Targa Resources, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Targa Resources Corporation Third Quarter 2019 earnings, webcast, and presentation conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a -and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. I would now like to turn the conference over to your host, Mr. Sanjay Lab, Senior Director of Investor Relations. Sir, please go ahead.

Good morning, and welcome to the Third Quarter 2019 earnings call for Targa Resources Corp. The Third Quarter earnings release for Targa Resources Corp, along with the Third Quarter earnings supplement presentation, are available on the Investor section of our website at targarresources.com. In addition, an updated Investor presentation has also been posted to our website. A reminder that statements made during this call that might include Targa Resources expectations or predictions should be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in forward-looking statements. For discussion of factors that could cause actual results to differ, please refer to our latest SEC filings. Our speakers for the call today will be Joe Bob Perkins, Chief Executive Officer, Matt Malloy, President, and Jen Neal, Chief Financial Officer. We'll also have the following senior management team members available for Q&A. Pat McDonough, President, Gathering and Processing, Scott Pryor, President, Logistics and Marketing, and Bobby Marrero, Chief Commercial Officer. Joe Bob will begin today's call with a few strategic highlights followed by Matt who will provide an update on business outlook, and then Jen will discuss Third Quarter results before we take your questions. With that, I'll now turn the call over to Joe Bob.

Thanks, Sanjay. Good morning, and thank you to everybody on the call. Before we get into our remarks, I'd like to acknowledge the recent retirement of Jeff McParland, consistent with our long-term succession planning. Most recently, Jeff served as President of Administration. Jeff was also Targa's first CFO. On behalf of the entire Targa team, we thank Jeff for his tremendous leadership and help shaping our financial organization in Targa's early years. It continues to be an exciting time at Targa. We're beginning to benefit from numerous major projects now online, most of which began over two years ago. This year, we completed and commenced operations on approximately $4 billion worth of projects, projects which have successfully transformed Targa into a leading, integrated, midstream company. These completed projects and the cash flow from these projects positions Targa very well. Our balance sheet and cash flow profile are expected to strengthen meaningfully as we move forward, and we will capture improved returns on capital benefiting from our integrated platform and lower capital spend. I want to express my personal thanks to the exceptional team at Targa for their continued focus and commitment, executing on these projects, on our company's long-term strategic priorities, and most importantly, safely operating our infrastructure facilities every day. With premier assets and a premier reputation in both our gathering and processing business and in our downstream NGO business, and with those assets and reputation complemented by our talented leadership and employees, Targa is very well positioned for the future. With that, I'll now turn the call over to Matt to discuss our business outlook.

Thanks, Joe Bob, and good morning. It certainly is an exciting time at Targa. Q3 was a strong quarter as we are beginning to benefit from a cash flow ramp associated with our significant investment cycle. Since our second quarter conference call, we completed our new 250 million cubic feet per day Falcon plant in Permian, Delaware, and the rebuild of Dock 2 at our LPG export facilities in Glena Park. Our Grand Prix pipeline continues to perform very well since commencing operations in early August. On our last earnings call, we said we expected volumes of about 200,000 barrels per day, and we exceeded those expectations, averaging about 230,000 barrels per day of deliveries into Bellevue in September. We anticipate volumes to continue to improve going forward, and we'll provide more information on 2020 volume expectations when we give our formal operational and financial guidance in February. As we think about our positioning going forward, there are some key points I'd like to touch on in summary, and then I will expand on as well. First, our gathering and processing business is growing and expected to continue to have strong performance, even if we experience a moderation of production growth. Second, our growth is coming from primarily fee-based assets, driving a higher percentage of fee-based margin and less commodity price sensitivity. Third, our continued organization-wide focus on capital discipline, largely along our core business of moving molecules from GMP, transport, fractionation, and export, is leading to more moderate capital spend going forward. And fourth, our financial metrics are improving and expected to improve going forward as we benefit from our integrated platform, growing EBITDA, lower capex, and better returns. Let's talk about our gathering and processing business. Beginning in the Permian, our systems remain highly utilized as volumes across both the Midland and Delaware bases, and our communications have been tracking above our initial expectations. In Permian Midland, volumes in the third quarter sequentially increased 8 percent as our Pembroke plant quickly ramped up in September. Our next Permian Midland plant, Gateway, is on track to begin operations in the fourth quarter of 2020. In Permian Delaware, volumes in the third quarter sequentially increased 15 percent as production from our customers continued to ramp. We completed our new Falcon plant ahead of schedule and commenced operations at the end of the third quarter. Falcon is quickly ramping, and we remain on track to complete our next Permian Delaware plant, Peregrine, in the second quarter of 2020. We expect volumes to increase across our Permian Midland and Permian Delaware systems in 2020 from continued production growth collectively, from our diverse customer base, full-year contributions from our recently completed processing plants in 2019, and our new plants that will begin operations in 2020. We remain in regular dialogue with our producer customers, and our growth is underpinned by the majors and large independents who are forecasting continued growth. With our integrated system, the increasing NGL production from target plants will largely be transported down Grand Prix into our Mont Bellevue Fractionation Complex. The Gulf Coast Express Pipeline commenced full operations in late September and provided much-needed incremental residue gas to Permian to Permian markets. Moving to the Badlands, our gas-gathered volumes increased in the third quarter as a result of incremental processing capacity available from the recent completion of our new Little Missouri Four plant. The volumes will continue to ramp through the balance of this year as incremental NGL take-away capacity from the basin comes online. With the completion of many downstream system expansions, including Grand Prix, our business mix has shifted more towards downstream, resulting in increasing fee-based margin. We also have a key strategic initiative underway which includes increasing our fee-based margin across our gathering and processing business. We continue to pursue opportunities with our customers to review current and prospective commercial arrangements, and have had recent success in converting certain percentage of proceeds arrangements to fee-based arrangements, and have also added incremental fee-based elements. We now estimate our fee-based margin to increase in 2020 to be about 80% of our forecasted operating margin. Turning to our downstream business, overall business fundamentals in Mont Bellevue continue to remain robust. During the third quarter, we completed a scheduled turnaround and related maintenance at our Fractionation Complex in Mont Bellevue. Without the turnaround, we expect that volumes would have been higher by approximately 50,000 barrels per day. And with the turnaround now complete, our Fractionation Complex continues to operate at very high utilization rates. Construction continues on trains seven and eight, which are expected to be online late first quarter and late third quarter of 2020, respectively. We expect both Fractrains to be highly utilized at startup based on our expectation of growing NGL volumes from Grand Prix and contracted third-party arrangements. In our LPG export business, we completed our DOC 2 rebuild at the end of the third quarter of 2019, which enhances our flexibility and increases our loading capabilities where we can now load up to 10 million barrels per month of LPGs beginning in the fourth quarter, depending on the product mix, vessel size, among other factors. Our next phase of export expansion at our Galena Park facility remains on track as well and will increase our effective capacity to up to 15 million barrels per month in the third quarter of 2020. With the completion of Grand Prix and several gathering and processing and downstream expansion projects in 2019, the trajectory of our capital spend is substantially moderated. We continue to be highly focused on managing our net growth capex with discipline and continue to estimate approximately 2.4 billion for this year. And based on current assumptions, our preliminary outlook for 2020 net growth capex is approximately 1.2 to 1.3 billion. Our preliminary estimate includes the remaining spend on announced projects currently underway across our GMP and downstream businesses, plus our current best planning assumptions for additional infrastructure from new projects. The timing of moving forward with new Permian gas processing plants and additional fractionation expansion in Montbellevue is predicated on our outlook for estimated volume growth and activity levels, which would impact whether we're at the lower or higher end of our estimated net growth capital range as a result of the timing of that capital spend. We continue to thoroughly evaluate and highly scrutinize all future new capital projects, prioritizing future investments around our core strategy with a continued focus on balance sheet improvement over time. With that, I will now turn the call over to Jen to discuss Targa's results for the third quarter. Thanks,

Matt. Good morning, everyone. Targa's reported quarterly adjusted EBITDA for the third quarter was $350 million, with dividend coverage of approximately one time. In our GMP segment, operating margin contribution from higher sequential inlet volumes, led by our Permian Midland and Permian Delaware regions, was partially offset by the impact of lower NGL and crude oil prices. Net of realized hedge gains, third quarter GMP operating margin was about $15 million higher than the second quarter. In our logistics and marketing segment, operating margins sequentially increased predominantly due to a partial quarter contribution from Grand Prix. The impact of the schedule turnaround in our fractionation facilities during the third quarter was offset by the early startup of GCX. Operating expenses in our GMP segment in the third quarter decreased over the second quarter, primarily due to lower property tax estimates, while the increase in sequential downstream operating expenses was attributable to a full quarter of train six operations and a partial quarter of Grand Prix deliveries into Montbellevue. Turning to hedging, our percent of proceeds equity commodity positions are well hedged, and we continue to execute additional hedges to increase cash flow stability. We are more than 80% hedged across all commodities for the fourth quarter and more than 50% hedged across all commodities for 2020. Additional updated hedge disclosures can be found in our investor presentation. During the third quarter, we recognized an unrealized non-cash mark to market loss of $101 million associated with hedging our natural gas transportation agreement, which will be offset by underlying locked in transportation gains in future periods. As Matt mentioned, our 2019 net growth capex estimate for announced projects remains at approximately $2.4 billion, and we have spent about $1.9 billion through the end of the third quarter. Our full year 2019 maintenance capex forecast remains unchanged at approximately $130 million. On a debt compliance basis, TRP's leverage ratio at the end of the third quarter was approximately 4.7 times versus a compliance covenant of 5.5 times. Our consolidated reported debt to EBITDA ratio was approximately 5.8 times. Using annualized third quarter EBITDA to calculate our consolidated leverage, our debt to EBITDA ratio was 5.4 times, which we think is more reflective of our leverage trajectory given our expectation to benefit from ramping EBITDA. We also continue to evaluate and execute asset sales as a catalyst to reduce leverage. During the third quarter, we closed on the sale of an equity method investment for $70 million. In our press release, we announced that we are evaluating the potential divestiture of our crude gathering business in the Permian, which includes crude gathering and storage assets in both the Delaware and Midland Basin. I am very pleased to announce that we have an update to our earlier press release, and we have now executed agreements to sell our Permian-Delaware crude business to Oryx Midstream for approximately $135 million. Subject to customary regulatory approvals and closing conditions, the sale is expected to close in the fourth quarter of 2019. I would like to publicly thank our team that worked tirelessly through the night and early morning to execute the agreements. Combined, these asset sales were executed in an attractive double-digit multiple of EBITDA. We are also evaluating the potential sale of the remaining Permian crude storage and gathering assets in the Midland Basin. No common equity has been issued -to-date, and based on current market conditions, our expectation is that we do not need to issue any equity into the foreseeable future as we benefit from increasing cash flow and lower leverage from our projects now in service. Consistent with our expectations entering 2019, adjusted EBITDA and dividend coverage are expected to be at their highest points for the year during the fourth quarter, providing target with significant momentum as we exit 2019. With that, I would like to turn it back to Matt for a few closing comments.

Thanks, Jen. I would also like to bring to your attention our inaugural sustainability report, which we published in August, highlighting our framework of policies, practices, and systems in the areas of safety, environmental, social, and governance. We remain focused in continuing to progress our disclosures in these areas and to enhance our performance. So with that, Operator, please open the line for questions.

Certainly, sir. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the sound key. Your first question comes from the line of Shinaer Ghashuni from UBS. Your line is open.

Hi. Good morning, everyone. Hey, good morning. Maybe we can start off with, you know, you have Grand Prix coming online, a lot of fee-based assets coming online, and your fee-based component of earnings is definitely increasing. But there's also been some talk about some commercial successes that you and some others have had in converting percentage of proceeds, contracts, fee floors to sort of bring the exposure down further. Can you talk a little bit about this? Have you had some successes? Do you expect more successes, if so, and how we should be thinking about it on a go-forward basis?

Sure. So in our commodity-sensitive areas, as we're going out and continuing to spend capital to hook up additional wells and facilitate growth for our producers, given current commodity prices, the returns on some of those are, you know, relatively low compared to recent points in history when you look at commodity prices. So it's not too difficult of a discussion, you know, to have with them to just show what our overall margins are. And we want to continue to invest for our producers. So we're adding fee-based components to those contracts. We're adding some fee floors and instances. Sometimes we're moving completely to fee. So it just depends on producer preferences. But we would like to see a meaningful, if not majority or plus, of fee base to protect our investment as we go forward.

All right. Perfect. And as a follow-up question, you know, really pleased to see the asset sales plus which you've just talked about in your prepared remarks. Do you see any more opportunities for asset sales down the road? Like, would you consider selling GCX when the DEFCO presumably comes in-house?

So the other asset that we named in the press release this morning was our crude business in the Midland. So that's another one that we're in the process now. We've engaged Jeffries and we're going to look to monetize that. I think we're going to continue to look across our asset base and see what, while it might be complementary, if it's not core and down our strategic gas value chains of gathering and processing all the way down, you know, to the export dock, we're going to have a discussion and take a hard look at it. But right now the only one that's really on that would be the crude business in the Midland side.

Great. One final question. How much flex do you have to be towards the lower end of your growth capex range for 2020?

Well, I think you saw us give a relatively narrow range, you know, as we're ramping up our internal processes for what projects we want to include and what that budget's going to look like for 2020. I think we feel pretty comfortable with that 1.2 to 1.3. And then it's really going to be when we add another processing plan in the Permian, you know, are we going to have some spending, you know, in 2020 or does it get pushed to the end of 2020? That's what's going to really move the 1.2 to 1.3 timing of when processing is getting added. And then when we green light, you know, track train seven and eight fill up, are we ordering long lead times for train nine and other things? So that's why I think there's a relatively tight range. And then it's just the completion of our major projects already is the majority of that.

All right. Perfect. Thank you very much. Appreciate the time today.

Okay. Thank you.

Your next question comes from the line of Spyro Donis from Credit Suisse. Your line is open.

Yeah. Good morning, everyone. Maybe starting off with 2020 growth capex, if you could. Coming down significantly, great to see. Just curious as you think about the backlog beyond 20, you guys had guided to aggregate capex at one point of about 1.8 billion between 20 and 21, which I guess implies maybe five or 600 million in 21. How much could we see that figure kind of change over time? Or is the right way to think about it that you maybe use any sort of excess spending capacity to bind the Devco interest instead of new projects?

Yeah. I think as we look at our capital spending trajectory, I think 2020 is a big step for us. You know, it's about half of what it was last year. So you're seeing that capex moderate. I think when we gave that guidance back in November of last year, the point of that was to show that going forward, the capex is going to be moderating significantly. I think 2020 shows that. But even in 2020, we have, you know, spending on two-fractionation trains, which is higher than a normal amount of spending would be for fractionation. So, you know, we plan to give annual guidance. So 2020 shows a step in the right direction, significantly moderated capex. Then as we move through the year, you know, we'll give annual guidance for 2021.

It will largely be predicated on activity levels, right, Spiro? So at this point, when we think about the assets coming online in 2020, the expectation is that they will be highly utilized relatively quickly. And so I think that if activity levels stay consistent with where they are today, our expectations for the near term, then obviously capex would be higher as a result of that. If activity levels decrease, then I think we've got more flex as we go through time to delay the timing of when we have our next plant in the Fermion, either the Midland and the Delaware side, or when we would need that additional fractionation in Bellevue.

Okay, that makes sense. And then just circling back on asset sales, congrats on getting the deal done so quickly. Maybe just talk about how you think about using the proceeds. And maybe as you look at basins or assets outside of the Fermion, where maybe growth is a little bit slower but capex needs, I imagine, are much lower, how do you think about the valuation hurdle there to sell those assets, which I presume are sort of free cash flow positive at this point?

Good question. We've got a lot of interest in assets across the portfolio, and we've gotten a lot of reverse inquiry around different assets. We're very pleased with the announcement this morning that we were able to successfully execute agreements on the Fermion-Delaware crude side. And now we'll be evaluating the potential sale of the Fermion-Midland crude assets. When you look across the portfolio beyond that, I think that everything is for sale for the right price. That's part of our jobs. But as you rightly point out, there are some areas within our system where we're spending relatively little capital, where we've been incredibly successful in reducing costs and really squeezing every last dime out of assets that we possibly can. And so getting a valuation that makes sense for us to sell those assets versus just continuing to harvest that cash flow can be a difficult decision. But we're always open to evaluating anything that's in our portfolio.

And just to add onto that too, Jen, you know, we have been active in that market as a buyer and as you see now as a seller. For selling assets in the GMP business, it's not a great market for that. So as we're looking around at potential opportunities and what we could or could not monetize, you know, it's not a great market for that on the gas gathering and processing side.

Got it. Appreciate all that color. Thanks, everyone.

Okay. Thank you.

Your next question comes from Tristan Richardson from Centrist. Hey,

good morning, guys. Just on the 1.2 to 1.3, it sounds like there is some assumption of new project potential in that number. Could you give us a sense of the buckets between sanctioned projects and then kind of the wedge of potential projects that you've got high visibility to that aren't necessarily greenlit today?

Yeah, so most of that spending is related to projects that are already underway, right? Train 7, Train 8, Gateway, Peregrine, Export Facility. And I think the reason it's a relatively tight range is we do expect highly likely to be announcing another plant out in the Permian. So there will be some spending for that. And that's why we gave a range. You know, we see it as about a $100 million range for depending on when we greenlight that plant. And then when Y-grade volumes are increasing as a result of production activity, we're going to have any spending or some modest amount of spending on Train 9 for 2020. So those are the two kind of drivers to be at the high end or low end of that range.

As Matt mentioned in his prepared remarks, we are expecting growth from the producers on our systems, particularly in the Permian. And so there is a lot of spending that we're assuming will take place to facilitate their growth as they continue to drill and be successful.

And Matt, I would add one other project to that, and that is the extension of our Grand Prix pipeline north into the SCUBE stack that is highly backed by a Williams contract.

Yeah, agree. That's another large project. Thanks, Scott.

That's largely going to be spent in 2020. That is in there.

Yeah.

Helpful. Thank you. And then just to follow up, you know, as we think about the de-lovering cycle that kicks off here and into 2021, any thoughts to updating the market on sort of long-term leverage targets, either, you know, -year-end 19 or beyond, or as particular as we think of prospects for consolidating the Devcos multi-years out?

I think, Tristan, that we've been consistently saying that a goal of ours is to reduce our leverage. We deliberately let it move higher over the last couple of years as we had good visibility to the ramp in cash flow and even dot from the projects coming online. And now you're hearing us say that one of the reasons that we're exploring some of the asset sales that we've been successful on executing on is to more quickly reduce our leverage. And so that's a big focus area for us. I think that because our leverage is where it is today, a goal of four times consolidated over time is a reasonable assumption, but it's going to take us some time to get there just given where we are today, even as our EBITDA ramps. And so we'll be looking at the Devco repurchase and the terms of those repurchases and our leverage as we move through time. We've got great flexibility in that structure in terms of having four years from essentially the fourth quarter to take it out. So I think that we feel like we have a lot of options to use our additional cash flow as it's generated.

Oh, thank you guys very much.

Okay, thank you.

The next question comes from Christine Xu from Barclays. Your line is open.

Good morning, everyone. I wanted to start with your comments about increasing the fee-based cash flows. So when you say you're adding fee-based components and floors or just outright all fees, is it just for new volumes and there's nothing for existing volumes? And if it is just for new volumes, I mean, would it be fair to say that all this contracting that you're talking about is primarily taking place in the permeant?

I'd say it's a mix of new volumes and existing. So we have multiple contracts with our producers that are in different stages of their life. Some have left on them relatively short-term and some are longer-term. But I'd say it's a mix of growth volumes and existing volumes. And then you'd be correct as in that most of it I think will be taking place in the permeant, but we also have some POP and some other commodity price sensitivity elsewhere. So even though there's less activity, there's less opportunities for us to go in there and do that, we are going into those other areas as well, but it is primarily in the permeant.

Okay, great. And then I wanted to just talk about WAHHA. You know, the basis is widening back out even though Grand Prix is in service. And could you just confirm that you won't be exposed to this basis due to your capacity on the line and we should think that your price realization is aga dulce less the tariff you're paying, the tariff that you're paying for the pipeline capacity?

Yeah, this is Pat McDonough. I'll take a shot at that. I mean, we obviously have a variety of different ways that we move gas from our assets in the permeant basis. GCX is just one of those. Obviously we have firm transportation on that pipe. We're moving gas to aqua dulce. We also have firm capabilities out of the basin on other pipelines. We really have a mixed portfolio where we have firm sales at WAHHA to people with firm transportation takeaway. We have our own firm transport going west, coming back east, going into Mexico, et cetera. So when we look across our portfolio, we feel very good about our capabilities of moving our gas, a lot of it out of the basin, some of it with some WAHHA realized price, but most of that based on sales in other locations out of WAHHA.

Okay, great. And then just one last question. So on Grand Prix, you expected September to hit 200,000 barrels per day, and it looks like you're tracking better at 230. Is this just an acceleration of the timing of volumes, and is 250,000 barrels per day still the right number to hit sometime in 2020, or could this be on the conservative side? And was it more a function of volumes being better on your system or a third-party processing plan?

Yeah, I'd say when we gave the original 200,000, I'd say it was a conservative estimate. It was our first full month in service, and so we wanted to make sure we felt we were going to be able to exceed that. And so we did exceed that number that we gave. You saw volumes on our system sequentially increase in the Permian, Midland, and in the Delaware, both of which helped drive some of that outperformance. So I think it's really across the board. It's across the Permian. It's our volumes, and it is third-party volumes as well. I think as you get into 2020, I think we'll give some updated volume guidance, or we anticipate giving some updated volume guidance in 2020 for Grand Prix, which will include Grand Prix. I think we feel really good about our previous 250 at some point in 2020. We'll be bringing that. We'll be updating that in February. But yeah, we feel really good about being able to exceed that.

Great.

Thank you. Okay. Thank you.

Your next question comes from the line of Michael Blum from Wells Fargo. Your line is open.

Thanks. Good morning, everyone. So you kind of broadly referenced this earlier in your comments, but I'm wondering if you could talk a little more directly about what you're hearing from your producer customers in various basins that you operate, just to get a feel for what you're hearing. Just how much of a slowdown do you anticipate overall, or are you really not seeing it? Because we seem to be hearing kind of mixed messages from the mainstream side.

Yeah, this is Pat, and I'll address that. Obviously, our biggest capital spend is in the Permian Basin, and our biggest growth over the past several years now has been in the Permian Basin. And obviously, we've employed a lot of capital there in the recent past, and those contracts and that activity level is underpinned by the large majors and the large independents. Certainly, we do have some smaller guys that may be more impacted by a slowdown. But generally, if you look at what we've done the last nine months in the Delaware and Permian, we're 30% increase year on year on the nine-month look. Would we expect a 30% increase with rigs down roughly 16% year on year? Probably not a 30% increase, but a substantial increase. Our Delaware volumes obviously are coming off a smaller base. We would expect continued growth there. The activity level and the commitment of those producers is we've got a good line of sight on, and we see that activity level being high. The Midland side, you know who our producers are. You've seen their public releases. They have drilled big, committed to drilling on the Midland side of the basin. We expect robust growth there. So is there some slowdown on some areas? Yes. Is it materially impacting us? Not at all. We see a lot of robust growth. And the good part about it is all of that growth really hits our fully integrated stream. It's coming through our GMP plants, and it's all stuff that's going to get into Grand Prix and down to Bellevue and to our export terminals. So it looks fantastic for 2020 for us right now when we look at it.

Yeah. And just to add one point to that, Pat, an increasing share of our growth is from the majors and large independents too. So as the Delaware ramps and as we ramp our growth, it is increasingly tied to the majors, large independents who move rigs a little bit slower than some of the smaller guys.

Okay. Got it. Second question is as you are adding here a fair amount of new frac capacity and expanding your LPG export doc, can you just speak to any trend in rate you're seeing there? I mean, are you seeing rates hold steady? Are they going up, down? I just wanted to get a feel for that. And then kind of related to that, if you can give us your updated views on just global LPG demand as you're running the doc. Thank you.

When you look at it on – this is Scott – and when you look at it on the frac side, we are recognizing that our expansion that we have on the frac side is supported by contracts that Pat referred to on the upstream side that is related to those larger companies, the larger independents as well. So when we look at the Fractionation business, it is highly supported by that in our integrated platform. It's not only feeding upstream, it's feeding through our Grand Prix pipeline and ultimately into our Fractionation business and all the way down to the doc. There's been some talk of late that we have seen on the frac side some increase in spot rates on Fractionation. I would say that we are highly focused in on operating our Fractionation business around the secured contracts that we have and performing for those producers in and through our frac. Even though we've seen some increases on that on a spot basis, it's not the frenzy that you saw this same time last year. And again, we are managing our inventories and looking forward to Train 7 coming online in the first quarter. And again, as Jen said in her comments, seeing that that will be highly utilized because we've got good transparency to the market in the four months. On the export side of the business, again, we will benefit and we're already seeing benefits across our doc relative to the refurbishment of our doc 2 that was announced that we said that we've completed. So we'll see benefit of that in the fourth quarter, which primarily debottled excess on the butane side of our business. So the market is strong. We're seeing opportunities out there. We are highly contracted today and I think we'll continue to benefit from that going forward. And again, it links us up relative to what we export across our doc is highly tied to what our Fractionation growth business looks like, as well as how that is tied all the way back into our GMP. And don't forget, we've also got another expansion that will be completed in the third quarter of next year, which is adding additional refrigeration, which steps us up to roughly from 10 million barrels a month today to 15 million barrels a month sometime in the third quarter of next year.

Great. Thank you. Okay. Thank you.

Your next question comes from the line of Jeremy from JPMorgan.

Hi. Good morning. Just want to pick up on the comment you said earlier about getting to 80% fee base being kind of your expectation for 2020. And I was just wondering if that was an average for the year, does that continue to kind of like progress over the years, the X rate higher, or is there any ability to kind of keep nudging that number up? I mean, it seems like that's a pretty big step change versus where TRGPs bend historically. So just want to start there.

Yeah, that 80% is an average, but we see it continuing, maybe not in a straight line, but continuing up into the right. So that fee base percentage should just continue to increase over time. So I would expect the back half of the year to be higher fee base percentage than earlier, but that is an annual average.

And I guess for the open exposure at this point, how do you guys think about hedging? And I'm not sure if you touched on how much you've locked in for 2020 as of now.

Yes, we're over we're hedged over 50% across all commodities for 2020, Jeremy. And I think that we're very much focused on cash flow stability as our leverage is higher and begins to work down. And so you've seen us add significant number of hedges really in the back half of this year. And I would expect that that would continue.

That's helpful. Thanks. And just was curious if the agencies had kind of taken notice of this and how this kind of impacts your standings there given how the business has been changing over time.

We continue to try to have a very active dialogue with the agencies, make sure there are no surprises there. So delivering on the forecast that we show them, delivering on the asset sales that we tell them we expect to have, making sure that we're just delivering on all fronts. And so that's an ongoing dialogue. And we expect that the continued growth of our business in terms of fee base margin, asset diversity, et cetera, will only help us in those dialogues.

That's helpful. That's it for me. Thanks.

Thanks, Jeremy.

The next question comes from Keith Stanley from Wolfe Research, Bill 97.

Hi. I just wanted to clarify any early thoughts on the funding plan for the CapEx budget next year. I think in the prepared remarks you said no common equity. Should I think mainly asset sales to execute on? Would you consider preferred equity or mainly debt financing of the CapEx?

We benefit from increasing cash flow and EBITDA and have very good visibility to that. So that provides us with additional debt capacity plus more internally generated cash flow. So I think you've seen us through 2019 each quarter deliver more strongly the message just as our business has performed that we do not have expectations to need to issue any equity over the foreseeable future. As Matt said, we've got the assets that we've already executed in terms of asset sales. We've got the one that we announced this morning with the Permian Delaware crude business and the only active asset sale other than that that's underway, which is in the early stages, is a potential sale of the Midland side of the Permian crude business. And that's really all that we're expecting at this point.

OK. And just to clarify the 1.2 to 1.3 billion net, is that the same as the gross number? Is that net of some of the asset sales or any projects financing?

That's net of all of our partnerships. So that's what Targa's expected spending is relative to all the growth projects that we have visibility to for 2020.

OK. And then. Sorry, go ahead.

Oh, sorry. I was just going to add that it doesn't include any potential asset sales or anything like that. It's the pure spending for growth capital on projects that we have visibility to.

OK, great. And one last small one, just the you said you sold the Delaware crude gathering business for I think was one hundred thirty five million. Can you just remind me the size of the Midland gathering relative to the Delaware and on crude?

So current operating margin on the Midland side of the crude business is higher than it is on the Delaware side. OK, great. Thank you. Thank you. Great.

That's it for me. Thank you.

Thank you.

Very next question comes from Chris. So he's all free from Jeff. You're going to be super.

Hey, good morning, everyone. Thanks for taking my question. Jen, I guess relative to our modeling saw a nice sequential improvement in the GMP operating costs this quarter, sizable decline from from last quarter. I guess I'm just curious, any additional color on the drivers and the sustainability of that improvement?

I think that our operating team, particularly in the Permian, where we've been spending a lot of capital, we've been bringing a lot of assets in a service, has been very much focused on reducing operating expenses. And I applaud them for those efforts. We mentioned on our second quarter call that we were putting an AGI well in the service as well this summer, which was going to help reduce our chemicals costs. So part of that is what you're seeing in the third quarter. But this is a big area of focus for us, Chris, along with capital discipline, managing our costs, OPEX as well as GNA is a big point of focus across the organization. And so this is consistent with our expectation in terms of Q3 being lower than the second quarter. In the second quarter, we also had the reclass of some GNA into OPEX as well. So that was sort of more one-timey in nature. And I would expect that we will continue to remain very much focused on this. And what we're mostly focused on is having reduced per unit costs as volumes are continuing to ramp across a lot of our GMP business and also our downstream business.

Okay, great. And then congrats on the quick sale in Delaware. I suppose that speaks to both the quality of the asset and the banking team involved. And good luck on the Midland side.

Internal team involved.

I'm curious, with those asset sales, you know, you've mentioned some more that are pending perhaps. And then the recent pullback in producer activity, you know, how much it impacts and to speed maintenance activities in the future. Any meaningful toggle we should expect on that front?

I wouldn't expect a meaningful toggle in terms of our maintenance spending looking forward. We've also placed a lot of new assets in service, but new assets don't require a lot of maintenance. But no, I wouldn't expect that there's a big step change that's about to occur there up or down.

Okay. And then I just have one final – it's more of a clarification point on questions from earlier. And Christine had asked about the fee and commodity mix of business and efforts to grow the fee stream. I think in response to Jeremy, you said that you're still planning to hedge the open commodity exposure to ensure cash flow stability, and you're hedged about 50% for next year. But could you just remind me of any internal hurdles or targets that you have to be, you know, hedged a certain percentage at a certain time?

So our general – yeah, our general targets as we work with the risk committee of the board of directors is to hedge 75% for the next 12 months out, 50% for the 12 months after that, 25% for the 12 months after that. Those are the general guidelines. And then within those general guidelines on a quarterly basis, we're working with the risk committee to figure out the appropriate tolerance for hedges within TARGA.

Okay. But your point at this point is that those are unlikely to change even as the business becomes more fee. Do you think that's still a good target for us to at least assume?

I think that's a fine target for now. You've seen us hedge more when we've been given the opportunity higher than those thresholds or at the same time have also hedged less than those levels when there has been something in the market that has sort of driven that decision making. So we'll continue to be flexible, but those are our targets, and I don't see those changing in the near term.

Great. All right. Thanks a lot for the time this morning.

Okay. Thank you.

The last question from Sanal Saibal from Seaport Global Securities. Your line is open.

Yeah. Hi. Good morning, guys, and thanks for taking my question. A couple of ones for me. When you talk about transitioning from commodity to fee-based contracts on the POP side, I was wondering if you could talk a little bit about, you know, is there any kind of level of commodity transition? Is there any kind of commodity prices where this transition is kind of revenue neutral to TARGA?

You know, when we're discussing with the producers, we're really looking at, when we put capital out, getting an all-in return on capital. So we're targeting, you know, if we start with a fee-based contract, it's what fee do we need to earn an appropriate gathering and processing return on capital, and that's where we start. And then if they want to mix a piece of that into POP or do a hybrid or floor, we're flexible with all those things. We've done some of those things. It's less about us agreeing on a commodity price and where we get revenue neutral and more over a range of scenarios than understanding we need to have an adequate return or at least price floor protection to spend that capital.

Okay. The second question I had was related to the lowering of OPEX in Q3 versus Q2. I think Jen mentioned some reevaluation on the property taxes, which helped that take down. I was wondering, you know, how frequently is that property taxes reevaluation done?

Well, what happens is at the beginning of the year, we make an estimate on our ad-volume taxes. And then as we move through the year and we have realized numbers or better visibility to numbers that we expect to be realized, we change that estimate. So generally we start every year on the gathering and processing and downstream sides with a high ad-volume estimate. Then as we move through the year and that estimate becomes, again, either more realized or we have more visibility to what it's going to be, it tends to come down. So that's really just the pattern that we generally have year in and year out for ad-volume taxes. Okay. Got it.

And then this last one for me on the export side, could you indicate what's the rough breakdown between the propane exports and the butane exports that you're seeing currently?

We have not given that. It is moving more towards butane than we've seen historically, whereas I think if you go back over the number of years, we've been kind of 80-20. Scott, we've been closer to 30% or even more so on butane.

Yeah, we've seen that increase over time, again, pointed back to the projects that we have focused in on, bolt-on type projects that have debottled around the butane side. So I think over time you will see that gradually increase with more focus on butane and that helps us also optimize on the upside how much volume we would actually see across the dock.

You can see in our investor presentation, Sunil, we provide a breakdown of the propane-butane mix of what's already been loaded at the facility.

Okay. Got it. Thanks, guys, and congrats on a good quorum.

Okay. Thank you. Thanks, everybody.

I'm showing no further questions at this time. I would now like to turn the conference back to Sanjay Lad.

Great. Thank you to everyone that was on the call this morning, and we appreciate your interest in target resources. Please note that we'll be available for any follow-up questions you may have throughout the day. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.