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Targa Resources Partners LP (NYSE:NGLS)

Wells Fargo 12th Annual Energy Symposium Conference

December 10, 2013 08:40 AM ET

Executives

Joe Bob Perkins - Chief Executive Officer

Analysts

Michael Blum - Wells Fargo

Michael Blum - Wells Fargo

We are going to move on to our next presenter, Targa Resources Partners and Targa Resources Corp., I guess. We are very pleased to have Joe Bob Perkins, CEO of Targa. Joe?

Joe Bob Perkins

Good morning, everybody. I am happy to be here and thank you very much. It was not a set-up, just then when Michael said Targa Resources Partners and Targa Resources Corp., I guess. There are two ways to own Targa Resources, I guess.

The Partnership on the left hand side is our publicly traded MLP. And on the right hand side, Targa Resources Corp. is the C-Corp. GP, of the MLP. You can see performance since December of 2010 which was the second IPO, the IPO of the C-Corp. For the MLP on the left the blue line is outperforming the Alerian, the S&P and the Utility Index all across that period of time, I am very proud of that.

You go to the right hand side, Targa Resources Corp., ticker TRGP is a C-Corp, and it has LP interest, CP interest and IDR. Therefore it’s leveraged to grow and it has strongly outperformed the Alerian, the Utility Index and the S&P over that period of time. So I guess you should be interested in both of those.

If we look on an annual basis since 2010 Targa Resources Partners has outperformed the Alerian Index in every year and generally outperformed those other indices as well and if you look at Targa Resources Corp., in the bottom left hand side on an annual basis that TRGP outperformance is pretty impressive over the Alerian and kind of dwarfs the other two indices as well.

Why is that? You have strong distributions, top right hand corner for the MLP. Those strong distributions translate into strong dividends for the C-Corp and even more so going from a $1.03 on an annualized basis, the fourth quarter of 2010 now to a $2.28 annualized rate.

Let's talk about the business, talk about the assets and you got to start with a satellite picture, I think that’s sort of mandatory at an energy conference. This is our satellite picture where our assets reside and I will go into it a little bit more. The bottom left hand corner is a pie chart that says by our reportable segments what is the percent contribution on an operating margin basis. And you can see that our Gathering and Processing business is currently about 50% of that mix, the largest part being Field G&P and I’ll talk about that in a minute.

About a third, the red portion of that pie chart is our Logistics Assets business and the remainder is our Marketing and Distribution business, a one page story.

If you pullout page six you won’t have to carry around the rest of the book because that really is the target story in a nutshell, and if I went through all the words here we can spend the rest of the 20 minutes or so talking about them. I am going to try to say the headline area here. And that is across this whole energy conference you are going to see companies being transformed by shale-based resource plays across the U.S. and U.S. is in a tremendous position to benefit from that.

Targa Resources is also in a great position. We have a terrific footprint in the gathering the processing basins, some of the best places in the world to be in that business. And then secondly we’ve got a leading position in Mont Belvieu where NGLs go and I’ll show you how that’s so important, that is driving our growth; really just investing to try to keep up with our footprint in those important areas.

And on the right hand side we’ve got investments highlights that say increasing scale and diversity and increasing fee based business, I will hit on each of those as well as what we said in guidance, in our November investors conference, early November saying to expect 7% to 9% MLP and GLS distribution growth 2014 over 2013, similarly to expect TRGP’s dividend growth to be in excess of 25%, 2014 over 2013.

And if you look at that on an adjusted EBITDA basis it's going from about $600 million in 2013 to about $750 million in 2014. That’s our investment highlights and that’s what we told folks in the first part of this November.

We also said in the first part of this November that 2013 would come in at the lower end of the guidance range we did more than a year ago, meaning about $600 million of EBITDA. And I can say things that have happened since the 1st of November and lots has happened since the 1st of November, including questions I know I am going to get all day today about what about the weather, we still expect 2013 to be about $600 million, like we said in first part of November, means there were pluses and minuses and we still will meet those expectations.

Taking the first call on that one page story I want to talk a little bit about our Gathering and Processing footprint, while I play video games in the background. Okay, our gathering processing footprint, this is the mandatory shale resource play map across the entire United States and we are not everywhere but boy, I like where we are. In fact I can’t think of better places to be than the Williston basin in North Dakota, Bakken Three Forks resource play, this is going to go on for decades, the Permian Basin; the best oil fields in North America in the West part of the Barnett Shale.

Two of the country’s two largest oil fields, two of the world’s best top ten oil fields, that’s where we are. And we are also in the wet part of the Barnett Shale which is still growing and driving volumes in our North Texas system. Additionally sort of then also I showed you it was 12% of our operating margin, a little while ago, our Coastal Gathering and Processing presence is well positioned for what we believe is ultimately a resurgence in Gulf of Mexico drilling and production.

So that’s the basin level footprint that is so well positioned, like I said not everywhere but even if I was picking today I think that’s what I would pick.

Now the downstream part of our business benefits from the basins where we’re in; the Bakken, the Permian, North Texas, the Gulf of Mexico. But it is benefits from the basins where we’re not like the Eagle Ford, the Mid-Continent, the Rockies, because all of that drilling creates production that creates natural gas liquid that have to go somewhere and they go to the market hub for NGLs at Mount Belvieu. More than 80% of the country’s NGLs want to go there because more than 80% of the packing facilities are there, and we are very well positioned, the second largest fractionator, one of only two operating export facilities and that is driving our investment, just to keep up with our customers’ needs.

Speaking of investment, this is probably an overused chart in conferences like this. These are major board approved public projects, where we show $1.9 billion worth of those projects coming on in 2013 and 2014. We spent about $900 million on just these projects in 2013, we are spending about $600 million on just these projects in 2014.

Roughly about half of it’s on the gathering and processing side, about half of it is being spent on the downstream side and it is driving an increasing amount of fee-based margin. And I won’t go line by line on this, but I love to show pictures. I am a little disappointed we didn’t include a picture of the gathering and processing facilities that are going up in North Texas, West Texas and the Bakken. But a gas plant is sort of a gas plant and I hope you have seen pictures of it.

I’ll point to something kind of special in the top left hand box, and that is our entire Cedar Bayou fractionation facility, along with Houston Area terminaling assets. But if I went up there and pointed to particular vessels I could say here is Cedar Bayou fractionator number four which came on in the third quarter, contributing in the fourth quarter this year and fully contributing throughout 2014. A major project of some $385 million, early and on budget and helping meet customer needs. That’s a rare piece of real estate up there.

If you talk about the Mount Belvieu salt dome, there are only a few of us with the storage, underground storage capacity that is necessary to make fractionation work at this market hub. And we have a little bit of green space as you can see for future projects.

I love the picture of international export expansion because I got all three size ships that we talk about in that one picture. And none of them were Photoshopped in like in other investor conferences. The little ship is the smaller vessel that we’ve been able to export in the past, that’s a medium sized ship. The third up from the bottom is the so called navigator class which holds somewhere between a 150,000-160,000 barrels.

Our exports prior to September of this year were constrained to those two vessels and constrained to butane and HD5, U.S. grade propane. Beginning in September of 2013 we’ve significantly increased the capacity and brought on the ability to export international grade propane in those great big vessels that you see on the bottom. That’s the VLGC. And that one right there I believe held about 560,000 barrels of propane, or propane and butane.

We brought on the first phase of the project, 30, page 32 in our book, shows you details about that export project and how we have expanded capacity going through the third quarter of next year to between 5.5 million and 6 million barrels a month which is the way we think about it. That’s quite a few of those large vessels, each month.

And the second phase is coming on beginning in January through the third quarter to that full capacity. We have to have a pipeline project, we’ve got a dock enhancement project and we’ve got additional refrigeration being added across right here.

Those were the projects that we’ve been doing, these are the projects that we are going to do. Not yet approved by our Board but kind of pretty public right now. And just those listed items are than a $1.5 billion worth of project that I fully expect us to be doing. Just a question is exactly when, and I would characterize exactly when is 2015 plus on this chart.

The past, which is the projects we got done prior to 2013, the current 2013 and 2014 and the future look very, very similar, continuing to invest in gathering and processing business and continuing to invest in our downstream business, strong, strong footprints with a lot of organic opportunity.

And what does that result in, one of the things that’s important to investors is our strong increase in fee-based margin. You can see since the first quarter of 2010 that percentage increasing into 2013 where every quarter so far has been over 50% and where we project 2014 being 60% to 65% but look at the dollars also. The third quarter of 2013 was $113 million of fee-based margin from $23 million back in 2010.

Diversity, scale, really have changed. I remember the IPO in 2007 when we had only the North Texas assets in the MLP; a 100% gathering & processing, all non-fee-based and now we’ve got the geographic diversity I was just showing you, okay, the gathering and processing and downstream diversity, about 50-50, 54% of it’s fee-based, a much different much more stable much more sleep at night MLP.

This chart says theory is nice but scale, diversity, increasing fee-based margin and hedging really do work. Going back to 2007, EBITDA being the blue bars and the light blue bars being projected, same bars in each of those graphs, red line being commodity prices for crude oil, and natural oil and NGL, we have had stable and growing EBITDA despite pretty volatile commodity markets. It’s not just theory that works. It’s also weighted by a very strong financial foundation, the same way we manage the company when we founded it we’re managing it today, with liquidity in our pocket to make sure we can get those important projects done. $824 million of liquidity right now and you can see looking backwards that’s about what we have been running. That means my capital projects are already funded.

In a compliance leverage ratio, that operates in a conservative three to four band, that’s been our target from the time we first went public with the IPO in 2007. We mostly existed at the bottom of that range and sometimes below, always saying we might have an excursion. That large and capital investment slug, the acquisition of Badlands was our excursion and we went all the way to the top of the range. Four times leverage ratio, 2014 we will be back in the mid of that three to four range because that’s where we exist except for a few times.

This is the detailed guidance summary that was in our Investor Day, early November. Has all of the numbers I sort of alluded to in my highlights before, except for that 2013 guidance we gave at the same time, we said the lower range of the 595 to 655, call it 600 is where we were talking about in early November and I can say we will still do that, expect to do that.

2013 got labeled by someone in my company as a transformative year, it was, incredible step functions done. Our strategy, the same as it has always been, invest in Gathering and Processing, invest in the downstream, continue to execute across an increasingly diverse asset base in identifying additional projects all along the way. Executing in 2013 we did that, $900 million worth of CapEx, plant additions coming on, downstream projects coming on, Badlands integrated and rapidly improving in terms of volumes.

And where do we find ourselves at year end 2013? We find ourselves at the fee-based margin I just talked about, well over 50% going to over 60%. We find ourselves with all of those projects coming on that are driving the transformation. A strong financial position in terms of liquidity and leverage and guidance that says we are going to be 25% higher in ’14 than we were in ’13. Everybody I know says going up 25% from call it 600 to 750 is another transformation over here. So I’ll label 2014 a transformational year as well.

That’s our asset base. Hopefully I have hit on those highlights. I told Michael when we were chatting before this presentation I wanted to leave time for questions. A lot of the people out there who knew me looked at that many slides and said that’s way too many slides for Joe Bob. But I did leave time for Q&A and so let’s try to do that.

Question-and-Answer Session

Michael Blum - Wells Fargo

Just real quick Joe Bob, can you just remind us of the 65% year-end 2014 run rate is going to be fee-based. What percentage of that is take-or-pay or reservation charges? And what percentage might carry some type of volumetric risk to it?

Joe Bob Perkins

Well in the broader stream volumetric risk per target is driven by the drill bit and if you believe in continued drilling production in basins that are cost advantage, that’s the description of our volume risk. However when we look at our downstream business the bulk of that has significant take-or-pay. The fractionation contracts for trains one, two, three and four and ultimately if we do five and six have a high percent of reservation fee. One through four is basically at 90% take-or-pay.

I actually expect those volumes to be close to 90% or lower because there is more ethane rejection than people had anticipated. On an EBITDA basis our guidance cranks in the 90% numbers for the fractionation. You go to our Galena Park exports, also a very significant part of 2014, significant take-or-pay. The ship doesn’t show up, we are indifferent. But the ship’s going to show up and we keep trying to squeeze more in. Our gathering and processing is subject to risk is volume risk, as you know.

But I don’t feel very much volume risk when I look at what’s going on in the Permian Basin, when I look at what’s going on in the Williston, when I look at what’s going on in North Texas and the Gulf of Mexico, Coastal Stratus we expect to make about as much money as they had in the past because we keep getting richer and richer gas even though inlet volumes go down. But I loved the question, thank you.

Unidentified Analyst

I will repeat the question.

Joe Bob Perkins

Okay.

Unidentified Analyst

How much of your expansion is tied to FERC and EPA approvals and how tricky is that going to be?

Joe Bob Perkins

I’ll take in pieces. None of my expansion is right now is driven by any FERC approvals and I’ve been through those in the past and those are manageable. EPA approvals have been tricky for me, sometimes they are necessary. Our issue has been for people who have followed this in the past is the change in greenhouse gas rules, which we can permit for, absolutely abide by and know how to do.

But there was a break point where Texas was arguing with the Federal government and Rick Perry was running for Governor where they drew a line in the sand and said they [weren’t] going to implement greenhouse gas rules and we had to go from the Texas EPA to the TCEQ to the Federal EPA to get it done and that cost us a lot of time on our train five permit, cost us a lot of time on our North Texas processing plant, Longhorn plant permitting.

Longhorn is under construction now. We just got public notice November 20th of this CBF Train 5 permit. So it's cost us time but it’s a process I think my people, terrific environmental people are world class at navigating through is and is good as any of our competition can do it.

Unidentified Analyst

Yeah, are there any basins that you are not in now that you are looking to get into and would that be through potential acquisition or organic growth?

Joe Bob Perkins

We’ve looked since the formation of Targa about expanded footprint. And we’ve looked at many of the basins we are not in, kind of like I said a second ago I can’t think of a better set to be in. And as recently as December 2012 we acquired a significant footprint in the second largest oil base which we weren’t in, in the Bakken, the Williston Basin in North Dakota. I don’t have a hit list to get into right now, I don’t anticipate expanding that footprint through acquisition or greenfield in the next couple of years but we are always looking.

Michael asked the hard question.

Unidentified Analyst

Two questions I guess one can you just expand on how this weather is impacting you if at all? I guess that’s the first question.

Joe Bob Perkins

Sure cold is tough in the gathering and processing business really, really tough. Our San Angelo facility on the Eastern side of the Permian Basin during this last freeze had a reported estimate is probably a better way to put, 80 power poles down. Now we help, we work with the co-ops and electric utilities to get them up as fast possible but there are even more poles down for electric service for the producers around that, that impacts volumes.

Our third, some third party pipelines have had issues due to cold weather and other problems. For west Texas it is incredibly difficult, when it’s that cold, you got to be outside to keep wells on for producers as well as our people, so lower volume. It is minus, it’s below zero and has been below zero in the target Badlands for the last week. That’s just hard to do work in. We’re still constructing projects but you know what our people are incredible. Will that be downturn? Yes but we have got some ups that we’re offsetting it, or will in fact we will get about that guidance before. Maybe had little conservativism in the early November guidance too, because we know it gets colder but our guidance is still solid.

Michael Blum - Wells Fargo

One more from me. Joe you mentioned in that photo of Mont Belvieu, you had few little slivers of grass in there, that will be a park in New York City. Just curious what are you seeing for demand for additional frac? Do you think there really will be additional frac, you will have the opportunity to build down the line?

Joe Bob Perkins

When you look at Mont Belvieu and really very limited real estate, we have added acreage around there over the last several years quietly but you can’t add salt dome. That salt dome isn’t expanding and it’s being used up. We still have spaces for the incredibly important storage that goes with fractionation, storage for the incoming y-grade, storage for the spec product that’s produced to keep it flowing.

I believe track 5 and track 6 will get built. It’s just a matter of time and that the demand is strong even though we are mapping rejections in many places across the country. Certainly when you have the world class [pet-chems] coming on to that, that ethane’s no longer being rejected or whole lot less of it is being rejected you have very short track capacity. And by the way track capacity is not all created equal. If there’s no ethane in the stream you are de-rating everybody’s frac. It’s just a question of when do we do train 5, when do we do train 6 and we’ll announce that as we get the commercial deals to go.

As I rushed through that presentation I said all roads are going to Mont Belvieu. It was an arrow on there that’s been on that chart from the Northeast, Marcellus Utica for some time and if those projects get done and projects are bringing more NGL from the Northeast it just increases the analyzed amount of supply hitting the frac demand.

Michael Blum - Wells Fargo

All right, thank you very much.

Joe Bob Perkins

Thanks, Michael.

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