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Targa Resources Partners LP (NYSE:NGLS)

Q2 2010 Earnings Call

August 05, 2010 10:00 am ET

Executives

Anthony Riley - IR

Rene Joyce - CEO

Jeff McParland - EVP, CFO

Analysts

Darren Horowitz - Raymond James

Adam Rothenberg - BLP

Operator

Good day ladies and gentlemen and welcome to the Targa Resources Partners second quarter 2010 earnings conference call. At this time all participant lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) as a reminder this conference is being recorded. I would now like to turn the conference over to Mr. Anthony Riley. Please go ahead.

Anthony Riley

Thank you operator. Good morning everyone. I am Anthony Riley and I would like to welcome to Targa Resources Partners LP second quarter 2010 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 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 prior period results as well as providing additional color on our results, current performance, and other matters of interest.

Before we begin, I would like to remind you that any statements made during this call that might include the partnership’s expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision Securities Act 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 in our annual parent on Form 10-K for the year ended December 31, 2009 and our quarterly report on Form 10-Q for the quarter ended March 31, 2010.

One quick reminder before starting into the results with the closing of the acquisition of the Downstream Business in 2009 and the Permian and the Straddle systems in 2010 in accordance with the accounting treatments for entities under common control the results of operations of the partnership include the historical results of the downstream business and the Permian and Straddle systems.

I would also like to point out that the partnership has changed its segment reporting starting with today's quarterly result. Jeff will review more details of the change for reporting segments a bit later in the call. But I will briefly summarize the new segment structure before Rene discusses our results. To start the gathering and processing division now includes two segments. The field gathering and processing segment included the North Texas SAOU and the recently acquired Permian system. The second segment, Coastal gathering and processing contains the LOU system and the recently acquired Straddle system both from Louisiana.

The NGL Logistics and Marketing division for downstream business now have two segments. The logistics assets segment and the marketing and distribution segments.

With that, 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 the management that will be available to assist in Q&A session.

By way of agenda, I will start off with a review of our key accomplishments and business highlights followed by segment performance overview for the quarter. I will then turn it over to Jeff to review our consolidated financial results, detailed segment performance and other financial matters. Following Jeff’s comments, I will provide some updates on some ongoing activities at the partnership and finally, we will take your questions.

The partnership reported strong second quarter operating and financial results combined plant inlet volumes for the two gathering and processing segments increased almost 10% compared to last year's second quarter while fractionation volumes in the logistic segments were essentially flat compared to last year. In the marketing and distribution segment operating margin was down slightly. Our solid operating performance resulted in the distributable cash flow of over $55 million which corresponds to the strong distribution coverage of approximately 1.4 times for the quarter.

We recently announced a 2% increase in our distribution for the second quarter which will be paid on August 13. We are pleased to be talking about distribution growth again supported by the strong underlying strength of our business.

We also recently executed a new five-year 1.1 billion senior secured revolving credit facility which boosts our liquidity, with our February 2012 maturities in July 2015 and speaks of the strength of our business. Jeff will give you some more color on the new agreement in a bit. And finally just last week we announced a new growth project with Marathon Corporation to install new benzene treating equipment as an addition to our LSNG unit at our Mont Belvieu complex. This project along with our expansion of the Cedar Bayou Fractionator enhances the growing fee based services in our downstream business.

Turning to the segment level I will first summarize the quarter's performance in our gathering and processing segments. Second quarter plant natural gas inlet for the field gathering and processing segment was 402 million cubic feet per day, an increase of approximately 3% compared to the same period in ’09. This increase was primarily, the increase was driven by 5%, 9% increases at the San Angelo unit and Permian system, somewhat offset by a 3% decrease at North Texas.

The increase in the San Angelo system was primarily driven by increased Sprayberry drilling activity. The increase at the Permian system was primarily driven by new producer dedications from existing production. The slight decrease at North Texas is primarily due to the settlement of a contract dispute somewhat offset by new well connects. The settlement allows the commercial counter party to substitute an annual payment for the physical volumes available to us for processing. Field gathering and processing operating margin increased 37% compared to last year driven primarily by higher inlet and higher NGL gas and condensation prices which rose 39%, 37% and 33% year-over-year.

On a sequential basis second quarter plant natural gas inlet for the field gathering and processing segment increased 3% compared to the first quarter of this year driven by increases at all three systems. A 1% North Texas increase over the first quarter’s net results the new well connects and milder temperatures in the second quarter offset by well declines.

The 7% San Angelo increase is primarily the result of more well connect activity and milder temperatures during the second quarter. The 3% Permian system increase is primarily the result of volumes from new dedications. Despite the volume increase the second quarter operating margin was slightly lower than the first quarter primarily a function of lower average realized NGL gas and condensate prices which declined 13%, 26% and 3%. Moving to the coastal gathering and processing segments, second quarter plant natural gas inlet was 1.32 billion cubic feet per day, an increase of approximately 12% compared to the same period in ’09.

The year-over-year increase was driven by a 13% increase in the Straddle system and a 7% increase at our Louisiana system. Straddle system inlet volumes were higher primarily due to the recovery of operations after Hurricanes Ike and Gustav. The increase at the LOU system was driven primarily by higher discretionary volumes somewhat offset by lower well head volumes. Coastal gathering and processing operating margin increased approximately 8% compared to last year driven primarily by higher total plant inlet and NGL prices somewhat offset by lower well head volumes at LOU.

On as equal basis second quarter plant natural gas inlet for the coastal gathering and processing segment decreased 2% compared to the first quarter of this year driven by decreases at both LOU and the Straddle system. The 8% LOU system decreased over the first quarter as a result of the lower well head and discretionary volumes primarily stemming from weak drilling activity and decline. The 1% decrease at the Straddle is primarily due to a loss of certain volumes and some compressor repairs which negatively impacted throughput.

Second quarter operating margin was lower than the first quarter primarily a function of lower inlet volumes and a 9% decline in average realized NGL prices. Next I will provide an overview of the two segments and the downstream business. Starting with the Logistics Assets fractionation volumes for the second quarter of this year were down about 1% to 228,000 barrels a day compared to a year ago with the decrease primarily driven by slightly lower volumes at our Lake Charles fractionator. Second quarter operating margin and the Logistics Assets segment decreased 10% to $18 million compared to last year driven by primarily by lower tunneling service business interruption receipts last year and higher operating expenses. Jeff will cover some of these moves in more detail a little later.

Compared to the first quarter of this year second quarter operating margin and the Logistics Asset segment increased almost 60% driven primarily by higher fractionation and treating utilization and lower operating expenses. The 9% increase in fractionation volumes is primarily a result of higher CBF utilization during the second quarter as both cold winter conditions and a CBF turnaround negatively impacted available NGL supplies and first quarter throughput. The CBF turnaround also increased first quarter operating expenses.

In the marketing and distribution segments second quarter NGL sales volumes decreased 17% to a little over, to almost 235,000 barrels a day compared to last year, primarily due to a contract change with a major petrochemical customer. Profitability with this customer is large only unchanged as we have mentioned in the past. Second quarter marketing and distribution operating margin decreased 16% year-over-year to a little over $14 million primarily due to higher margins on forward sales agreement in 009 compared to this year partially offset by higher marketing fees and lower operating expenses this year.

That wraps up my review so now I will turn it over to Jeff to give you more details on consolidated and segment financial performance.

Jeff McParland

Thanks Rene I would like to add my welcome and thank you for joining our call today. As Anthony mentioned under a common control accounting treatment the partnership’s reported results of operations now include the historical results of the down stream business as well as the Permian and Straddle systems for all per diluted shares presented. Before moving to the financial highlight for the quarter I would like to spend a minute talking about the new segment reporting. After we closed the Permian and Straddle systems in the second quarter we reevaluated our reportable segments and now present four segments.

Field gathering and processing, coastal gathering and processing, logistics assets and marketing and distribution. The separation of field and coastal gathering and processing recognizes the underlying operational commercial and economic distinctions between the businesses in each of these segments. The fuel gathering and processing segment combines our assets in the Permian including SAOU and North Texas which have a number of similarities in terms of plant inlet, gas and liquids quality and contract form and mix.

The coastal gathering and processing segment achieves a similar end and combines the LOU and Straddle systems located in the onshore region of Louisiana Gulf Coast. These businesses have a more diverse contract mix and generally see higher inlet volume supply predominantly from the Gulf of Mexico. In the downstream business the aggregation of NGL marketing and distribution into one segment acknowledges a significant inter relationships between those activities. This segment now includes the NGL transportation assets as well. Overall these segments are better aligned with our internal processes and we believe they should improve transparency for our investors.

Now let's move to the results. For the second quarter of 2010 the partnership reported net income allocable to limited partners of $15.9 million or $0.23 per diluted limited partner unit compared to net income of $4.5 million or $0.10 per diluted limited partner unit for the second quarter of 2009. These quarterly results reflect non-cash hedge charges of $7.5 million in 2010 and $24.5 million in 2009. Please also note that under common control accounting the net loss reported for the second quarter of last year included $20.7 million in affiliate interest expense related to the drop down businesses for periods prior to their acquisition by the partnership.

The 1% increase in gross margin for the second quarter compared to last year reflects higher throughput and NGL production increased natural gas sales volumes and higher commodity prices offset by lower NGL and condensate sales volumes, lower fee revenues, lower business interruption proceeds, lower hedge settlements and lower cost to market adjustment. Operating expenses increased 5% compared to last year primarily due to increased compensation and benefit costs and increased maintenance expenses offset by a decreased cost for outside contract services and professional fees. The 7% increase in depreciation and amortization expense for the quarter is primarily attributable to drop down businesses acquired in 2009 that now have a full period of depreciation and the capital expenditures in 2010. Second quarter general and administrative expense decreased 17% compared to last year primarily driven by timing differences. The decrease in interest expense was primarily due to lower interest rates on third-party debt affiliate. Lower interest expense on third-party debt compared to the affiliate debt associated with the predecessor operations.

Adjusted EBITDA for the quarter declined to $78.4 million compared to $81.4 million last year. This decrease was primarily the result of less favorable hedge settlements, lower operating margin in the logistics and marketing segments somewhat offset by higher gathering and processing operating margin and lower G&A.

Maintenance capital expenditures were $5.9 million for the second quarter of 2010. Taking a more detailed look at the segment results for the second quarter of this year. Let's start with the field gathering and processing segment. Second quarter gross margin increased 30% to $58.7 million primarily due to an increase in average realized commodity prices at higher plant in that volumes and growth NGL production.

Operating expenses increased 15% to $15 million for the quarter compared to last year primarily due to an increase in system maintenance and repairs. Second quarter average realized prices for the field segment for natural gap NGLs and condensate increased 37%, 39% and 33% respectively compared to last year. In a total gathering and processing segment second quarter gross margin increased 7% to $21 million compared to last year primarily due to an increase in NGL sales prices, higher plant inlet and NGL production and the return to normal processing from the special processing arrangements that were in place during 2009 Hurricane recovery efforts partially offset by lower volumes of LOU well ahead gas supplies.

The 6% increase in operating expenses for the quarter compared to last year was primarily due to an increase in compensation and benefit costs, chemicals and lubricants and utility expense partially offset by decreases in system maintenance repairs and supplies associated with the return to normal operations following Hurricane recovery.

Second quarter average realized prices for the coastal segment for natural gas, NGLs and condensate increased 15%, 41%, 52% respectively. In the logistics assets segment, second quarter gross margin increased by $0.5 million for 2010. The 2009 quarter included $1.9 million in business interruption receipts. Excluding the impact of the DI proceeds in 2009, the increase of 2.4 million in gross margin was primarily due to increased fractionation fees due to improvement in higher gas price prices partially offset by decreases in other service revenue at 2009 benefited from higher terminally activity following hike.

Fractionation volumes were within 1% of comparable volumes for the prior year. Operating expenses increased 13% to $23 million for the quarter compared to last year primarily due to higher general maintenance cost and higher fuel and electricity expenses driven by higher gas prices. The commencement of operations of a core generation unit at our Mount Belvieu facility in the third quarter of 2009 also increased operating expenses.

We had higher outside fractionation expense as well as work over expenses partially offset by favorable system product gains in 2010. In the marketing distribution segment gross margin decreased 14% in 2010 to $25 million primarily due to the 2009 impact of higher margins on forward sales agreements that were fixed relatively high prices during 2008 and lowest spot fractionation volumes and associated fees.

These items were partially offset by higher marketing fees on contract purchase volumes due to overall higher market prices. Margin on transportation activity decreased due to expiration of a large barge contract that partially offset by increased truck activity. Operating expenses decreased to lower barge expenses associated with the expiration of the large contract partially offset by increased truck transportation cost.

Second quarter average realized natural gas in NGL prices increased 26% and 49% compared to last year respectively. Now let's move briefly to capital structure liquidity and hedging. At June 30, we had approximately $113 million in capacity available loan to our senior secured revolving credit facility after giving effect to outstanding borrowings of $730 million, $116 million related to credit and the reduction on borrowing capacity as a result of the Lehman fault.

We also had $44 million of cash on hand bringing total liquidity at quarter end to approximately $157 million and total funded debt at June 30 was approximately $1.15 billion or about 57% of total capitalization and our consolidated leverage ratio at quarter end were approximately 3.3 times. On July 19, we post a new five year 1.1 billion revolving credit facility due July 2015. The new facility increases availability by approximately 141 million and includes a 300 million accordion feature. The new credit facility is secured by substantially all of our assets; it has an initial LIBOR spread of 275 basis points that will adjust starting in 2011 between 225 and 350 basis points depending on our leverage ratio.

Pro-forma for the closing of the new credit facility at June 30, the partnership had available capacity under the new credit facility of 255 million. I will wrap up with CapEx and hedging and then turn the call back to Rene. Including the businesses we acquired during the quarter, our estimated 2010 capital expenditures are approximately 145 million with maintenance capital expenditures accounting for approximately 25% of that amount.

With respective hedging our equity volumes within that field gathering and processing segment we estimate that for the second half of 2010, as we stand today we hedged approximately 80% of our equity volumes for natural gas and more than 70% of combined NGL and condensate volumes for 2010. For 2011, we estimate that we have hedge approximately 70% of our natural gas equity volumes and approximately 60% of combined NGL and condensate.

With that I will turn it back to Rene.

Rene Joyce

Thanks, Jeff. Regarding our 78,000 barrel day fractionation expansion at CBF, we are still on track, on time and on budget to commence operations no later than the second quarter up next year and this isn’t keeping with our original projections. Our volume outlook for the gathering and processing division has not changed relative to previous guidance. Based on information to-date we believe North Texas volumes for this year will approximate those of '09 San Angelo Permian systems will exceed those of '09 and we are still on track for a record number of well connections San Angelo this year and we believe this activity will continue through 2011.

Following the late 2010 inlet volumes at both LOU and Straddle systems will exceed those of last year. Just a quick comment with respect to the oil spill in the Gulf of Mexico and its potential impact on our Straddle plants. For a number of reasons we do not believe that recent events in the Gulf will have a significant long term negative impact on our Straddle system inlet volumes. While new drilling and completion activity obviously will be delayed and likely become more expensive and regulated in the future. We still believe new drilling will occur. To-date we have not seen any kind of impact to current production through our Straddle plants. We continue to actively pursue new fee based investment opportunity, potential opportunities for fee based gathering, processing and NGL assets and the shale plays especially where we have an advantage due to our existing downstream assets.

As well as additional expansion opportunities within our downstream business. Just last week, we announced the execution of a long term contract with Marathon Corporation to install own and operate treating equipments to reduce the Benzene content of natural gasoline. And new equipment will operate in conjunction with the partnerships existing natural gas gasoline hydrotreater or LSNG unit and will be located adjacent to the partnerships Cedar Bayou fractionators in Mount Belvieu, Texas.

We expect the new integrated facility to commence operations during the fourth quarter of next year, almost all CapEx associated with the project should occur during 2011 and approximate to $35 million we spent on the existing LSNG units which commenced operations in 2007. We believe this project is another example of the attractive fee based investment opportunities that exist within the partnerships downstream business.

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

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen (Operator Instructions). Our first question is with Darren Horowitz with Raymond James. Go ahead, please.

Darren Horowitz - Raymond James

Couple of quick questions from me. The first let me try to get a feel for the recent trend in frac spreads and the impact on margins for the coastal Straddles and LOU which respect to renewals are you getting higher free floors in better PL all terms?

Rene Joyce

We are seeing that on the renewals.

Darren Horowitz - Raymond James

And also you mentioned the volumes coming across coastal straddles being on pace to exceed last year. Can you quantify the magnitude, I mean is it fair to assume just by our model may be a 10 to 15% upside relative to full year '09.

Rene Joyce

Let's see who around the table has those numbers?

Jeff McParland

First of all, I don’t know the details of your model. Secondly, 2009 was confusing because of the Hurricane impacts. But I believe that the trend you're seeing today would indicate an improvement over 2009 based on my numbers as significant as that. We are not trying to fine tune the percentage.

Darren Horowitz - Raymond James

I appreciate the color. Last question for me Rene you talked about the record well connected San Angelo, is it too early to tell what that could mean for 2011 volumes?

Rene Joyce

We are not a guidance company and I hate to project but based on just one producer's activity out there, on dedicated acreage to us currently at 20 million a day, his projection says 40 million by the end of the next year falling to 60 million cubic feet a day. That’s just one producer's projections and that holds true at various degrees for other dedicated acreage out there. And the potential to add new acreage dedications. So San Angelo system is going and going and like I said in my remarks. We have every reason to believe what we see today continues through 2011.

Operator

Thank you. Our next question is from Adam Rothenberg with BLP. Go ahead please.

Adam Rothenberg - BLP

With the restatement of the fragments I was wondering if you provide us with quarterly and sort of annual numbers going back for the restated segments because makes it sort impossible to follow the company if we don’t have that?

Jeff McParland

Understood, under the common control accounting we also have to file supplemental financials representing historic periods. So, we will have the three years annual and the interim period for this year filed shortly after we filed the Q that were reflected this new segment layout.

Adam Rothenberg - BLP

And then are you guys hedging the straddles plants as well as your other GNP?

Jeff McParland

Never mind what the strength is.

Adam Rothenberg - BLP

And the press release said that there was 4 million lower GNA because it looked like timing under common control, can you just elaborate on that?

Jeff McParland

It's really just a lumpiness of the allocation process of allocating GNA under the omnibus agreement as compared to sort of flat run rate? So I think the 6 months numbers are better indication than the quarter over quarter.

Adam Rothenberg - BLP

And lastly how did the new G&P drop down assets performance for the two months that you guys have there and is that sort of inline with what you are expecting when you gave guidance for the year?

Jeff McParland

There is a couple of points one, just on the guidance we came out with that in the first quarter because of all the moving pieces that we are in the factor in the first quarter of the year before we have deported the quarter and as you know once we came out with the quarter we dropped the refresh of any of that information. As for the G&P assets generally when Rene want to comment.

Rene Joyce

No that is performing as expected.

Operator

And there are no further questions at this time sir you may proceed.

Rene Joyce

Thank you, operator and to an 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 look forward to speaking with you again.

Operator

Ladies and gentlemen thank you for your participation that concludes the conference. You may disconnect. And have a wonderful day.

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Source: Targa Resources Partners LP Q2 2010 Earnings Call Transcript
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