U.S. Markets closed

Edited Transcript of TRGP earnings conference call or presentation 7-Nov-19 4:00pm GMT

Q3 2019 Targa Resources Corp Earnings Call

HOUSTON Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Targa Resources Corp earnings conference call or presentation Thursday, November 7, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* D. Scott Pryor

Targa Resources Corp. - President of Logistics & Marketing

* Jennifer R. Kneale

Targa Resources Corp. - CFO

* Joe Bob Perkins

Targa Resources Corp. - CEO & Director

* Matthew J. Meloy

Targa Resources Corp. - President

* Patrick J. McDonie

Targa Resources Corp. - President of Gathering & Processing

* Sanjay Lad

Targa Resources Corp. - Senior Director of Finance & IR

================================================================================

Conference Call Participants

================================================================================

* Christine Cho

Barclays Bank PLC, Research Division - Director & Equity Research Analyst

* Christopher Paul Sighinolfi

Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Keith T. Stanley

Wolfe Research, LLC - Research Analyst

* Michael Jacob Blum

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

* Sunil K. Sibal

Seaport Global Securities LLC, Research Division - MD

* Tristan James Richardson

SunTrust Robinson Humphrey, Inc., Research Division - VP

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to the Targa Resources Corporation Third Quarter 2019 Earnings Webcast and Presentation Conference call. (Operator Instructions)

I would now like to turn the conference over to your host, Mr. Sanjay Lad, Senior Director of Investor Relations. Sir, please go ahead.

--------------------------------------------------------------------------------

Sanjay Lad, Targa Resources Corp. - Senior Director of Finance & IR [2]

--------------------------------------------------------------------------------

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 Investors section of our website at targaresources.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 a 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 Meloy, President; and Jen Kneale, Chief Financial Officer. We'll also have the following senior management team members available for Q&A. Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Marketing; and Bobby Muraro, 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.

--------------------------------------------------------------------------------

Joe Bob Perkins, Targa Resources Corp. - CEO & Director [3]

--------------------------------------------------------------------------------

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 2 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 NGL 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.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [4]

--------------------------------------------------------------------------------

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 Galena 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 G&P, 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 basins have been tracking above our initial expectations. In Permian Midland, volumes in the third quarter sequentially increased 8% as our Pembrook 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% as production from our customers continue 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 Targa plants will largely be transported down Grand Prix into our Mont Belvieu fractionation complex. The Gulf Coast express pipeline commenced full operations in late September and provided much needed incremental residue gas (inaudible) from the Permian to premium 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 4 Plant. The volumes will continue to ramp through the balance of this year as incremental NGL takeaway 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 Belvieu continue to remain robust. During the third quarter, we completed a scheduled turnaround and related maintenance at our fractionation complex in Mont Belvieu. 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 Train 7 and 8, which are expected to be online late first quarter and late third quarter of 2020, respectively. We expect both frac trains to be highly utilized at start-up based on our expectation of growing NGL volumes from Grand Prix and contracted third-party arrangements. In our LPG export business, we completed our Dock 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.

For the completion of Grand Prix and several gathering and processing and downstream expansion projects in 2019, the trajectory of our capital spend is substantially moderate. 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 billion to $1.3 billion. Our preliminary estimate includes the remaining spend on announced projects currently underway across our G&P 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 Mont Belvieu 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.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [5]

--------------------------------------------------------------------------------

Thanks, Matt. Good morning, everyone. Targa's reported quarterly adjusted EBITDA for the third quarter was $350 million, with dividend coverage of approximately 1x. In our G&P 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 G&P operating margin was about $15 million higher than the second quarter.

In our Logistics and Marketing segment, operating margin sequentially increased predominantly due to a partial quarter contribution from Grand Prix. The impact of the scheduled turnaround in our fractionation facilities during the third quarter was offset by the early startup of GCX.

Operating expenses in our G&P 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 6 operations and a partial quarter of Grand Prix deliveries into Mont Belvieu.

Turning to hedging. Our percent of proceeds equity commodity positions are well hedged as 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 noncash mark-to-market loss of $101 million associated with hedging our natural gas transportation agreements, which will be offset by underlying loss 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 4.7x versus a compliance covenant of 5.5x. Our consolidated reported debt-to-EBITDA ratio was approximately 5.8x. Using annualized third quarter EBITDA to calculate our consolidated leverage, our debt-to-EBITDA ratio was 5.4x, 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 at 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 year-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 Targa with significant momentum as we exit 2019.

With that, I would like to turn it back to Matt for a few closing comments.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [6]

--------------------------------------------------------------------------------

Thanks, Jen. I'd 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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Shneur Gershuni from UBS.

--------------------------------------------------------------------------------

Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [2]

--------------------------------------------------------------------------------

Maybe we can start off with -- 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 that -- how we should be thinking about it on a go-forward basis?

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [3]

--------------------------------------------------------------------------------

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 relatively low compared to recent points in history when you look at commodity prices. So it's not too difficult of a discussion 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 to -- completely to fee. So it just depends on producer preferences. But we would like to see a meaningful, if not, a majority or plus of fee base to protect our investment as we go forward.

--------------------------------------------------------------------------------

Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [4]

--------------------------------------------------------------------------------

All right. Perfect. And as a follow-up question, 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 DevCo presumably comes in-house?

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [5]

--------------------------------------------------------------------------------

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 Jefferies, 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 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 mid -- the crude business in the Midland side.

--------------------------------------------------------------------------------

Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [6]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [7]

--------------------------------------------------------------------------------

Well, I think you saw us give a relatively narrow range as we're ramping up our internal processes for what projects we want to include and what that budget is 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 plant in the Permian. Are we going to have some spending 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 greenlight frac Train 7 and 8 to fill up, are we ordering long lead times for Train 9 and other things. So that's the -- why I think there's a relatively tight range. And then it's just the completion of our major projects already underway is the majority of that.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from the line of Spiro Dounis from Crédit Suisse.

--------------------------------------------------------------------------------

Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [9]

--------------------------------------------------------------------------------

Yes. Maybe just starting off with 2020 growth CapEx, if you could, coming down significantly. Great to see. Just curious how you think about the backlog beyond '20. You guys had guided to aggregate CapEx at one point of about $1.8 billion between 2021, which, I guess, implies maybe $500 million 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 used any sort of excess spending capacity to bind the DevCointerest instead of new projects?

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [10]

--------------------------------------------------------------------------------

Yes. I think as we look at our capital spending trajectory, I think 2020 is a big step for us. 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 spending on 2 fractionation trains, which is higher than a normal amount of spending would be for fractionation, right? So we plan to give annual guidance. So 2020 shows a step in the right direction, significantly moderated CapEx. And as we move through the year, we'll give annual guidance for 2021.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [11]

--------------------------------------------------------------------------------

We'll 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. Train 7, we could use pretty much very quickly today. And so I think that if activity levels stay consistent with where they are today and with 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 Permian, on either the Midland and the Delaware side or when we would need that additional fractionation in Belvieu.

--------------------------------------------------------------------------------

Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [12]

--------------------------------------------------------------------------------

Okay. That makes sense. And then just circling back on asset sales. Congrats again. 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 Permian 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?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [13]

--------------------------------------------------------------------------------

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 Permian Delaware crude side, and now we'll be evaluating the potential sale of the Permian 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.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [14]

--------------------------------------------------------------------------------

Yes. And just to add on to that, too, Jen. We're -- we have been active in that market as a buyer, and as you see now, as a seller. For selling assets in the G&P 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, it's not a great market for that on the gas gathering and processing side.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Your next question comes from Tristan Richardson from SunTrust.

--------------------------------------------------------------------------------

Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [16]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [17]

--------------------------------------------------------------------------------

Yes. So most of that spending is related to projects that are already underway, right? Train 7, Train 8, Gateway, Peregrine, the 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. We see it as about $100 million range or depending on when we greenlight that plant. And then when Y-grade volumes are increasing as a result of production activity if they're -- we're going to have any spending or some modest amount of spending on Train 9 for 2020. So those are the 2 kind of drivers to be at the high end or low end of that range.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [18]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

D. Scott Pryor, Targa Resources Corp. - President of Logistics & Marketing [19]

--------------------------------------------------------------------------------

And Matt, I would add 1 other project to that, and that is the extension of our Grand Prix pipeline north into the SCOOP/STACK, that is highly backed by Williams' contract.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [20]

--------------------------------------------------------------------------------

Yes. Agree. That's another large project. Thanks, Scott.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [21]

--------------------------------------------------------------------------------

That's largely going to be [extended] in 2020.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [22]

--------------------------------------------------------------------------------

That is in there. Yes.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [23]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [24]

--------------------------------------------------------------------------------

Helpful. And then just a follow-up. As we think about the delevering cycle that kicks off here and into 2021, any thoughts to updating the market on sort of long-term leverage targets, either post year-end '19 or beyond? Or as -- particularly as we think of prospects for consolidating the DevCo's multi-years out?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [25]

--------------------------------------------------------------------------------

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 and cash flow and EBITDA 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 4x 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 4 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.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

The next question comes from Christine Cho from Barclays.

--------------------------------------------------------------------------------

Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [27]

--------------------------------------------------------------------------------

I wanted to start with the -- your comments about increasing the fee-based cash flows. So when you say you're adding fee-based components in 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 Permian?

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [28]

--------------------------------------------------------------------------------

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 are -- have less on them relatively short-term and some are longer term. But it -- I'd say, it's a mix of growth volumes and existing volumes. And then you'd be correct just in that most of it, I think, will be taking place in the Permian. 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 Permian.

--------------------------------------------------------------------------------

Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [29]

--------------------------------------------------------------------------------

Okay. Great. And then I wanted to just talk about Waha. 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, Agua Dulce, less the tariff you are paying -- the tariffs that you're paying for the pipeline capacity?

--------------------------------------------------------------------------------

Patrick J. McDonie, Targa Resources Corp. - President of Gathering & Processing [30]

--------------------------------------------------------------------------------

Yes. This is Pat McDonie. 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 Permian bases. GCX is just one of those. So obviously, we have firm transportation on that pipe. We're moving gas to Agua 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 Waha to people with firm transportation to 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 Waha realized price, but most of that based on sales in other locations out of Waha.

--------------------------------------------------------------------------------

Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [31]

--------------------------------------------------------------------------------

Okay. Great. And then just 1 last question. So on Grand Prix, you expected September to be -- to hit 200,000 barrels per day. And it looks like you're tracking better at 230,000. Is this just an acceleration of the timing of volumes? And is 250,000 barrels per day still the right number to hit some time 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 plant?

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [32]

--------------------------------------------------------------------------------

Yes. 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're going to be able to 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 250,000 at some point in 2020. We'll be bringing that. We'll be updating that in February. But yes, we feel really good about being able to exceed that.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [34]

--------------------------------------------------------------------------------

So you've kind of broadly referenced it early 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 -- just how much of a slowdown do you anticipate overall. Are you really not seeing it? Because we seem to be hearing kind of mixed messages from the midstream side.

--------------------------------------------------------------------------------

Patrick J. McDonie, Targa Resources Corp. - President of Gathering & Processing [35]

--------------------------------------------------------------------------------

Yes. This is Pat, and I'll address that. Obviously, our biggest capital spends 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 in the last 9 months in the Delaware and Permian, we're a 30% increase year-on-year on a 9-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 will expect continued growth there. The activity level and the commitment of those producers is we've got good line of sight on, and we see that activity level being high.

The Permian -- in the Midland side, you know who our producers are. You've seen their public releases. They have drill bit 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 G&P plants and it's all stuff that's going to get into Grand Prix and down to Belvieu and to our export terminal. So it looks fantastic for 2020 for us right now when we look at it.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [36]

--------------------------------------------------------------------------------

Yes. 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.

--------------------------------------------------------------------------------

Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [37]

--------------------------------------------------------------------------------

Okay. Got it. Second question is as you are adding here a fair amount of new frac capacity and expanding your LPG export dock, 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? 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 dock.

--------------------------------------------------------------------------------

D. Scott Pryor, Targa Resources Corp. - President of Logistics & Marketing [38]

--------------------------------------------------------------------------------

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 dock. 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 to 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 forward months.

On the export side of the business, again, we will benefit, and we're already seeing benefits across our dock relative to the refurbishment of our Dock 2 that was announced that we said that we've completed. So we'll see benefit of that in the fourth quarter, which primarily debottlenecks us 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 dock is highly tied to what our fractionation growth business looks like as well as how that is tied all the way back into our G&P. 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.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Your next question comes from the line of Jeremy Tonet from JP Morgan.

--------------------------------------------------------------------------------

Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [40]

--------------------------------------------------------------------------------

Just wanted to pick up on the comments you had said earlier about getting to 80% fee-based being kind of your expectation for 2020. And I was just wondering if that was an average for the year? Or did that continue to kind of like progress over the years? Is the exit 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 TRGP has been historically. So I just want to start there.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [41]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [42]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [43]

--------------------------------------------------------------------------------

Yes. So 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 it 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.

--------------------------------------------------------------------------------

Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [44]

--------------------------------------------------------------------------------

That's helpful. And just I 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?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [45]

--------------------------------------------------------------------------------

We continue to try to have a very active dialogue with the agencies to 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-based margin, asset diversity, et cetera, will only help us in those -- the dialogues.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

The next question comes from Keith Stanley from Wolfe Research.

--------------------------------------------------------------------------------

Keith T. Stanley, Wolfe Research, LLC - Research Analyst [47]

--------------------------------------------------------------------------------

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?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [48]

--------------------------------------------------------------------------------

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. So 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.

--------------------------------------------------------------------------------

Keith T. Stanley, Wolfe Research, LLC - Research Analyst [49]

--------------------------------------------------------------------------------

Okay. And just to clarify, the $1.2 billion 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?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [50]

--------------------------------------------------------------------------------

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. 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.

--------------------------------------------------------------------------------

Keith T. Stanley, Wolfe Research, LLC - Research Analyst [51]

--------------------------------------------------------------------------------

Okay. Great. And 1 last small one. Just the -- you said you sold the Delaware crude gathering business for, I think, it was $135 million. Can you just remind me the size of the Midland gathering relative to the Delaware on crude?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [52]

--------------------------------------------------------------------------------

So current operating margin on the Midland side of the crude business is higher than it is on the Delaware side, but we're not going to provide any more detail at this point given we're just really kicking off the potential evaluation of the sale of the Midland crude assets.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Your next question comes from Chris Sighinolfi from Jefferies.

--------------------------------------------------------------------------------

Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [54]

--------------------------------------------------------------------------------

Jen, I guess, relative to our modeling, we saw a nice sequential improvement in the G&P operating costs this quarter, a sizable decline from last quarter. I guess I'm just curious. Any additional color on the drivers and the sustainability of that improvement?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [55]

--------------------------------------------------------------------------------

I think that our operating team, particularly in the Permian, where we've been spending a lot of capital and we were bringing -- been bringing a lot of assets into 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 cost. 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 G&A 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. The second quarter, we also had the reclass of some G&A into OpEx as well. So that was sort of more of one timing in nature. And I would expect that we will continue to remain very much focused on this. So what we're mostly focused on is having reduced per unit cost as volumes are continuing to ramp across a lot of our G&P business and also our downstream business.

--------------------------------------------------------------------------------

Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [56]

--------------------------------------------------------------------------------

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

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

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [57]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [58]

--------------------------------------------------------------------------------

Okay. And then I just have 1 final -- it's more of a clarification point on questions from earlier. And Christine had asked about the fee and commodity mix of the 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 hedged a certain percentage at a certain time?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [59]

--------------------------------------------------------------------------------

So our general -- yes, 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.

--------------------------------------------------------------------------------

Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [60]

--------------------------------------------------------------------------------

Okay. And -- 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?

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [61]

--------------------------------------------------------------------------------

I think it'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.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

And the last question from Sunil Sibal from Seaport Global Securities.

--------------------------------------------------------------------------------

Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [63]

--------------------------------------------------------------------------------

A couple of ones for me. Can 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 is there any kind of level of commodity prices where those -- this transition is kind of revenue neutral to Targa?

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [64]

--------------------------------------------------------------------------------

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 -- 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, them understanding we need to have an adequate return or at least price floor protection to spend that capital.

--------------------------------------------------------------------------------

Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [65]

--------------------------------------------------------------------------------

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 helps that tick down. I was wondering how frequently is that property taxes evaluation done.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [66]

--------------------------------------------------------------------------------

Well, what happens is at the beginning of the year, we make an estimate on our ad valorem 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 valorem 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 valorem taxes.

--------------------------------------------------------------------------------

Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [67]

--------------------------------------------------------------------------------

Okay. Got it. And then just 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?

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [68]

--------------------------------------------------------------------------------

We have not given that. It is moving more towards butane, what 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.

--------------------------------------------------------------------------------

D. Scott Pryor, Targa Resources Corp. - President of Logistics & Marketing [69]

--------------------------------------------------------------------------------

Yes. 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.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [70]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [71]

--------------------------------------------------------------------------------

I got it. And congrats on a good quarter.

--------------------------------------------------------------------------------

Matthew J. Meloy, Targa Resources Corp. - President [72]

--------------------------------------------------------------------------------

Okay. Thank you.

--------------------------------------------------------------------------------

Jennifer R. Kneale, Targa Resources Corp. - CFO [73]

--------------------------------------------------------------------------------

Thanks.

--------------------------------------------------------------------------------

D. Scott Pryor, Targa Resources Corp. - President of Logistics & Marketing [74]

--------------------------------------------------------------------------------

Thanks, everybody.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sanjay Lad, Targa Resources Corp. - Senior Director of Finance & IR [76]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [77]

--------------------------------------------------------------------------------

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