Targa Resources Partners Management Discusses Q4 2010 Results - Earnings Call Transcript

Feb.24.11 | About: Targa Resources (NGLS)

Targa Resources Partners LP (NYSE:NGLS)

Q4 2010 Earnings Conference Call

February 24, 2011, 10:30 am ET

Executives

Anthony Riley – Senior Manager, Finance and IR

Joe Bob Perkins – President

Matt Meloy – CFO and Treasurer

Analysts

Darren Horowitz – Raymond James

Mark Reichman – Madison Williams

Michael Blum – Wells Fargo

Yves Siegel – Credit Suisse

Operator

Good day, ladies and gentlemen and welcome to the Targa Resources Fourth Quarter and Year End 2010 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to introduce your host for today, Mr. Anthony Riley. Sir, please go ahead.

Anthony Riley

Thank you, operator. I would like to welcome everyone to our Fourth Quarter and Full Year 2010 Investor Call for Targa Resources Corp. and Targa Resources Partners LP. We've already received positive feedback about combining the calls. This is likely to continue to be our practice and we will work to make the combined call efficient and effective for all stakeholders.

Before we get started, I would like to mention that Targa Resources Corp., TRC or the company and Targa Resources Partners L.P., Targa Resources Partners or the partnership have published their joint earnings release, which is available on our website at www.targaresources.com. Speaking on the call today will be Joe Bob Perkins, President; and Matt Meloy, Chief Financial Officer and Treasurer. Joe Bob and Matt are going to be comparing the fourth quarter and full year 2010 results to prior period results as well as providing additional color on our results, business performance and other matters of interest.

Before we begin, I would like to remind you that any statements made during this call that might include the company's or the partnership's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor Provision of the Securities Acts of 1933 and 1934.

Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the partnership's annual report on Form 10-K for the year ended December 31, '09 and quarterly reports on Form 10-Q as well as the company's registration statement on Form S-1 as amended.

One quick reminder before starting into the results, with the closing of the acquisition of the downstream business in '09 and the three transactions last year and in accordance with the accounting treatment for entities under common control, the results of operations of the partnership include the historical results of these businesses for all periods reported.

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

Joe Bob Perkins

Thanks, Anthony. Good morning and thanks to everyone for participating in our fourth quarter and full year 2010 conference call. Besides Anthony, Matt and myself, there are several other members of Targa management who will be available to assist in the Q&A session. Rene is on a Board that often meets overseas about the time of our calls and we sometimes can't manage around the conflict. He'd certainly prefer to be on this call.

By way of agenda, I'll start off with a high-level review of the Partnership's segment performance, key accomplishments and business highlights for the quarter and for the year. We'll then turn it over to Matt to review the Partnership segment results in a bit more detail, consolidated financial results and other financial matters for the Partnership.

Matt will also review key financial matters related to Targa Resources Corp. Following Matt's comments, I'll provide an executive summary of the industry dynamics as we see them driving our 2011 performance expectations, then give you an update of our related 2011 volume outlook and close with the status of some of our ongoing growth projects as well as a view of other potential growth opportunities. And of course, we'll take your questions at the end of our comments.

So let's get started. As you've seen, the Partnership had a very strong fourth quarter of 2010. We reported a seasonally strong fourth quarter adjusted EBITDA of $115.8 million, which helped drive a healthy distribution coverage ratio of 1.4 times our fourth quarter distribution paid, up $0.5475 or $2.19 on an annualized basis.

Keep in mind that 1.4 times coverage includes the impact of the approximately $310 million equity offering completed in January of this year. Importantly, the $2.19 rate paid for the fourth quarter represents a distribution increase of almost 6% compared to the rate paid in the fourth quarter of 2009. We are very proud of that 6% increase year-over-year.

A strong fourth quarter performance was driven primarily by healthy throughput volumes in both of our two divisions and higher realized commodity prices. Our field G&P segment continues to benefit from high levels of producer activity. We reported inlet volumes of 605 million cubic feet a day and gross NGL production of 74,000 barrels per day.

Both metrics had exceeded those reported in the fourth quarter of 2009 and the third quarter of 2010. Fractionation volumes in the Logistics Assets segment also posted healthy gains. We reached 244,000 barrels a day, which was 9% higher than the previous year's fourth quarter and the third quarter of 2010. This result should come as no surprise given the continued high-capacity utilization of fractionators along the Texas and Louisiana Gulf Coasts.

Moving to full-year results, 2010 adjusted EBITDA was approximately $396 million and was supported by solid throughput volumes in both divisions and generally higher realized commodity prices for all segments and commodities, especially average realized NGL prices, which increased more than 30%.

2010 plant inlet volumes in the Field Gathering and Processing segment increased about 1% to 588 million cubic feet a day. However, this modest gain is a bit misleading due to Versado volumes negatively impacted by a one-time operational disruption in the second half of the year.

This played a major role in the 10% year-over-year plant inlet decline for the Versado system and we’ve talked about that previously. The Versado figures map the fact that all of the other three Field Gathering and Processing areas posted healthy inlet gains in 2010 versus 2009. Matt will expand on these increases in a bit.

2010 gross NGL production increased over 2% to 71,000 barrels per day compared to 2009 and outpaced the rate of corresponding inlet growth of about 1%. 2010 plant inlet volumes for the Coastal G&P segment increased almost 8% compared to 2009, boosted primarily by a significant 17% gain at VESCO.

We've often said that not all volumes are created equal. This is particularly true for our Coastal Gathering and Processing segment. But relative to other Coastal Gathering and Processing volumes, increased VESCO inlet volumes are generally a strong positive due to relative liquid content and profitability.

Our Coastal G&P segment's gross NGL production increased 3% which is also indicative of improving economic performance, because we typically benefit well from increasing liquids production in this segment due to POL or percent of liquids contracts, in other favorable contract forms.

In the Downstream business, 2010 fractionation volumes in the Logistics Asset segment increased 6% to 231,000 barrels per day average for the year, while NGL sales in the Marketing and Distribution segment declined without much economic impact due to a contract change with the customer that we have discussed in the past.

In summary, we are very pleased with both our operating and financial performance for the fourth quarter and for the full year 2010. Drilling and production activity is very active in most of our key areas due to our favorable commodity-price environment combined with the innovative geophysical drilling and completion techniques which we see producers having turned oil plays like the Wolfberry and Bone Springs for our Permian and our SAOU properties into active resource plays.

Active resource plays similar to the also active early part of the Barnett Shale gas play in North Texas. These resource plays provide producers the opportunity to develop large acreage positions with very high success rates and attractive economics over a wide range of oil and NGL prices.

The same drilling and production activity observed in our gathering and processing areas is also going on in other producer areas that feed NGLs to our Downstream business. Demand for NGL logistic services like our fractionation services remain high. The consensus outlook for continued high crude to U.S. natural gas price ratios and the resulting positive impact for our North American ethylene producers and their competitive position in the global Petchem industry as well as the resulting impact on U.S. ethane demand benefits all of our target businesses.

You know, the capital markets are strong, as evidenced by our recent activity in book-to-debt in equity markets, leaving us with more than 900 million in year-end pro forma liquidity. All in all, we believe we're in a very good place right now with our assets and our opportunities.

However, as most of you know, the numbers in the industry backdrop often times don't tell the whole story. And 2010 was a year full of significant achievements for Targa. We completed the final three drop-down transactions in 2010. All three transactions were accretive to our unit holders and they were completed over a very short time period in 2010.

The combined assets provide a leadership position in North Texas, the Permian Basin, East and West side of the Permian Basin, the Louisiana Gulf Coast accessing the Gulf of Mexico production and in the key NGL market hubs of Mont Belvieu and Lake Charles. As domestic and international gas and NGL industry supply demand dynamics play out, we believe we are very well positioned to leverage our footprint and win our share of necessary midstream infrastructure investment over time.

With the completion of the time and resource-consuming drop-down transactions, we can now more easily direct our resources towards capitalizing on both a large suite of organic growth opportunities in various stages of development and on the acquisition based growth opportunities that are almost always available in this industry.

You have seen our recent announcements of a strong portfolio of attractive return, organic growth projects and the gathering and processing and downstream divisions. Details of some of those I'll review towards the end of the call. With drop-downs completed and strategic direction now clear, we will continue to focus on such organic growth and acquisitions projects.

Before I hand it over to Matt, I probably should elaborate on the strategic direction now clear point. Most of you are aware that we took Targa Resources Corp. public via an IPO completed in December of last year on the New York Stock Exchange.

You'll see Targa Resources Corp. under the ticker symbol TRGP. We also refer to it as TRC. In doing so, we not only created another opportunity for investors to leverage the growth opportunities of the partnership but we also clarified the strategic direction for the parent and for the management team.

Our focus on growth for the partnership will benefit the partnership and TRC, which owns LP units, GP units and IDRs. With the TRC strategy and structure now set, we have combined earnings calls and look forward to focusing the company resources towards positioning the partnership for growth and with that I'll hand it over to Matt.

Matt Meloy

Thanks, Joe Bob. I'd like to add my welcome and thank you for joining our call today. As Anthony mentioned on our common control accounting treatment the partnership's reported results of operations now include all assets for all periods presented. That applies to the three 2010 dropdown transactions as well as assets that were in the partnership for all of 2010.

Let's start with a review of the consolidated results. For the fourth quarter of 2010, the partnership reported net income attributable to Targa Resources Partners of 35.9 million while net income attributable to limited partners was $0.39 per diluted limited partner unit compared to net income attributable to TRP of $25.4 million and net income attributable to limited partners of $0.52 per diluted – LP unit for the fourth quarter of 2009.

These quarterly results reflect non-cash hedge charges of $10.2 million in 2010 and $25.3 million in 2009. Please also note that under common control accounting, net income reported for the fourth quarter of '09 included $16.6 million in non-cash affiliate interest expense related to dropdown businesses for periods prior to the acquisition of those businesses by the partnership.

Adjusted EBITDA for the quarter was $115.8 million, compared to $123 million last year. The decrease was primarily the result of less favorable hedge settlements and higher G&A expenses.

The 3% increase in gross margin for the fourth quarter compared to last year is primarily a reflection of higher average realized NGL and condensate prices and higher fractionation volumes coupled with a higher fixed portion of fractionation fees, somewhat offset by lower condensate sale volumes, lower hedge settlements and lower business interruption insurance revenues.

Operating expenses increased 33% compared to last year primarily due to increased non-capitalized maintenance costs including unplanned repair costs at the Eunice plant, increased compensation and benefit cost and increased professional fees and contract services.

The increase in depreciation and amortization expense for the quarter compared to last year is primarily attributable to an impairment taken on a (inaudible) plant in our Coastal gathering and processing segment and to our incremental capital expenditures in 2010. Fourth quarter G&A expenses increased compared to last year primarily due to higher professional fees associated with the dropdowns and a higher compensation cost.

The decrease in interest expense was primarily due to the repayment or cancellation of higher interest rate affiliate debt associated with predecessor operations. Gross maintenance capital expenditures were 22 million for the fourth quarter of 2010.

Turning to the segment level, I'll first summarize the fourth quarter performance of our Gathering and Processing segment. Fourth quarter 2010 plant natural gas inlet for the Field Gathering and Processing segment was 605 million cubic feet per day, a 6% increase compared to the same period in 2009. All Field Gathering and Processing segment inlet volumes were up compared to last year except for Versado.

North Texas, SAOU and Permian increased by approximately 15%, 20% and 12% compared to last year. The increase at North Texas was driven primarily by new Barnett Shale well connect activity in the oilier Wise and Southern Montague Counties. The increase at SAOU was primarily driven by increase in Wolfberry drilling activity while Permian increased primarily due to new producer dedication from existing production much of which was associated with the Wolfberry and Bone Springs Plants.

Somewhat offsetting the impressive inlet gains, the Versado inlet volumes decreased driven primarily by down time at the Eunice Plant to repair damage to a water tank. The plant is up and running at volume levels similar to those prior to the turn around. Field Gathering and Processing operating margin was basically flat compared to last year with higher volumes and liquid prices offset by lower natural gas prices and higher operating expenses.

On a sequential basis, fourth quarter plant natural gas inlet for the Field's G&P segment increased 4% compared to the third quarter of 2010, driven by increases at each operating unit. North Texas, SAOU and Permian all saw a healthy sequential inlet volume increases of 4% to 5% due primarily to new well connect activity. Versado increased 2% sequentially as the Eunice Plant was brought back on line in the fourth quarter.

Field Gathering and Processing fourth quarter operating margin increased 21% over the third quarter driven primarily by the higher inlet volume and higher NGL and condensate price which were up 15 and 11%. The increase was partially offset by lower gas prices that declined by 12%.

Moving to the Coastal Gathering and Processing segment, fourth quarter 2010 plant natural gas inlet was 1.6 billion cubic feet per day a decrease of approximately 7% compared to the same period in 2009. The year-over-year decrease was driven by a 12% decrease in the Coastal Straddle, a 17% decrease at LOU somewhat offset by a 13% increase at VESCO.

Coastal Straddle volumes were lower primarily due to the normal volume decline and down time at the Stingray Plant to perform generator maintenance. The decrease at LOU was driven primarily by lower well head volumes and declines in discretionary volumes available for processing. These declines were somewhat offset by higher volumes at VESCO due to the addition of new gas packages tied into the facility at the end of '09 and throughout 2010.

Coastal G&P operating margin decreased by approximately 11% from last year, driven primarily by the reduced coastal Straddle inlet volumes, a leaner gas stream and increased operating expenses caused by higher maintenance costs. This reduction was somewhat offset by a more favorable fractionation spread resulting from a 14% increase in average realized NGL prices coupled with a 9% decrease in gas prices. And the segment benefited from increases in VESCO's inlet volume gains.

On a sequential basis, fourth quarter plant natural gas inlet for the coastal G&P segment decreased 3% compared to the third quarter of 2010, driven primarily by a 7% decrease from the coastal Straddle volume. VESCO and LOU were higher by 3% and 2%, respectively.

The 7% decrease in volumes processed at the coastal Straddles is primarily due to lower volumes on the offshore gathering pipelines supplying our Southwest Louisiana plant, due to pipeline maintenance activities and (inaudible) gas plant downtime due to maintenance. Despite these – the volume declines, fourth quarter operating margin was approximately 40% higher than the third quarter, primarily a function of a reversal of an accounting reserve and a 21% increase in the average realized NGL price.

Next I'll provide an overview of the two segments in the downstream business. You will recall that we often refer to the NGL Logistics and Marketing division as our downstream business. Starting with the Logistics Assets segment, fractionation volumes for the fourth quarter of 2010 were 244,000 barrels per day, an increase of approximately 9% over 2009.

This increase was driven primarily by a Y-grade exchange with a third party that increased throughput at the Lake Charles fractionator. This exchange also resulted in additional back-end volumes fractionated at the Cedar Bayou Fractionator.

Fourth quarter operating margin in the Logistics Assets segment increased 15% to $31 million, compared to last year, driven primarily by the higher fractionation volumes and increases in the fixed portion of fractionation fees. Compared to the third quarter of 2010, fourth quarter operating margin in the Logistics Asset segment increased approximately 31%, driven primarily by take-or-pay payments on contracts specifying minimum volume commitments and higher LPG terminaling activity at the Galena Park marine terminal.

In the marketing and distribution segment, fourth quarter NGL sales volumes were approximately flat. Fourth quarter marketing and distribution operating margin increased 8% year-over-year to $32 million, driven by higher volumes and higher realized NGL prices.

With positive year-over-year results from the downstream business making up for the decline in coastal gathering and processing total fourth quarter operating margin decreased 6% to $152 million compared to the prior year. The explanation for the decrease is primarily lower commodity hedge revenue.

Before we move on to discuss capital structure and liquidity, I'd like to discuss some recent event and current conditions affecting the first quarter of this year. To start, as we have previously highlighted to investors several times over the years, the first quarter of each year is typically the partnerships we get due to seasonality and seasonal related operating and commercial practices. The first quarter is the optimal time to schedule turnaround for the logistics asset segment.

For example, we typically schedule and have scheduled the plant turnaround for our Cedar Bayou Fractionator. These turnarounds typically reduce revenues and increase operating expenditures. Also cold weather conditions in our field gathering and processing plant can significantly impact our business.

We have experienced very cold temperatures that are well below seasonal averages at our field G&P plant which reduced inlet volumes and reduce NGL production. This leaves a lower wide grade receipts by fractionation facilities.

While these items will impact Q1 2011, we believe the outlook for full year 2010 is at least as strong as the financial expectations we had as we entered the year. We believe the other parts of our diverse and integrated asset base will perform well over the course of the year.

With that, let's now move briefly to capital structure and liquidity. At December 31, we had approximately $233 million in capacity available under our senior secured revolving credit facility that after giving effect to outstanding borrowings of approximately $765 million and $101 million in letters of credit and approximately $76 million of cash on hand. This resulted in approximately $310 million of year-end liquidity.

Total funded debt on December 31 was approximately $1.4 billion or about 58% of total capitalization and our consolidated leverage ratio at year-end was approximately 3.7 times debt to EBITDA. We've already had a very busy and productive start up to 2011, having completed three important capital markets transactions resulting in over 600 million of new capital rates.

We closed a public offering of 9.2 million of common units including exercise of the full green shoe which resulted a net proceeds of 298 million as well as a private offering of 325 million of six and seven eights senior notes due 2021 resulting in 319 million in net proceeds. The new notes (inaudible).

The net proceeds from both the debt and equity offerings were used to reduce borrowings under our senior secured credit facility. We also quoted an exchange offer to holds of our 11.25 senior notes due 2017 for our new 6 and 7, 8 senior notes due 2021 that constituted the issuance of an additional $158 million principal of the 6 and 7,8 notes. So as a result of the regular – as a result of the regular 6 and 7,8 debt offering and the 11.25 exchange, we now have approximately $484 million of principal amount of the new 6 and 7,8 notes.

Pro forma for the three transactions mentioned, the partnership's liquidity as of December 31, 2010, was approximately $900 million, a healthy amount that leaves the partnership in a great position to fund future organic growth and acquisition opportunities that Joe Bob mentioned, and we'll discuss further in just a bit.

Next I'd like to take a few minutes to comment about our hedging and capital spending programs for the year. Using hedges in place as of December 31, we estimate the partnership has hedged approximately 70% of its 2011 expected natural gas and 70% of its 2011 expected combined NGL and condensate equity volumes.

Since December 31, we have added additional – we have added incremental gas, NGL and condensate hedges. Including those new hedges, we estimate our percent of equity volume hedge for both gas and combined NGLs and condensate in 2011 would both be closer to approximately 80%.

Moving on to capital spending, we estimate we'll spend on the net basis approximately $230 million of capital expenditures in 2011, with approximately 25% of the total comprising maintenance capital spending. We also estimate our share of investment related to our minority 38.8% ownership in the expansion of Gulf Coast fractionators or GCF, to be approximately $20 million this year, which is not included in the $230 million figure I just mentioned.

You will recall that GCF is reflected in our financials under equity earnings. To be clear, this will not be reflected as CapEx on the cash flow statement. All in, if you combine the bucket I just walked you through, approximately $230 million of CapEx and $20 million per our share of GCF, we're at approximately $250 million of spending on capital projects for 2011.

Before handing the call back to Joe Bob, I'd like to make some brief remarks about the result of Target Resources Corp. At December 31, the balance on the TRC Holdco loan due 2015 was $89.3 million, where we're currently paying LIBOR plus 300 basis points. Also, at year-end, there were no borrowings under a senior secured revolving credit facility with $75 million of availability. At December 31, TRC had cash balance of approximately $112 million. This gives TRC total liquidity of $187 million.

For 2011, we expect TRC stand-alone general and administrative expenses will be approximately $5 million. On February 21, TRC paid its first every quarterly dividend of just over $0.06 per common share or $1.03 per common share on an annualized basis, representing a prorated dividend for the portion of the fourth quarter of 2010 that the company was public.

The IPO closed on December 10, 2010. So TRC was only public for approximately three weeks during the fourth quarter. The first quarter of 2011, we will reflect a full quarter of TRC being a public company. So we expect to provide additional TRC stand-alone income and cash flow information in the first quarter reported results.

That wraps up my review. So I'll now turn the call back to Joe Bob.

Joe Bob Perkins

Thanks, Matt. To wrap up the final portion of our prepared remarks, I'd like to cover three topics, but I'm probably repeating some of the things we've already said. First of all I'll provide an executive summary of the industry dynamics that we see driving our 2011 performance expectations.

Secondly, I'll give you an update on our related 2011 volume outlook. Then I'll close with the status of our ongoing growth projects and our view of other potential growth opportunities.

For the first topic, you are undoubtedly hearing the same themes about industry dynamics from Targa, from our peers, from the producers and from the Petchem players, so I'll be brief. Those industry dynamics, combined with Targa's well-positioned asset base in both Gathering and Processing and NGL Logistic Services have led to strong performance and very attractive growth opportunities.

Bottom line, the executive summary of those favorable industry dynamics could be stated as the following

the current and forecast commodity pricing levels have led to a shift in drilling and production activity that's focused on oil and natural gas with high condensate in NGLs and we don't see that changing. This greatly benefits our North Texas system, which is the oilier Barnett Shale; SAOU, which is the Wolfberry as well as the Canyon Sands; and our other Permian G&P properties, traditional oil infield, Wolfberry and Bone Springs.

The same dynamic which results in higher volumes of NGLs from our plants results in higher volumes of NGLs from other people's plants. Other people's plants whose liquids are greatly benefiting our Downstream Business. Furthermore, the same environment benefits Targa's Coastal Gathering and Processing segment through POP hybrid and (inaudible) contracts which mitigate some of the volume weaknesses that we see from time to time from the coastal areas.

So what does this all mean for our Targa volume outlet? Based on information available to date, we believe the overall 2011 Field Gathering and Processing segment plant natural gas inlet volumes should be approximately 10% higher than those of 2010. With the following color provided by area underneath that Field Gathering and Processing segment.

SAOU and North Texas will be the strongest performers on a volume basis in the Field segment, meaningfully higher on inlet volumes than 2010. For SAOU, we're expecting another record year of well connects driven by very high producer activity and Targa capital projects to keep up with that activity.

2010 beat the previous well connect record for SAOU by a wide margin and we think 2011 will easily beat 2010. SAOU is incredibly active and with supply and demand for G&P services as it is you can assume that the terms of new POP contracts for new gas packages being added to our system are even more attractive for Targa.

It's a good story at SAOU. Meaningfully above last year, probably the largest volume percentage gainer at year end 2011. At North Texas, significant producer combo activity, Targa's spare plant capacity, Targa capital products to ensure that we can access additional volumes combine for a volume outlook for North Texas where our percentage increase will be only slightly below that of SAOU.

Additionally, for more color, we expect the 2011 inlet volumes for the Permian to meet or exceed those of last year. And we've used those code words before and usually deliver on them and we expect that Versado's 2011 inlet volumes should approximate those of last year. So in summary for the field gathering and processing part of our business, we've told you that we expect volume increases over 2010 by about 10% and we provided a profile on where that will come from.

On our Coastal Gathering and Processing segment, Targa often says that not all volumes are created equal. For example, a move of about 50 million cubic feet a day is very meaningful in the field Gathering and Processing segment and meaningful if economically Targa. But a move of about 100 million cubic feet a day in the coastal Gathering and Processing segment doesn't impact the partnership margin levels very significantly.

That's easy to understand by comparing for example the gas quality as reported for recovered GPM and you will recall GPM is the abbreviation for gallons of NGLs per MCF of gas. For the field gathering and processing segment GPM is about 5.1 versus an equivalent Coastal segment GPM of 1.3. You will also note that field Gathering and Processing generally gets a contractual POP, percent of gas and liquids proceeds, whereas most of the coastal Gathering and Processing segment settles on POL, percent of liquids.

So with that as context, as you think about coastal G&P volumes and as we give you color on it, based on our current forecast we believe 2011 plant inlet volumes for the coastal Gathering and Processing segment combined should meet or exceed those of last year.

Under that overview of meet or exceed for the segment we expect that the VESCO inlet will be meaningfully higher than 2010 due to expected additions of discrete gas packages. At the same time, 2011 plant inlet volumes for the rest of the segment, which are LOU and other coastal Straddles, should approximate their combined 2010 volumes. Perhaps offsetting VESCO improvements to some degree as volume for the full segment meets or exceeds last year.

With that volume color I'll move on to updating our growth projects. First a quick update on those growth projects under construction. Bottom line they're all on track and on budget. Our 78,000 barrel a day fractionation expansion at CBF is still on track, on time and under budget. The new unit should commence operations in April which is in line with our initial project schedule.

The benzene treating project that we've mentioned is on schedule and on budget and should commence operations during the fourth quarter of this year, again no change to prior plants. The GCF expansion which is operated by Targa, is just getting underway and the operator is targeting a May 2012 startup with no change to the approximately $75 million gross project budget.

On other topics you may have heard that we have recently added two business development officers whose goal is to add selected refined products and crude storage and terminaling opportunities, the strategic fit to Targa. This is a new but complementary business and we're hopeful that we'll be talking about some of those potential projects in the near future. We've also had a recent increase in spot propane and butane exports and a significant increase in interest in term export contracts.

Let me tell you a few words about our latest North Texas expansion program. The Board recently approved $40 million of capital expenditures to expand the gathering and processing capability of the North Texas system, with certain portions of those approved expenditures subject to finalization of customer commercial agreements.

The expansion program is in response to strong volume growth and new well connects associated with producer activity in the oilier portions of the Barnett Shale natural gas play, as we've described, especially portions of southern Montague and northern Wise County.

The full scope of the expansion includes a major pipeline to increase residue take-away capacity, gathering system expansions, compression equipment to keep up with the producers and other work. All taking advantage of our available processing plant capacity.

Certain pieces of the expansion are underway. Assuming full commercial agreements are consummated in the first half of 2011, we would expect that most of the approved capital expenditures would be completed by early 2012.

For our SAOU expansion program, we have also recently announced a $30 million capital expenditure program to expand gathering and processing capability in response to that very strong volume growth and new well connects associated with producer activity, primarily in the Wolfberry play.

This growth investment program includes new compression facilities and pipelines, as well as expenditures to restart the 25 million cubic-feet-a-day Conger processing plant. That's anticipated to be completed early in 2011.

We have mentioned in the past the ongoing upside available from SAOU and North Texas. You can certainly expect continued activity. For example, in SAOU, we are already renovating two 15-million-feet-a-day skids from our not used Garden City facility to continue to put us in a position to quickly provide additional processing capacity even before we've started up the Conger facility.

Even with all the growth projects currently underway, we're confident in our ability to continue to develop additional projects and opportunities. Our confidence is supported by the strategic location of our assets in areas with high current and forecast activity. The resource play is driving activity in North Texas, SAOU and other parts of the Permian are providing year's worth of well locations for our producer customers.

We also have spare capacity and well located infrastructure in Versado and Sand Hills that can be utilized to process additional volumes, perhaps from the active Bone Springs/Avalon shale plays occurring around our assets.

We have an asset base and interconnection capability that cannot be duplicated at the nation's number one hub for NGL Logistic Services in Mont Belvieu and surrounding Galena Park, Texas. To be used for a number of potential new expansions inside our fence line.

For example, in addition to the almost complete CBF expansion, we've recently filed an air permit request with the TCEQ for an additional 100,000 barrel per day frac expansion at CBF. This expansion is currently being discussed with our customers, marketed so to speak and not many companies have the ability and infrastructure to quickly and economically build such an interconnective facility at Mont Belvieu.

And at risk of pointing out the obvious, you've probably noticed that the Targa list of projects underway continues to increase and that our progress reports toward completion indicate that they are being well executed. We're proud of that.

The list of projects that we are not yet discussing publicly and the list of prospects that we are working on in private is also increasing. We are opportunity rich and that is indicative of our ability to successfully execute and leverage opportunities tangential to our existing assets and existing businesses.

If we are challenged to prioritize our efforts and we are, that's a high class problem. Additionally, our asset position provides linkages to key domestic NGL supply lines, important petrol chemical customers and docks for international ships and related cargos. The partnership is involved in discussions and negotiations to further commercialize and expand those assets to meet our customer's business.

And as I said earlier, with the drop down process behind us and our strategic direction in future structure for the apparent set at Targa Resources Corp., our focus has clearly been set on executing on our business plan and executing on growth opportunities as developed and presented to us.

That concludes the formal part of the call. We'll now open it up for your questions. Operator, with your assistance please.

Question-and-Answer Session:

Operator

Certainly. (Operator Instructions) And our first question comes from the line of Darren Horowitz of Raymond James.

Darren Horowitz – Raymond James

Good morning. Thanks. Joe Bob, I appreciate all the color that you guys provided volumetrically and also around the Downstream Business. And I've got a couple questions for you. First, and this digs a little bit deeper into more of the volume color around SAOU and North Texas, but I'm just trying to get a sense of the timeframe that, that ramp and producer activity in the Permian and Sprayberry and Wolfberry trends starts to hit and impact plant inlet volumes this year? It's probably going to be lumpy. And again, I appreciate the color but can you break it down at least roughly by quarter?

Joe Bob Perkins

Darren, we established this proud tradition of giving you volume color at the beginning of each year and I think we gave a little more volume color this year than we did last year. My color was on an annual basis, not on an end-of-year basis but on an annual average. I think I clearly said 10% or so above 2010 annual average and that SAOU and North Texas would be the leaders driving that. There – you can sort of do your own math on how to get there and I'm not going to give you a quarterly breakdown, but I also understand that if I was in your position I would ask for it.

Darren Horowitz – Raymond James

Well, yeah, I mean, that's fine. I was just trying to get a sense for how big the magnitude could be in the back half of the year relative to the first half.

Joe Bob Perkins

Understood.

Darren Horowitz – Raymond James

Yeah. Well, switching gears a little bit and recognizing that the ramp in the Wolfberry also benefits the Sand Hills system, I'm curious as to what producer activity in the Bone Springs area in particular could mean to that system?

Joe Bob Perkins

You're absolutely correct. Sand Hills sits on the west side of that Wolfberry trend and SAOU sits on the east side of that Wolfberry trend. The center is not nearly as interesting, we must have planned that very well.

The Bone Springs play is on the south and west side as I recall as Sand Hills and both Bone Springs and Wolfberry are driving activity there. You'll notice I said SAOU and North Texas in the lead, Sand Hills as a part of the Permian activity is going to meet or exceed last year and that's about as much color as I'm going to give you right now.

Darren Horowitz – Raymond James

Okay. And then final question for me just from a big picture perspective, when you take into account everything that you've outlined organically, the opportunities to further enhance the Downstream Logistics Business and then any sort of high on the priority list acquisition candidates. Can you just quantify for us in aggregate CapEx what you think that could mean? I mean does it look like something that could be several hundred million dollars of CapEx or possibly even more?

Joe Bob Perkins

The color we gave you on CapEx was a projection of 2011 annual spent. About half of that was in the downstream. About half of that was in the upstream. Most of the downstream expenditures are in and around our Mont Belvieu and Cedar Bayou facilities. There's upside on that. Those are the projects that we sort of discussed and laid out for people. If we have a very active year on the organic growth side we'll add to that list and we will discuss that accordingly as projects are announced.

Darren Horowitz – Raymond James

Okay.

Joe Bob Perkins

And I don’t know how to project acquisition for you and I don’t ever recall having done that, but as long as we’ve been in this business there have been opportunities out there and we continue to evaluate them with discipline.

Darren Horowitz – Raymond James

Sure. I was just more trying to get a sense of what that $250 million number in theoretical big picture terms could ultimately end up materializing at.

Joe Bob Perkins

Understood?

Darren Horowitz – Raymond James

That’s fine. We’ll wait and see. I appreciate it.

Operator

Thank you. Our next question comes from the line of Mark Reichman of Madison Williams.

Mark Reichman – Madison Williams

Good morning. On the capital expenditures I was just looking at your January presentation and the forecasted ‘11 CapEx is 180 and then now it’s growing to 230. Now is that delta is that the expenditures for North Texas predominantly?

Joe Bob Perkins

Yes. You track us well. That is the biggest single increase of what we disclosed.

Mark Reichman – Madison Williams

Okay. And then on the Mont Belvieu upgrade are there any expenditures? I think you addressed this earlier. Are there any expenditures related to Galena Park in the budget currently?

James Whalen

Yes. There are some expenditures related. This is Jim Whalen. There are some expenditures related to Galena Park at their nominal.

Mark Reichman – Madison Williams

Okay. Thank you. And then on the maintenance CapEx, is it fair to say that how would you – and I don’t think you provided the guidance in the past, but how would you break that out by quarter? Is it sufficient to just break out evenly for 2011?

Matt Meloy

This is Matt. We’ve given kind of maintenance CapEx on an annual basis over the last few years, and I just pointed to the last couple of years that we tended to have more maintenance CapEx in the back half of the year versus the front. That’s just in our reported results and you know we don’t really have any other better feel than that.

Mark Reichman – Madison Williams

Okay, great. Now that’s helpful.

Joe Bob Perkins

I’ll give you just a little bit more color than that. If you look at what we did in 2010 we spent $22 million in the fourth quarter. That was a significant amount of a total maintenance cap that was spent, and typically in the first quarter it’s very low because we just spent it in the fourth quarter and it grows from the first quarter to the fourth quarter.

Mark Reichman – Madison Williams

Okay, great. Thank you very much.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Michael Blum of Wells Fargo.

Michael Blum – Wells Fargo

Hi, good morning, guys.

Joe Bob Perkins

Good morning, Michael.

James Whalen

Hi, Mike.

Michael Blum – Wells Fargo

A couple questions. One, in the press release I noticed you had a line about acquisition negotiations that are in process, and I was just curious if you would elaborate on that? Does that mean that you are negotiating right now? Does that mean we should expect at some point you would announce the completion of an acquisition? How should we interpret that?

Joe Bob Perkins

Yes.

Michael Blum – Wells Fargo

Okay.

Joe Bob Perkins

I can’t believe we got that one through the press release, Michael, come to think of it and we’re all kind of going "Whoops". It means there are active negotiations. Somewhere in my script I said that, as an example, I hoped we could discuss future opportunities associated with the products and crude terminalling and storage development efforts. But all of those type of things are under CAs, so that one little statement that got into the press release is about as much as anyone is going to be allowed to talk about.

Michael Blum – Wells Fargo

Okay, I’ll ask the question about it anyway. Will these potentially if they make it to the goal line, could these potentially be meaningful in size and capital dollars or are these going to be more small or incremental?

Joe Bob Perkins

Again those are under CAs.

Michael Blum – Wells Fargo

Okay.

Joe Bob Perkins

In the products terminalling and storage space that I talked about their objectives are to look at small and large opportunities and when we are looking at M&A opportunities throughout our history we’ve looked at small and large opportunities.

Michael Blum – Wells Fargo

Okay. When looking at the growth CapEx budget for 2011, given the backlog and the potential projects that you outlined and short of the shadow backlog that you alluded to beyond that, is it fair to assume that would you expect out of the year progresses you could potentially be adding to that total 2011 CapEx budget?

Joe Bob Perkins

We will be disappointed if we don’t.

Michael Blum – Wells Fargo

Fair enough.

Joe Bob Perkins

Know that I’m in range of Jim kicking me, so I like it when he answers those.

Michael Blum – Wells Fargo

Got you. Two other quicker ones, that potential 100,000 barrel back expansion at Q.D.F, if that – if you got the contracts, et cetera, et cetera, what’s the timing in terms of first getting the permit and then being able to build it and all that until that could possibly – what’s the first possible time that could be in service?

Joe Bob Perkins

Since I’m out discussing with industry participants and competing with other, a very few other projects, I think I won’t announce that on this call. Okay?

Michael Blum – Wells Fargo

That’s fine. Last question for me, given the ramp in the Permian and West Texas and the expansion that you’re doing around the processing, are there – what’s – is there any constraints around NGL pipeline take-away capacity that you see developing out there? And if so, how do you see that working its way out?

Joe Bob Perkins

Yes, there are constraints, and I think constraints will increase. Targa has taken steps and will continue to take steps to position ourselves well relative to that upcoming bottleneck.

Michael Blum – Wells Fargo

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Yves Siegel of Credit Suisse.

Yves Siegel – Credit Suisse

Thanks. And since you just threw out the last line, what steps have you taken in terms of the bottlenecks?

Joe Bob Perkins

We added take-away capacity at SAOU recently with an arrangement with Louis Dreyfus. And we, like other people, are looking at other pipeline projects for those resource play development spaces.

Yves Siegel – Credit Suisse

What’s the lead time on a pipeline project?

Joe Bob Perkins

Depends on how big a pipeline is and over what distance. But ours is in place for the additional take-away for SAOU if you are wondering about that.

Yves Siegel – Credit Suisse

Okay. And just to play off your earlier comments, I think you said that you have a high class problem in terms of prioritizing the organic growth opportunities that you have in front of you. And I apologize if I’m mischaracterizing any of this stuff, but what are the limiting factors that you have in front of you when you start thinking about the organic growth opportunities? I’m going to assume that capital is not going to be an issue for you. I’m wondering if there are issues in terms of....

Joe Bob Perkins

People resources.

Yves Siegel – Credit Suisse

People. Okay.

Joe Bob Perkins

Our most talented people are having a great time and working wide open. Our whole organization is ten. The people connecting wells in North Texas and SAOU have been doing an outstanding job connecting more than one a day. Just – that is a high class opportunity and we’re trying to add resources where resources need to be added.

Yves Siegel – Credit Suisse

Okay. And so what kind of hurdle rates – what’s a – what’s your lowest hurdle rate right now?

Joe Bob Perkins

We have a guideline that we require the guys to look and that is a 15% after tax and then also as we realize the MOP is not a taxpayer, but that’s still how we look at it. So, if you can’t bring a project that gets north of 15% after tax, it probably is not going to get done.

Yves Siegel – Credit Suisse

And that’s unlevered, right?

Joe Bob Perkins

Yes.

Yves Siegel – Credit Suisse

Okay.

Joe Bob Perkins

And we do look back on these and we have to show them to our board. And our performance against the estimated economics has been very, very good. I’m not going to tell you the lowest one I found, but it’s pretty surprising the lowest one we found in terms of how attractive it was.

Yves Siegel – Credit Suisse

Okay. And then my last question, if I could is, you also mentioned that you’re negotiating better terms on the POPs. Could you elaborate on that? What’s a conventional type of contract now? And what are the levers that you’re trying to pull?

Joe Bob Perkins

I’ll elaborate in that I said you could assume we were. In terms of supply demand, that’s a reasonable assumption. And it really wouldn’t be good business for me to describe a typical term and it’s a lot more complicated than just the typical term because it’s about terms around that term.

Yves Siegel – Credit Suisse

Okay. Well, thank you, guys.

Joe Bob Perkins

You bet.

Operator

Thank you. And I show no further questions in the queue at this time. I’d like to turn the conference back over to our executives for any further remarks.

Joe Bob Perkins

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

Operator

Ladies and gentlemen, thanks for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!