Targa Resources Partners' (NGLS) CEO Joe Bob Perkins on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Targa Resources (NGLS)

Targa Resources Partners LP (NYSE:NGLS)

Q2 2014 Earnings Call

August 1, 2014 10:30 am ET

Executives

Jennifer Kneale - Director, Finance

Joe Bob Perkins - CEO

Rene Joyce - Executive Chairman

Matt Meloy - CFO

Analysts

Edward Rowe - Raymond James

Jerren Holder - Goldman Sachs

Brian Lasky - Morgan Stanley

Faisel Khan - Citigroup

Justin Agnew - Robert W. Baird

Jeremy Tonet – JPMorgan

Helen Ryoo - Barclays

Michael Blum - Wells Fargo

Christopher Sighinolfi - Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the Targa Resources Second Quarter 2014 Earnings Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions).

As a reminder, this conference call is being recorded. I would now like to introduce our host for today's conference Jennifer Kneale. Please ago ahead.

Jennifer Kneale

Thank you, Operator. I would like to welcome everyone to our second quarter 2014 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 at www.targaresources.com. We will also be posting an updated investor presentation to the website later today.

Speaking on the call today will be Joe Bob Perkins, Chief Executive Officer; Rene Joyce, Executive Chairman; and Matt Meloy, Chief Financial Officer. Other management team members are available for the Q&A.

Joe Bob and Matt are going to be comparing the second quarter 2014 results to prior period results, as well as providing additional color on our results, business performance, and other matters of interest, including our revisions to our 2014 financial outlook.

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 prediction should be considered forward-looking statements and are covered by the Safe Harbor provision 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, 2013, and quarterly reports on Form 10-Q.

With that, I will turn it over to Joe Bob.

Joe Bob Perkins

Thanks, Jen. Welcome and thanks to everyone for joining. Following our customary format, I'll start off with a high-level review of our second quarter 2014 performance highlights. Then, Matt will review the partnerships consolidated financial results, its segment results, and other financial matters of the partnership. Matt will also cover key financial matters related to Targa Resources Corp. Following Matt's comments, I will provide some concluding remarks that will include an update on our 2014 financial outlook and our outlook for growth capital projects and expenditures. Then, Rene would like to say a few words about the second part of the press release concerning management changes, and we will add his perspectives on the business outlook. Then, we'll take your questions.

Our second quarter adjusted EBITDA was $226 million, as compared to $126 million for the second quarter of last year. Yes, the financial reporting accountants assure me that it really does round to $100 million as an increase over the second quarter last year. This 79% increase was driven by record quarterly operating margin in the Logistics and Marketing division, and record quarterly operating margin in the Gathering and Processing division. Logistics and Marketing operating margin was 104% higher than the second quarter of 2013. In the GMP division operating margin was 42% higher.

The field Gathering and Processing segment produced operating margin of $98 million, representing an increase of 45% versus the second quarter of 2013. This margin increase was primarily driven by the combination of a number of factors, including significantly higher oil and gas throughput volumes, and a significantly higher year-over-year contribution from Badlands.

Continued strong producer activity and increased throughput in other field Gathering and Processing areas, and just beginning to benefit from the startup of commercial operations at our 200 million cubic feet per day, Longhorn plant in North Texas in May, and our 200 million cubic feet per day High Plains plant at SAOU in June.

The logistics asset segment produced quarterly operating margin of $109 million, up a 108% compared to last year, primarily driven by higher LPG export activity and higher fractionation activity. We benefited from additional capacity from our Phase 1 expansion at Galena Park export facility completed last September, and from increasing operational capabilities as we continue to complete stages of our Phase 2 expansion over this year.

In the first quarter, we completed a new pipeline between Mont Belvieu and Galena Park. Early in the second quarter, at Galena Park we added refrigeration and completed construction of another dock capable of handling VLGCs.

The last piece of the Phase 2 expansion is the addition of another de-ethanizer at Mont Belvieu, which will be completed in the third quarter of 2014.

Operating margin from our marketing and distribution segment was 95% higher in the second quarter of 2014 than the same time period last year, primarily as a result of the increase in LPG export activity.

Our distributable cash flow for the quarter of $175 million resulted in distribution coverage of approximately 1.4 times, based on our second quarter declared distribution of $0.78 or $3.12 on an annual basis.

The Partnership's second quarter distribution represents a 9% increase, compared to the second quarter of 2013.

If we look at it at the TRC level, the second quarter dividend of $0.69 or $2.76 annualized represents a 30% increase, compared to the second quarter of 2013. It was a very good quarter.

And since our last call, I am happy to say that S&P recently raised our credit rating for the partnership to BB+, one notch below investment grade.

Before I pass it to Matt, I want to thank Rene and Roy, on behalf of the management team and to thank them on behalf of our investors. As these two men retire at the end of the year, we all owe them a lot for the legacy they helped create at Targa. Speaking personally, it has been an honor and a privilege to have worked with these two men for last 12 years or so.

I also want to thank Jim Whalen for returning to the role of Executive Chairman of both boards, along with the rest of the executive team, and all of Targa's senior leadership, Jim and I are proud to continue the Targa legacy.

That wraps up my initial comments and I will 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. As mentioned, adjusted EBITDA for the quarter was $226 million, compared to $126 million for the same period last year. The increase was primarily the result of higher LPG export activity and fractionation activity in our Logistics and Marketing division, a higher contribution from Badlands, and higher volume throughput in our Gathering and Processing division.

Overall, operating margin increased 64% for the second quarter, compared to the same time period last year. I will review the drivers of this performance in the segment reviews. Net maintenance capital expenditures were $19 million in the second quarter of 2014, compared to $19 million in the second quarter of 2013.

Turning to the segment level, I'll summarize the second quarter's performance on a year-over-year basis and we'll start with the Gathering and Processing segment. Field Gathering and Processing operating margin increased by 45%, compared to last year, driven by higher natural gas inlet volumes, higher crude oil gathering volumes, and higher natural gas and NGL prices.

Second quarter 2014 natural gas plant inlet volumes for the Field Gathering and Processing segment were 903 million cubic feet per day, a 13% increase, compared to the same period in 2013. The overall increase in natural gas inlet volumes was due to increases in the each of the following business units: 87% at Badlands; 23% in North Texas; and 14% at SAOU.

Inlet volumes at Versado and Sand Hills were essentially flat versus the same period last year as a result of some operational issues but we expect growth going forward. And as you probably know Sand Hills is essentially full. But we're taking steps to provide additional short-term and longer-term capacity to handle significant activity in and around the system, including a previously discussed new pipeline now called the Midland County pipeline connecting to SAOUs new High Plains plant.

Versado is also seeing significant producer activity in growing volume and has available processing and treating capacity for that growth.

As mentioned, our Longhorn plant in North Texas began commercial operations in May and our High Plains plant in SAOU began in June. Producer activity in North Texas and especially the Permian Basin is exceeding our previous expectations of volume growth.

Crude oil gathered increased to 84,000 barrels per day in the second quarter, a 119% increase versus the same time period last year and highlights our continued progress in North Dakota.

For the Field Gathering and Processing segment, NGL price is increased by 12%, natural gas price is increased by 9%, and condensate prices were essentially flat in the second quarter of 2014 compared to the second quarter of 2013.

Turning now to the Coastal Gathering and Processing segment, operating margin increased 31% in the second quarter compared to the same time period last year. The increase in operating margin was a result of new volumes with a higher GPM at VESCO, including volumes from Shell Mars B development in the Gulf of Mexico and from higher GPM volume at LOU.

For the segment, natural gas prices increased by 14% and NGL prices increased by 2%, compared to the second quarter of 2013.

Given that NGL production has been 16% higher for the first half of the year, we're revising our expectation for coastal NGL production and we now expect coastal NGL production to be higher in 2014 versus our previous estimates that NGL production would be approximately flat in 2013.

Next, I'll provide an overview of the two downstream segments. Starting with the Logistics Asset segment, as Joe Bob mentioned in his opening remarks, second quarter operating margin increased a 108%, compared to the second quarter 2013, driven by higher LPG export and fractionation activity. For the quarter, we loaded an average of 4.8 million barrels per month of LPG export. We benefited from high international demand for both propane and butane, particularly from Central and South American markets.

Fractionation volumes increased by 35% versus the same time period last year, driven by the addition of CBF Train 4, which commenced commercial operations during the third quarter of 2013.

In the marketing and distribution segment, operating margin for the segment increased 95% over the second quarter of 2013, due primarily to higher LPG export activity and higher NGL marketing activity.

With that, let's now move to capital structure, liquidity, and other matters. As of June 30, we had $495 million of outstanding borrowings under the Partnership's $1.2 billion senior secured revolving credit facility due 2017. With outstanding letters of credit of $95 million, revolver availability was about $610 million at quarter-end. Total liquidity, including approximately $67 million of cash on hand, was about $678 million.

At quarter-end, we had borrowings of $234 million under our $300 million accounts receivable securitization facility. Through July, we have received approximately a $180 million of net proceeds from aftermarket equity issuances and we continue to be very pleased with the success of this program. Although, we may take advantage of other equity offering sources, the aftermarket program appears to be sufficient to meet out equity need.

Total funded debt on June 30, was approximately $3 billion, or about 55% of total capitalization, and our second quarter compliance debt-to-EBITDA ratio was 2.8 times.

For the second quarter of 2014, our operating margin was approximately 67% fee based.

Moving on to capital spending, we now estimate approximately $780 million of growth capital expenditures in 2014. The changes to our updated capital expenditure estimates are as follows. Inclusion of spending in 2014 related to construction of Train 5 a 100,000 barrel per day fraction at Mont Belvieu, and additional CapEx to support continued strong producer activity across our field areas of operation.

We also updated our list of major capital projects under development and now have over $2 billion of projects in various stages of development, in addition to the $2.6 billion and announced projects that are ongoing or recently completed. The major changes to the list are the inclusion of additional fractionation and a potential ethane export project.

Next, I will make a few brief remarks about result of Targa Resources Corp. Targa Resources Corp.'s standalone distributable cash flow for the second quarter of 2014 was $29 million and TRC declared approximately $29 million in dividends for the quarter.

On July 15, TRC declared a second quarter cash dividend of $0.69 per common share or $2.76 per common share on an annualized basis, representing an approximately 30% increase of the annualized rate paid with respect to the second quarter of 2013.

As of June 30, TRC had $87 million in borrowings outstanding under its $150 million senior secured credit facility and $9 million in cash resulting in total liquidity of approximately $72 million.

Given the strong EBITDA performance at the Partnership, we expect our pretax distributable cash flow to continue to exceed our 27% cash tax guidance estimate for the second half of 2014 and for the rate to approximate the first half of the year.

That concludes my review and I will now turn call back over to Joe Bob.

Joe Bob Perkins

Thank you, Matt. I will start with a summary of our outlook for the remainder of the year. We expect volumes to exceed earlier estimates in our GMP division. In our field GMP segment, producers remain extremely active across all our areas of operations.

Sand Hills capacity limitations, as Matt mentioned, have been assisted by the near-term addition of the Midland County pipeline connecting Sand Hills to SAOU with more capacity plans for the Sand Hills area in the works.

Versado is expected to fill faster than initially forecasted and our Badlands operations continue to exceed our 2014 expectations and we're likely to see natural gas volumes continue to increase as we support our producer customers in complying with North Dakota's updated blaring restrictions.

In our coastal GMP segment, we're benefiting from additional higher GPM volumes that were not included in our initial forecast for 2014, and as Matt said, we now expect 2014 NGL production to be even higher than 2013.

Our downstream businesses are performing very well on all fronts, especially with respect to our export services.

During the second quarter of 2014 at Galena Park we added refrigeration or pumping capacity and completed another dock ahead of schedule as part of our Phase 2 international export expansion project, providing incremental capacity and operational efficiencies for effective capacity. Our people also did a great job installing and ramping up the equipment and learning how to effectively operate increasing capabilities on the fly. Phase 2 is expected to be fully completed in the third quarter of 2014, with the addition of a de-ethanizer at Mont Belvieu. Once complete, total effective export capacity for Targa will be approximately 6.5 million barrels per month of propane and/or butane.

Those of you who watch our export capability numbers closely will notice that this new effective capacity is larger than our previously published 5.5 million to 6 million barrels per month. With our effective capacity revised higher as we became more comfortable with our operational capabilities.

The outlook for export services is robust and we continue to see high levels of activity and are benefiting from strong demand for our services.

Since the first quarter, we continued to add contracts as well as contract length. That leaves us to a revised financial outlook. Given our strong performance through the first and second quarters of 2014 across our businesses, and the very positive outlook for business performance for the rest of the year, we're revising our financial outlook for the year. We're now estimating 2014 adjusted EBITDA with a range of $925 million to $975 million based on what we see today.

With respect to our Partnership distribution growth expectations for 2014, we're clearly on track to be on the high-end of our original 7% to 9% growth expectations. At the TRC level, we can say that we're very confident with our original expectations that dividend growth will be more than 25% for 2014.

Moving to the status of our major growth projects, as Matt mentioned earlier, we're now including Train 5 in our capital expenditure estimates for 2014. We have board approval and have started construction. Train 5 should be completed in mid-2016 and is expected to cost approximately $385 million.

Given the strong activity in our field GMP segment the majority of Train 5's capacity will be utilized to fractionate target volumes and the rest will serve third-party volumes under both existing and future fractionation service agreements.

Earlier this year, we said that the timing and nature of additional fractionation at Mont Belvieu might be dictated by volumes coming from the Utica Marcellus via the proposed Utica Marcellus Texas pipeline joint venture between Kinder Morgan and MarkWest. That is still the case. If UMTP is a go, then the needs of UMTP shipper customers will impact the timing and the specifics of the fractionator designs for Train 6 and potentially Train 7.

Similarly, if UMTP does not go in the near future, other growing customer needs will determine timing and fractionator design. As Matt mentioned earlier, additional potential fractionation is now included in our list of major capital projects under development and we're also now including a potential ethane export project on the list.

Engineering is complete for another dock in demethanizer to support a potential ethane export project and discussions are ongoing with several potential customers that are interested in having another X ethane export providers located in the Houston ship channel. So that list major capital projects under development now has more than $2 billion worth of projects.

We are in the process of finalizing the permit details for our approved 35,000 barrel per day condensate splitter at Channelview and expect to file dose during the third quarter, those permits. Although we understand why outside interest is very high and we're getting questions about it, our splitter project is not impacted by the U.S. Commerce Department's private letter rulings in June 2014 on the export of process condensate from two projects in the Eagle Ford. There are logistical advantages and robust markets for the byproducts of condensate splitters positioned on the U.S. Gulf Coast. And we continue to see demand for additional potential splitter projects associated with our facilities.

We continued to put capital to work in North Dakota on attractive projects building out our crude and natural gas gathering systems. We believe that the next 40 million a day plant in the Badlands we call little Missouri 3 may be completed by year-end subject to weather and regulatory approvals but we're hopeful. We're already considering an additional gas plant after little Missouri 3 and we continue to identify and pursue other smaller oil and gas projects in the Badlands.

In the Permian Basin producers continue to grow volumes and require additional infrastructure around our assets to support their efforts. While not yet approved, and not on our announced approved list yet, another 200 million cubic feet a day Permian plant could be a near-term approval and would then move from the under development list to the approved list.

Clearly 2014 has already been another big year for Targa. I am incredibly proud of the performance of our employees this year and I am excited about our opportunities for continued strong target performance during the rest of the year and beyond.

Now, I would like to turn it over to Rene.

Rene Joyce

Thanks, Joe Bob. As you may have seen in our press release this morning Roy Johnson and I will be retiring at the end of this year. I will remain a Director of both boards. Roy and I have been involved in the midstream industry for more than 45 years and are exiting at a time when the opportunities to grow a company in this space have never been greater. For the first time in our careers we believe this will be case for a very longtime.

The employees at Targa are exceptional and they are managing assets and businesses that are ideally situated to capture these opportunities.

In closing, Roy and came up with the idea to start a midstream company in early 2002. And one of the most important steps we took that ultimately created all this value was the quickly team up with five great individuals in Warburg Pincus. Together as a team, and with some luck from doing all this during the shale revolution we were able to create a great company.

On behalf of Roy and I we want to thank them for their support and friendship and I look forward to still playing a role in this amazing story as a Director.

With that let's open the line for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions).

And the first question comes from Edward Rowe from Raymond James. Please go ahead.

Edward Rowe - Raymond James

Good morning guys and congrats for the quarter. Quick question on the LPG exports with strong spot LPG export demand and we're seeing huge builds in pad 3 on propane inventories, could be the ethylene cracker outages. But when you think about outside the guidance is this the case where you guys are able to lock additional long-term contracts at good rates or you're seeing significant spot shipper demand through 2014?

Joe Bob Perkins

We are seeing significant demand of pipes through 2014. What we said today that since first quarter when we gave you some numbers about it, we continue to add contracts and we continue to add contract term reflecting that strong demand.

Edward Rowe - Raymond James

Okay. I appreciate that. When you think about how do you balance between having the option value of having spot contracts versus getting some longer tenor contracts given the outlook on further LPG expansion, how do you guys kind of weigh that balance?

Joe Bob Perkins

It's probably more than a balancing act; we have been increasing capacity, main play capacity and increasing effective capacity. It's difficult to term that up until you've already proven it's there. And we're working within a conservative operational constraint and make sure that we can deliver on term contract requirement. We're not trying to balance spot option availability. We're contracting up rapidly and we're taking advantage of the markets to try to move this much as we can through increasing capability.

Edward Rowe - Raymond James

Okay. I appreciate that and kind of just switching gears, with your asset footprint in Permian while most of them are within some of the oil or part of the Permian we're seeing some growth in condensate in a portion of the Permian. Do you see any opportunities around may be stabilization given your exposure within that area and that's all I have. Thank you.

Joe Bob Perkins

Go ahead, Matt.

Matt Meloy

This is Matt Meloy. We've got discussions going on with several producers and they are interested in stabilization and movement of the condensate out of the Permian to the Gulf Coast for splitting and export. So we're still working those angles but like Joe Bob said we see a demand for the finished product after the split here on the Gulf Coast.

Edward Rowe - Raymond James

Thank you.

Joe Bob Perkins

I should also add for folks who don't know we have stabilizers and have had on that many of our plants already and sometimes you're running them and sometimes you're modifying them.

Operator

Thank you. And our next question comes from Jerren Holder from Goldman Sachs. Please go ahead.

Jerren Holder - Goldman Sachs

Good morning. Just wanted to start off wishing Rene and Roy the best on their retirement. Also if you could probably get a little bit more perspective on ethane exports, kind of the key points may be being discussed with the customers in a potential size, scope et cetera anything any additional perspective?

Rene Joyce

Yes, and I will kind of refer, this is Rene. We will refer back to where we stood with LPG exports we were way behind enterprise both in terms of timing and capabilities, but over time we've developed a very nice long-term business around LPG exports. And we find us ourselves in that situation today with ethane exports.

As Joe Bob said in his comments the engineering is complete for the de-ethanizer and additional export facilities for ethane. We're in conversations with a number of parties, what's very encouraging besides a number of parties we see a waterborne market for ethane developing so much smaller than LPGs but it is developing for ethane. So we're optimistic that we could create a business, a long-term business around ethane exports.

Jerren Holder - Goldman Sachs

Okay, thank you. And if you could provide some color may be on the utilization levels that some of the newer plants you put in service in May and June how are they ramping up and where are they sitting right now?

Joe Bob Perkins

I understand that focus on the utilization of the new plant. But I want to take a step back. The cool thing about both of those new plants as they are part of the systems and even super systems now and they are the newest most efficient plant in those systems and super systems. So it's natural for us to move some volumes to them.

The outlook for North Texas and the outlook for the Permian SAOU plus Sand Hills is for volumes to be increasing even faster than we thought in the beginning of 2014 and that's the big picture. And then we've taken that outlook our multiple scenarios about what's going to happen across field GMB and put that into our revised financial outlook for 2014.

Jerren Holder - Goldman Sachs

Thank you. And lastly, I guess, if you could provide some perspective on your views on NGL prices. I think some of the E&P companies out there have had a more bearish view kind of going forward especially if you look at the export announcements and what's expect to come on line for LPG next year, what are your thoughts on kind of NGL prices outlook?

Joe Bob Perkins

Oh, I try not to be the NGL price forecaster. And our business in many ways is insensitive or we get positives on one side a price movement and offsetting negatives on the other side of price movement and that's a good position for Targa to be in. Our outlook for original guidance you recall what that pricing looked like. We did multiple price scenarios including current prices as we updated 2014 financial guidance. You won't see Targa claiming to be a bear or bull relative to the current spot markets for LPGs, natural gas, or condensate.

Operator

Our next question comes from Brian Lasky from Morgan Stanley. Please go ahead.

Brian Lasky - Morgan Stanley

Good morning. A quick question, Joe Bob you talked about a little bit in terms of the implications of frac buys on your MOU with Kinder Morgan. Could you go into a little bit of detail there about the MOU you have between yourselves and Kinder Morgan and MarkWest, is there certain amount of cash that you need to keep for them at some point or is that very much where you guys are still in driver seat in terms of moving forward with that?

Joe Bob Perkins

I don't want to go into detail about things that have got CAs about. Our capacity Train 5, Train 6, potentially Train 7, is available to meet the needs of customers from the northeast via the Kinder Morgan pipeline and we stand ready to make that capacity available. The announcement of Train 5 is a Train 5 of particular design and we're beginning to build it immediately saying that we need most of it for our Targa volumes but that might well also serve third party volumes under existing and future contracts.

The potential for Northeast volumes would change the design of the next fracs coming home potentially significantly is it a propane plus train or is it a propane plus a little bit of ethane train and that would determine the design for which we would permit to meet the needs of shippers on the Kinder Morgan pipeline. If that project does not go forward there is an awful lot of demand from other parts of the country and the design of the next train beyond Train 5 will probably look more like Train 5 which has a good bit of flexibility already. So I hope that answers the question. We see demand for fractionation being pretty robust and I think the price we used in the script was that the potential go forward Northeast liquids coming this direction would impact timing and design but there is still a lot of things.

Brian Lasky - Morgan Stanley

But you guys are in the driver seat in terms of whether you move forward on Train 6 or 1 is your ability to move forward contingent on anything else with that JV? Are you (inaudible)?

Joe Bob Perkins

Train 5 or 6 with respect to our friends at Kinder Morgan and you said that twice. I will work with them and the going forward of 6 or 7 is likely to go forward with or without volumes coming from their pipeline.

Brian Lasky - Morgan Stanley

Got it. And then just forward back on the condensate splitter (inaudible) why don’t you guys just elaborate on your thoughts about an incremental splitter opportunities and how you guys may weigh that against actually getting in the condensate exports kind of things and how you are positioned there?

Joe Bob Perkins

We believe our facility are nicely positioned for multiple commercial activities. Right now we are, and that’s what we said in the beginning, involved in discussions with several counterparties interested in that particular location and benefit that our facilities bring for condensate splitters to the ship channel and those byproducts coming off the condensate splitters to robust markets for them at the ship channel.

Matt Meloy

Yeah, this condensate splitter that we're designing is going to generate six products. A lot of those products have a robust domestic market, some of those products will be ideally situated for exports, and that’s the same thing we're hearing from the customers that we're dealing with. The splitters can be designed around the quality of the condensate coming in and again there is domestic and international market for these products.

Joe Bob Perkins

At the same time I think that there will be condensate export in it I am not saying we won’t participate in that to have to be split on the other side of the border. That’s not -- that’s the way its just ought to go. Demand on both the, for both pipes.

Operator

Thank you. And our next question comes from Faisel Khan from Citigroup. Please go ahead

Faisel Khan - Citigroup

Thanks. Good morning, this is Faisel from Citigroup. Just a few questions. You talked a little bit about this on the call but the sequential sort of increase in the first quarter to second quarter in the fractionation volumes I guess from 312 to 346, can you grant a little more generality in terms of what drove that sequential increase?

Joe Bob Perkins

Yes, I mean we saw, part of this was from our field gathering and processing plants.

Matt Meloy

And Train 4 was ramping up.

Joe Bob Perkins

Train 4 is ramping up.

Matt Meloy

Q2 to Q2.

Joe Bob Perkins

But this is Q1 to Q2 and we saw a lot of growth just from Permian and from our field production and really to go into CBF.

Faisel Khan - Citigroup

Okay, so that brought an increase in --

Joe Bob Perkins

Yes, Q1 to Q2 we just continued the increase for not only our volumes but also third party volumes.

Faisel Khan - Citigroup

Okay, okay understood. And then just, you know, going back to the spot cargos for LPG facility in the quarter are most these sport cargos have ex-ship or FOB?

Matt Meloy

They are all FOB.

Faisel Khan - Citigroup

All FOB, okay, makes sense. And then, as you are looking at the sort of proposed ethane export facility, how important do you think it is to be sort of investment grade with these counterparties that you are dealing with? Is it non issue or is it a bit of a sticking point?

Joe Bob Perkins

Well, the counterparties to be investment grader for me to be investment grade?

Faisel Khan - Citigroup

For you to be investment grade?

Rene Joyce

I don’t think that us being one notch below investment grade is a sticking point for those counterparties.

Faisel Khan - Citigroup

Okay, okay got it.

Joe Bob Perkins

I think the most important thing with these parties is the availability of ethane in our system that can supply them over the long term.

Faisel Khan - Citigroup

Okay, okay that makes sense. And then just going to more of a strategic question I guess in your press release you guys put out last month, you talked about you'd been in sort of high level discussions with Energy Transfer. Can you talk about how you guys are thinking about M&A with the company and whether a change in sort of with the retirement of some of the senior management here has anything to -- did that have any view or sort of influence on how you are thinking about M&A in the context of the company?

Joe Bob Perkins

Actually I am glad you asked the question. Because Rene, Roy, myself want to quickly dispel any thoughts that their retirement is linked to those rumors in that article and all. We're managing the company the same way we have for the last 12 years and we'll manage it the same way in the future with Rene on the board. And I can speak for all the senior management on that.

There was rumors. There was an electronic sort of article to the extent that we had to come out with a statement strongly encouraged by the NYSE at that time. That statement we've been previously engaged. It was preliminary at high level and the discussions had been terminated. I can assure you that statement was correct. I don’t really have anything else to say today about that statement or that article.

Now you'd also kind of address a broader question and, first of all, Targa is always looking at potential assets and entity acquisitions, Targa acquiring assets and entities over wide range of types but we remained disciplined and we're not going to frustrated by others times paying too much.

We also have a fiduciary responsibility to consider any credible offers that are incoming. We're focused every day on improving the long-term values of Targa Resources. By doing that management and the boards have the appropriate context to evaluate an incoming offer.

Faisel Khan - Citigroup

Okay. I think that makes sense. I appreciate the clarity.

Rene Joyce

I'll just add one comment. There is nothing between the two going on or leaving with the Energy Transfer situation unfortunately, it's just a function of the age.

Operator

And the next question is from Justin Agnew from Robert W. Baird. Please go ahead.

Justin Agnew - Robert W. Baird

Good morning and congratulations on a strong quarter.

Joe Bob Perkins

Thanks. Before you ask the question Rene and Roy are younger at heart than most of the rest of us, so that’s part of why we were laughing.

Justin Agnew - Robert W. Baird

All right. Are you going to seeing any cost inflation either on the material side or any of the engineering or construction work on any of your projects?

Joe Bob Perkins

I heard on the material side or in the engineering construction but I didn’t hear the first part of the phrase. Would you mind?

Justin Agnew - Robert W. Baird

Do you see any cost inflation on any of that?

Joe Bob Perkins

Cost inflation. There are cost pressures just because there is an awful lot of activity out there. The workforce is the one we'd see the kind of the most impact on. The good news is Targa is pretty good not retaining our employees and we intend to try to stay good at retaining our employees. Material costs are going up a little back. Matt, you got more to add to that?

Matt Meloy

I would guess it's going up in less than 7 to 10% per year and we have worked with some phenomenal E&C company that have built on time on budget and we have great confidence in their continued support of Targa's growth, and we're very pleased with what we're seeing right now.

Joe Bob Perkins

We believe it's manageable right now but you're right, no pressure.

Justin Agnew - Robert W. Baird

Got it. And then when we think about the growth out of the coastal GNP segment does any of that do an uptake in the TMS volumes or somewhere else?

Matt Meloy

No.

Joe Bob Perkins

No, somewhere else is the right answer.

Rene Joyce

Yes, we've seen some growth at VESCO from the Mars platforms coming on and volumes going through VESCO and we also have a producer customer onshore Louisiana at LOU; there's some high GMP volumes there. The second quarter volumes at LOU that are actually down from Q1 we'd expect those to kind of tail off.

Joe Bob Perkins

We've seen Wilcox volumes come and go along the onshore Louisiana area that goes to LOU, kind of spurts up and then it doesn’t. I think we're going to continue to see gas, oil, gas for the system there is just whether it's enough to make up for the decline.

Rene Joyce

And there is growing activity in the offshore. One prospect will be hopefully tying it to the Mars platform, so there's some activity that will impact these operations over the next few years.

Operator

Thank you. Our next question comes from Jeremy Tonet from JPMorgan. Please go ahead.

Jeremy Tonet – JPMorgan

Hi, good morning and congratulations on the strong (inaudible). Also best wishes to Rene and Roy going forward. I was just wondering just one form of question on ethane exports. I wondering if you might be able to have any thoughts you might have on the development of this market and thoughts on if it's really just cracker piece frac y displacement or could more this be going into being used as fuel or just any thoughts there on how does burgeoning market develop?

Rene Joyce

Well, I'm not going to go into a lot more detail but our discussions with multiple customers are for multiple markets. I think that ethane to those multiple markets will develop over time. It makes sense on a global macroeconomic standpoint. And as it develops whatever the cost, you just don’t have back to back contracts but that’s a multiyear process. Back to back contracts will be much safer.

Matt Meloy

And multiple uses.

Rene Joyce

Right.

Joe Bob Perkins

There are customers that are going to use this to replace their own declining supplies of ethane in the feedstock and there are locations in the world that we work with for other products that are looking at ethane as a strong source of fuel for electric generation.

Jeremy Tonet – JPMorgan

Got you. Yes, that seems like there could be a pretty large market potentially. So interesting to see -

Rene Joyce

Like I said it's developing and we're encouraged that it can eventually end up into a sizable waterborne market.

Joe Bob Perkins

The market has to get confidence that ethane prices are going to be reasonable and that the supplies are going to be there. So they have got a significant capital investment themselves in order to create the demand for the ethane.

Operator

Thank you. And our next question comes from Helen Ryoo from Barclays. Please go ahead.

Helen Ryoo - Barclays

Thank you. Good morning. Congratulations on the quarter and congratulations Rene and Roy. Just a couple of questions. First on the marketing segment, your margins were sequentially down on – you could hear me right?

Rene Joyce

Yes, we can.

Helen Ryoo - Barclays

Okay. Your margins were sequentially down on the marketing segment and the volumes were flat but your LPG export activity was higher. So I am just curious why your marketing segment had a sequentially lower number. Is the mostly NGL price driven?

Joe Bob Perkins

One of the firs things is the seasonality in wholesale propane. So I would add that's the larger factor. Q1 is usually the strongest quarter for our wholesale propane and then Q2 it doesn’t make much.

Rene Joyce

This Q1 but you will remember back had some dislocations associated with pricing that probably made it even better in Q1.

Helen Ryoo - Barclays

Okay. And then just some fractionation, so I think I mean your fractionation volume were sequentially higher and then I think the press release mentioned some higher reservation fee receipt. Are you essentially receiving I mean just going forward I don't know how much access capacity you have as the frac forward runs out but are you pretty much covered with the reservation fee that the volume should not really matter, you are getting paid anyway on the full capacity, is that the right way to think about it?

Joe Bob Perkins

That's the way right way to think about it and that's what we build into our most of the scenarios of our guidance.

Helen Ryoo - Barclays

Okay. And then frac 5, is that the same thing you are going to have reservation fee built in there. So pretty much immediately you're going to get fully paid regardless of the actual volume of the frac?

Joe Bob Perkins

You kind of changed the question. Frac 5 is pretty much and it will be associated with reservation fees to Targa and third party existing contracts or future contracts over time. Then you repeat it and you said pretty much immediately. There will be some ramp up into track 5; there were some ramp up into frac 4 as you will recall.

Helen Ryoo - Barclays

Okay.

Rene Joyce

The producers don't have bottled up capacity to go from 0 to whatever their quantity is. We did have several suppliers that ramped upon train 4, some of those came on later in 2013 than the initial volumes that came on in mid-year 1'3.

Joe Bob Perkins

That answers your question?

Helen Ryoo - Barclays

Yes, it does. So it seems like there was a ramp up period but your income to frac 4 you are at the top of the full payment phase right now and then for frac 5 you are going to have some sort of periods that you are going to essentially fully paid regardless of the volume.

Joe Bob Perkins

Yes, over a reasonable period of time we would expect frac 5 to be similarly kind of 90% utilization more as of financial stand point is the good way to model it.

Helen Ryoo - Barclays

Okay, great. And then just lastly, going to Bad Lands I guess I mean there was One Oak announced the pretty big plans in the northeast McKenzie County and it seems like it's pretty close to where your assets are, but just wondering if you have a big competitor plan in the area. Is that good for you given maybe less flaring, it should help the volume coming into your system or does it change your thoughts around maybe more processing in that area? Could you may be talk about that a little bit?

Rene Joyce

In the Bad Lands acreage, there are huge acreage dedication. One Oak has more acreage dedicated to them than any other company. They should because they have been there they go back to it before Bakken, and there is a lot of held by production acreage out there. We don’t really see that we're competing with other companies for natural gas up there for processing because we have significant acreage dedication to ourselves. One Oak is reaching out try to alleviate the flaring for producers over a wide area. We're looking at any new sources, but we have a growing need by the producers under contract to Targa to build addition plays.

Helen Ryoo - Barclays

Yes, that's very helpful. Thank you very much.

Operator

Thank you. Our next question comes from Michael Blum from Wells Fargo. Go ahead.

Michael Blum - Wells Fargo

Hi, good morning, everybody. Rene and Roy congratulations on your retirement also. Pretty much everything was covered. I just had one clarification on the LPG export facility. Saw your updated statement of capacity, should we sink over that sort of the delta as available for sport or that's also potentially also getting contracted now?

Joe Bob Perkins

That's 6.5 million barrels a month that you heard us described. You should think of as available for spot and term. There is no reason we can't contract for 6.5 million barrels a month. We speak in terms of an effective capacity, which is not the 12,500 barrels per hour times 24 hours times 365 days a year. That would be 9 million barrels a month. We can refrigerate and pump 9 million barrels a month of HD5 propane and/or low ethane propane when you added all up, but when you factor it down for several categories, one equipment run time and efficiency, okay. Is that refrigeration always running? Two, docks and ship factors including weather right scheduling and storage and product availability, which Targa has a strong advantage in, when you take those three factors, it's not just about the pumping capacity. And right now based on our experience in using this number for a multi-month view we're very comfortable with 6.5 million barrels a month. There will be spots certainly days, weeks and you had months that could exceed 6.5 million barrels per month and that might be additional room for spot. Does that help Michael?

Michael Blum - Wells Fargo

Yes, thank you. My second question is and maybe I am reading into this too much but in the press release you talk about a step change in the gross and EBITDA this year and I certainly wouldn't argue with that characterization. And I did hear your commentary on where you think distribution growth will end up for the year, but just wondering if you are sort of thinking about a step change in the distribution as well to sort of going lock step with the EBITDA growth or do you think there is no reason to really go above 9%?

Joe Bob Perkins

You might be reading too much into our step change discussions etc. I mean, certainly, we have had a very large step change in EBITDA that in $715 million to $925 million to $975 million is the result of things going well across all our businesses. Distributions have increased as a result of that. I mean, we're at the top of that range that we talked about and we're certainly admitting that we're above the plus on the 25% but we're also letting with a multiyear view and we always drive this thing with a multiyear view, we're letting coverage go up with that multiyear view. And increasing coverages in the short term create benefits in the longer term that support higher long term distribution rates. What we don't want to do is drive the boat with a whole bunch of steps, right, ups and then perhaps flats and then more ups, we have got a terrific record of continued increases and continued growth and increases. And I do not think you should interpret whatever word was used in step function there to imply that we were then start driving the boat differently.

Operator

Thank you, and our next question comes from Christopher Sighinolfi from Jefferies. Please go ahead.

Christopher Sighinolfi - Jefferies

Just real quick (inaudible) estimated cost is $385 million, I was just wondering is that gross CapEx or is that net for your interest?

Matt Meloy

Gross.

Joe Bob Perkins

Gross.

Christopher Sighinolfi - Jefferies

Okay, thanks. And then, Matt, I know you reviewed it and I was scribbling quickly, so you don’t mind I ask you to review it again just the cash tax rate expectation for tubeage for TRGP?

Matt Meloy

Yes, it's come in higher than our 27% estimate for the first half of the year, it's really been closer to about 33-ish% for the first half and it is driven by higher TRP EBITDA which is a good thing and helps over the longer term but in the short term it creates more taxable income at TRC. So given we were rising guidance here higher again in the second half of this year something kind of in line with first half seem to be a reasonable estimate.

Christopher Sighinolfi - Jefferies

Okay, great. And then the final thing as to rephrase my first question a little bit differently, Joe Bob, if I think about that new capacity sort of targeted let's say normal operating condition of 6.5 million a month roughly what percentage today of that would be sort of not under a longer term contract would be spot?

Joe Bob Perkins

In the end of first quarter we're sort of --

Christopher Sighinolfi - Jefferies

I hear Rene laughing by the way.

Joe Bob Perkins

We anticipated the question, we also know what the answer we're going to provide. In the first quarter, we sort of gained numbers. We're not trying to be hard headed or resistant but it is not really in our interest to give specific numbers on our contracting on a quarterly basis. We may provide some additional quantification say at our next annual update. What we said today was that relative to first quarter when we said we had an average of 4.2 million barrels contracted for the remaining three quarters and where we said 2015 had a similar amounted contracted and I think we also said that we had contracts going out to 2020, what we said this time as we're continuing to add contracts with a lot of demand and we're continuing to add contract term with a lot of demand. So that's directional for you but I know it's not what you want.

Operator

And I'm showing no further questions. I'd like to turn the call back over to Joe Bob Perkins for any closing remarks.

Joe Bob Perkins

Well, thank you all very much for your attendance and for all of your questions. I particularly want to thank you for everybody's kind words to Roy and I. If you have any further questions, please feel free to contact any of us Jen, Matt, Rene, myself, and probably have more phone numbers than them. So have a good day and have a nice weekend. Good bye.

Operator

Thank you. Ladies and gentlemen, this concludes today’s program. You may all disconnect. Everyone have a great day.

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