Targa Resources Corp. (TRGP) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Targa Resources' Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to your host, Joe Brass, Director of Finance.

Thank you, operator. I'd like to welcome everyone to our third quarter 2012 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, www.targaresources.com. We will also be posting an updated investor presentation to our website after the call. Speaking on the call today will be Rene Joyce, Chairman; and Matt Meloy, Chief Financial Officer. Due to a prior travel commitment, Joe Bob Perkins, CEO, will not be speaking with us on the call, but will be available remotely during the Q&A session. Rene and Matt are going to compare the third quarter 2012 results to prior period results as well as providing additional color on our results, business performance and other matters of interest. 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 predictions should be considered forward-looking statements and are covered by Safe Harbor provision of the Securities Acts of 1933 and 1934. Please note that actual results may and could differ materially from those projected in any forward-looking statements. For a discussion of the factors that could cause actual results to differ, please refer to our SEC filings, included the Partnership's Annual Report on Form 10-K for the year ended December 31, 2011, and quarterly reports on Form 10-Q. With that, I would like to turn it over to Rene Joyce.

Thanks, Joe. Welcome and thanks to everyone for participating in this call. Besides Matt and myself, there are several other members of the management team, who will be available to assist in the Q&A session. For today's call, I'll start with a high level review of performance and then highlights. We will then turn it over to Matt to review the Partnership's consolidated financial results, its segment results and other financial matters for the Partnership. Matt will also review key financial matters related to Targa Resources Corp. Following Matt's comments, I'll provide a few more remarks and then we will take your questions. But before I get started, I would like to remind listeners that they can assess the presentation and replay of our recent October 18 Investor Day webcast through our website for an even more detailed discussion of our businesses and growth projects. Our reported third quarter adjusted EBITDA was $116 million, an 8% increase over last year, despite weaker commodity prices and the impact of Hurricane Isaac. Distributable cash flow of approximately $77 million resulted in distribution coverage of about 1x based on our third quarter declared distribution of $0.6625 or $2.65 on an annual basis. Consistent with our 2012 full year guidance given last fall, the Partnership's third quarter distribution represents a 14% increase compared to the third quarter of 2011. Moving to a brief business overview. Despite lower commodity volumes, volumes in our field G&P continue to increase, up over 9% year-over-year, driven by strong producer activity across our systems. Hurricane Isaac impacted our Coastal G&P volumes and operating margin during the quarter. We estimate approximately an $8 million impact to EBITDA during the quarter for these operating disruptions, which includes a $3.3 million charge in cleanup and repair cost. The downstream division continued its strong growth profile. Third quarter operating margin increased 53% over 2011. The increase is due to higher fractionation and treating fees, increased LPG export activity and the impact of the 2011 petroleum logistics acquisition. That wraps up my initial comments. I'll hand it over to Matt.

Thanks, Rene. I'd like to add my welcome and thank you for joining our call today. Let's start with a review of the consolidated results. As Rene mentioned, adjusted EBITDA for the quarter was $116.2 million compared to our previous guidance of $113 million, and $107.3 million for the same period last year. The increase was primarily the result of higher logistics and marketing operating margin and higher commodity hedge settlements, partially offset by lower operating margins in the Gathering and Processing division. Overall gross margin increased 3% for the third quarter compared to last year. I will review the drivers of this performance in our segment review. Gross maintenance capital expenditures were $16.2 million in the third quarter of 2012 compared to $24.7 million in 2011. Adjusting for the non-controlling interest portion of maintenance capital expenditures and certain reimbursements from TRC to the Partnership, net maintenance capital expenditures were $12.4 million in the third quarter of 2012 compared to $21.9 million in 2011. Turning to the segment level, I'll summarize the third quarter's performance on a year-over-year basis. We'll start with our Gathering and Processing segment. Field Gathering and Processing operating margin decreased by approximately 25% compared to last year, driven by lower natural gas and NGL prices, partially offset by increased throughput. These segment results do not include the impact of our hedging program. Third quarter 2012 plant and natural gas inlet for the Field Gathering and Processing segment was 686 million cubic feet per day, a 9% increase compared to the same period in 2011. 3 of our 4 our Field Gathering and Processing business units were significantly up in volume. North Texas, SAOU and Sand Hills natural gas inlet volumes increased by approximately 17%, 10% and 11% respectively, with a slight decrease in natural gas inlet…

Thanks, Matt. Just a few final comments; essentially, the executive summary of the October 18 Investor Presentation. The underlying industry dynamics of shale and resource development provide the foundation for Targa's performance and future growth. We have a leadership G&P footprint in multiple basins where volumes are growing. And we're taking advantage of this situation by adding processing capacity in these areas. We also have a leading presence in and around Mont Belvieu where fee-based business is growing, and we're adding fractionation storage and export capacity. Multiple projects contribute to our strong growth profile, and we continue to work on additional projects. Two project approvals were announced in the press release proceeding, the October Investor Presentation. The first, a $225 million project to install a new $200 million a day cryogenic plant and infrastructure to support our San Angelo system, and add to our strong Permian basin presence. We will call it the High Plains plan. It is well located relative to multiple plays such as the Cline, Canyon Sands, Wolfberry and others, and well located relative to NGL and residue takeaway. The High Plains plan is expected to be completed in mid-2014. A second project we announced was to expand our international export project, even before we have completed the first phase of that expansion. The total combined spend will be approximately $480 million. In the third quarter of 2013, we will have the capacity to load 4 VLGCs, in addition to our small- to mid-size LPG export business. By the third quarter of 2014, we will be able to add another 1 million barrels to 2 million barrels a month, or another 2 to 4 VLGCs. We expect the impact from these and other highly visible growth projects to provide the margin scale and diversity that will support continued distribution growth, and we continue to work on unannounced -- on the unannounced project portfolio. There are not really any new developments over the last few weeks since our Investor Day on October 18, but the ongoing work includes: Train 5, another 100,000 barrel fractionation facility at Belvieu; other projects in the Permian basin; and the potential for further expansion at our terminals and development of new terminals at other locations, all of which we have previously discussed. And with the benefit of substantial liquidity providing flexibility to expand our diversified midstream platform, the Partnership is positioned to invest in even longer-term growth. So with that, we'll open it up to questions. And now, I'll turn it back to the operator.

[Operator Instructions] I have a question from Scott Fogleman with Credit Suisse.

Just a little housekeeping question, just what is the capacity there at Big Lake, the new plant that you all got from Capito [ph]?

Believe it's a little over $200 million a day, it's a $250 million a day plant.

And I mean you, kind of, touched around it, but what would you say the hurricane impacted the overall throughput at Coastal during the quarter?

It was down for a period of time, kind of, late in the third quarter. When we looked at it reported, we didn't outline the exact volume impact. But we just said it's about -- when you look at the volumes loss, we estimated all-in about an $8 million EBITDA impact. Then you can look, kind of, third quarter to second quarter, the volume's down at both the Coastal Straddle and VESCO, and then how much lower those volumes are Q3 to Q2?

Well, essentially all the Gulf shut off. We had volumes impacted at all of our on-shore facilities to varying degrees, but the bulk of the volumes lost was at Venice and Yscloskey.

[Operator Instructions] I am not showing any other questions in the queue at this time, sir.

Thank you, operator. And to the extent anyone has follow-up questions, please feel free to contact Matt or any of us. Thank you again for your time today, and we look forward to speaking with you again.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.