Targa Resources Partners LP Q3 2009 Earnings Call Transcript

| About: Targa Resources (NGLS)

Targa Resources Partners LP (NYSE:NGLS)

Q3 2009 Earnings Call Transcript

November 5, 2008, 12:00 pm ET


Anthony Riley – Senior Manager, Finance/IR

Rene Joyce – CEO

Jeff McParland – EVP and CFO


Chris Holt – Barclays Capital


Good morning, 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, November 4, 2009.

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. Thanks for joining us.

Before we get started, I would like to mention that Targa published an earnings release this morning and it is available on our Web site 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 third quarter '09 to the third quarter '08 and providing additional color on performance and recent activities.

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 on 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, regulatory, 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 statement.

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

Rene Joyce

Thanks, Anthony. Good morning and thank you for participating in this call. Joining Jeff and me in Houston are several members of Targa's management team and they will be available to assist with the Q&A session. By way of agenda, I will start off briefly reviewing our third quarter Gathering and Processing performance. I will then turn it over to Jeff to review our consolidated results, the drop down transaction and other financial matters. Following Jeff’s comments, I will discuss the outlook for Targa. Finally, we will take your questions.

With regard to the consolidated Gathering and Processing performance highlights for the third quarter, gathering throughput and plant natural gas inlet volumes were both about 2.3 billion cubic feet per day or 20% higher than '08. This increase is primarily due to our increased ownership in the Venice Gathering complex at the mouth of the Mississippi River and the impact of hurricanes Ike and Gustav on our coastal straddles that hit us in September of '08.

Natural gas sales of 684 billion Btu per day for the quarter were 28% higher than the 533 billion Btu per day for '08. The increase in natural gas sales volumes was primarily due to the increased demand from our industrial customers in the Lake Charles area and increased sales under third-party contracts.

Gross NGL production of 124,000 barrels per day for the quarter was 23% higher than '08, driven primarily by increased hybrid settlement as a percent of liquids in our Gathering and Processing business in the coastal straddle plants.

Our condensate sales volumes remained essentially unchanged at about 4,800 barrels per day for '09 compared to '08. Our NGL sales volumes increased by 15,000 barrels per day or 17% to 100,000 barrels per day for '09 compared to 85,000 barrels per day in '08. The increased in NGL sales volumes is primarily due to increased ownership in VESCO and the impact of plant shutdowns after hurricanes Ike and Gustav in September '08.

Our average realized natural gas, NGL and condensate prices for the quarter were down 62%, 49%, 34% year-over-year respectively.

I would now like to provide some insight on how Targa's remaining Gathering and Processing assets have been performing. We have been pleased with performance of Targa's Permian Basin assets which consist of our 67% interest in the Targa operated for SAOU System and our 100% owned Sandhill system. Where SAOU inlet volumes were down slightly in '09 as compared to '08 due to a reduction in (inaudible) gas well drilling. But, this has been somewhat mitigated by our focused drilling and Orco [ph] was behind existing batteries and by increased fee-based processing. Because associated gas from oil wells is richer in NGLs than gas wells, NGL production is up slightly in '09 versus '08. However, NGL prices have been lower in '09 than in '08.

Other West Texas inlet volumes, primarily Sandhills, are essentially flat to last year. We have benefited from some producers still focused on oil projects [ph] and from picking up selected volumes of gas previously processed elsewhere and the addition of fee-based processing from a competitor. However, for the third quarter, this was offset by gas which was shut-in for a period of time due to pipeline repairs.

Our coastal straddle business has performed very well for '09 year-to-date. Most our straddle plant processing is under agreements that we refer to as hybrid contracts which have been settling as a percent of liquids versus fee because producer processing margins have been strong throughout the year.

Year-over-year comparisons are impacted by a number of items including the timing of hurricane repairs, producer repair issues, our increased ownership in VESCO and other factors. Overall, coastal straddle inlet volumes are similar, although slightly lower than last year. But, NGL production has been better than last year.

With that, I will turn the call over to Jeff.

Jeff McParland

Thanks, Rene. I would like to add my welcome and thank you for joining our call today. Total revenues decreased by $1.2 billion or 52% to $1.1 billion for the third quarter of 2009 compared to $2.4 billion for 2008. Revenues from the sale of natural gas decreased by $225 million, consisting of a decrease of $349 million due to lower realized prices, partially offset by an increase of $125 million due to higher sales volumes.

Revenues from the sale of NGL decreased by $1 billion, consisting of a decrease of $874 million due to lower realized prices and a decrease of $133 million due to lower sales volumes. Revenues from the sale of condensate decreased by $9 million, consisting of a decrease of $18 million due to lower realized prices, partially offset by an increase of $9 million due to higher sales volumes. Other revenues, which include revenues principally derived from fee-based services, increased by $9 million.

Our product purchases decreased by $1.2 billion or 57% to $932 million for 2009 compared to $2.2 billion for 2008. Operating expenses decreased by $10 million or 14% to $64 million for 2009 compared to $74 million for 2008.

General and administrative expense increased by $4 million or 18% to $31 million for 2009 compared to $27 million for 2008. G&A increases are primarily due to higher property insurance premiums and outside professional services, offset in part by decreases in compensation costs.

We reported a net loss attributable to Targa of $3 million for the third quarter compared to a loss of $21 million for 2008. Third quarter adjusted EBITDA was $90 million, up 96% from 2008, driven primarily by significant increase in operating margin at the NGL Distribution and Marketing division, somewhat offset by lower operating margin of the Gathering and Processing division. The 2008 third quarter EBITDA reflects lower cost or market inventory charges in the NGL division as well as hurricane impacts.

On a consolidated business, capital expenditures for the third quarter were approximately $20 million. As Rene mentioned, on September 24, Targa completed the sale of its Natural Gas Liquids business, the Downstream business, to the Partnership for aggregate consideration of $530 million subject to certain adjustments.

Consideration to Targa included 25% of the transaction value in newly issued common and general partner units of the Partnership, with the remaining 75% or approximately $397.5 million in cash. Targa now owns approximately 20.1 million common units which represent a 32% partnership interest and approximately 1.3 million general partner units corresponding to the 2% general partner interest. At September 30, total funded debt was $1.25 billion, of which $939 million is debt of the Partnership that is non-recourse to Targa but is consolidated.

Excluding the debt of the Partnership, Targa's total funded debt as of September 30 was $315 million, consisting of our $250 million senior unsecured notes due 2013 and $65 million of outstanding senior secured term loan. The $65 million term loan balance reflects prepayments from 100% of the $397.5 million in cash proceeds received at the closing of the Downstream transaction and an additional $50 million from cash on hand as well as the scheduled $3.1 million quarterly amortization of principal.

At September 30, total liquidity excluding the Partnership was $370 million, including $240 million of availability under the revolving credit facility and $130 million of cash on hand. In addition, we had $12 million of availability under the synthetic LC facility. We elected to permanently reduce the capacity of the original $300 million synthetic LC facility to $50 million during the quarter. Including availability under the LC facility, but excluding the Partnership, total liquidity was approximately $382 million at quarter end.

We have revised our 2009 capital expenditures estimate to $90 million, with approximately $50 million of that amount as a Partnership.

That wraps up the financial overview, so I will turn the call back to Rene.

Rene Joyce

Thanks, Jeff. To conclude, I would like to repeat that Targa's capitalization and liquidity are strong. Our businesses, including Targa Resources Partners, are performing very well. Regarding drilling activity, we continue to monitor activities very closely in all our areas of operation. As you might expect, oil plays are more active than pure gas plays. That benefits most of our Permian Basin assets and some of others served by our coastal straddle plants.

Moreover, we continue to focus on what we can control, including items like cost reductions, discipline with respect to capital expenditures, solid execution with respect to customer contracts and continued work on capital improvement and major growth projects for all of our existing businesses.

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

Question-and-Answer Session


Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) And our first question comes from the line of Chris Holt with Barclays Capital. Please go ahead.

Chris Holt – Barclays Capital

Hi, good afternoon guys.

Rene Joyce

Good afternoon, Chris

Chris Holt – Barclays Capital

Obviously, you have a lot of liquidity on hand here at the end of the quarter with cash on the balance sheet as well as credit facility availability. What are your thoughts on kind of the uses for that cash? Do you repay term loan or would you save that for potential acquisitions? Can you just talk about that a little bit?

Jeff McParland

Chris, this is Jeff. How are you? Generally, the leverage position and cash position reflects the stated deleveraging strategy we've had at Targa Resources Inc. from the get go, namely the drop down assets of the Partnership and delever over time. That really remains our broader strategy; specific uses of components or refinancing are sub pieces of that broader strategy. So, we are focused primarily on the over time drop of assets to the Partnership.

Chris Holt – Barclays Capital

Okay, thanks.


(Operator instructions) And Mr. Joyce, I am showing there are no more further questions at this time.

Rene Joyce

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


Ladies and gentlemen, this concludes the Targa Resources Inc. conference call. You may now disconnect. Thank you for using ACT Conferencing.

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