anticipate that the downstream business will make a meaningful difference in changing the EBITDA and growth profile of the Partnership overtime.

To conclude, I feel the combination of our operating capital and liquidity highlights, as well as the addition of the downstream business and over two years of distribution support, underscores Targa’s commitment to the Partnership.

That concludes the formal part of the call. We will now open it up for your questions.

Question-and-Answer Session


Thank you, sir. (Operator Instructions) Your first question comes from Darren Horowitz from Raymond James. Please go ahead sir.

Darren Horowitz - Raymond James

Good morning guys. Rene, just a couple of quick questions for you; based on what you just said about your expectations for Texas volumes and San Angelo volumes, obviously across both North Texas and San Angelo you had a pretty good quarter.

Can you give us a little bit more color there as to what you’re hearing from producers, in terms of wells completed, waiting to get hooked up and more importantly a little bit more color on what you think it takes at LOU, to get things going in the back half of the year?

Rene Joyce

I will answer one. I will let Mike answer North Texas. But at San Angelo we’re starting to hear from producers, because it’s primarily oil production. That some rigs in the second half of this year should be moving back in, which gives us confidence that the volumes for this year should equal the volumes from last year. So that’s a positive development that wasn’t there a few months ago.

In Louisiana, the well had volumes that have stabilized, but they continue to decline, but the discretionary source of gas which is the big volume, should continue as is for the remainder of year. That’s why I’m saying LOU volumes will be higher year-over-year.

Again, LOU does a lot of other things besides gathering processed gas. We’ve got the butane storage arrangement there; we market liquids in the Lake Charles through our fractionation facilities and we got an intra-state system supplying over 40% of the Lake Charles market.

So it makes in money a number of different ways, but like I said, discretionary volumes will drive performance higher year-over-year and with North Texas, I’ll let Mike address what he’s hearing up there.

Mike Heim

Basically in North Texas we saw a shift in the fourth quarter of last year, where a lot of the producers didn’t particularly like the price, but wanted to drill. So they drilled the wells and they didn’t complete them.

We’ve seen clusters of wells fract in the last 90 days; we’ve gotten quite a bit of gas on. We have been pleasantly surprised at the initial production out of a lot of these wells that seem to be a couple of suite spots that have averaged substantially higher volumes than what our historic wells in the areas have.

So, it’s been very pleasant up there. We do see some drilling and I think we’ve kind of come around the bend up there. It’s certainly not like it was in the year ago as far as the number of rigs. Obviously it’s probably down to half or less, but it seems like we’re getting better wells when we get these turned into us.

Darren Horowitz - Raymond James

I appreciate the color. Thanks guys.

Rene Joyce

Thank you.


Your next question comes from Chris Holt from Barclays Capital. Please go ahead sir.

Chris Holt - Barclays Capital

Hey guys. I’m just trying to get a better sense on the LOU volumes. It increased sequentially; is that pretty much just all discretionary or is it kind of support between discretionary as well as the new pipeline connect as well?

Rene Joyce

It’s between the existing discretionary and the new pipeline volumes.

Chris Holt - Barclays Capital

Okay and you think that’s going to continue through the rest of the year. I guess you said your volumes would be up?

Rene Joyce

Yes, that depends on how the frac spreads and today there’s a $3 spread between gas and ethane value and probably well over $5 on the whole NGL volume. Where gas is going and our view on NGLs, we think the frac spread is there all year going into next year, and that would be the big driver on the amount of this discretionary gas we would process at LOU.

Jeff McParland

We’re actually working on a third discretionary source right now. In fact we support one, but the third one has a very high chance of happening.

Rene Joyce

With the falloff of well head volumes, we’re doing everything possible to bring in process able gas from major other sources.

Chris Holt - Barclays Capital

Okay, and for G&A expenses. I know they are up sequentially and kind of up over 2008 levels. Can you give me a color on what the increase is there, and what may happen to G&A expenses with the dropdown?

Rene Joyce

Actually the drop is the primary driver. There’s one-time professional cost outside; professional costs involved in the efforts for the dropdown transaction, including company cost and independent committee cost that are the key element of that sequential increase.

Our underlying G&A expenses, we believe are running below last year’s levels. There also is a somewhat higher aggregate corporate insurance budget. This year, although it’s not significantly different than our plans, but that’s also being reflected in G&A.

Chris Holt - Barclays Capital

Would there be any increase from the dropdown or no?

Jeff McParland

Well, if assets are going to be dropped down, it’ll bring their G&A with them, but there won’t be any increase this year for the existing assets and their G&A.

Chris Holt - Barclays Capital


Jeff McParland

The $80 million to $85 million worth of EBITDA reflects the impact of the G&A that we expect to come with those assets.

Chris Holt - Barclays Capital

Okay, that’s what I was trying to I guess. Thanks.

Rene Joyce

Thank you.


(Operator Instructions) Thank you, sir. There appear to be no future questions. Please continue.

Rene Joyce

Well, thank you operator and to the extent anyone has follow-up questions, please feel free to contact Jeff or any of us. Thank you again for your time this morning and I’ll look forward to speaking with you again.


That concludes the Targa Resources Partners second quarter 2009 conference call. Thank you for participating. You may now disconnect.

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