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Targa Resources Partners LP (NYSE:NGLS)

Q3 2011 Earnings Call

November 7, 2011 9:00 pm ET

Executives

Joe Brass – Director, Finance

Rene R. Joyce – Chief Executive Officer

Matthew J. Meloy – Chief Financial Officer, Senior Vice President and Treasurer

Michael A. Heim – Executive Vice President and Chief Operating Officer

Analysts

Bradley Olsen – Tudor, Pickering, Holt & Co.

Darren Horowitz – Raymond James

Louis Shammy – Zimmer Lucas

T.J. Schultz – RBC Capital Markets

Yves Siegel – Credit Suisse

Michael Blum – Wells Fargo Securities, LLC

James Jampel – HITE Hedge

Helen Ryoo – Barclays Capital

Operator

Good day, ladies and gentlemen, and welcome to the Targa Resources Third Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Joe Brass, Director of Finance. Sir, you may begin.

Joe Brass

Thank you, operator. I’m Joe Brass, and I’d like to welcome everyone to our third quarter 2011 investor call for both Targa Resources Corp. and Targa Resources Partners LP.

Before we get started, I’d like to mention that Targa Resources Corp., TRC or the Company, and Targa Resources Partners LP, Targa Resources Partners or the partnership have published their joint earnings release which is available on our website www.targaresources.com. We will also be posting an updated investor presentation to the website after the call.

Speaking on the call today will be Rene Joyce, Chief Executive Officer and Matt Meloy, Chief Financial Officer and Treasurer. Rene and Matt are going to be comparing the third quarter 2011 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 the 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, 2010 and other quarterly reports on Form 10-Q, as well as the company’s registration statement on Form S-1 as amended.

A quick reminder before we get started into the results. With the closing of multiple acquisitions from TRC over the previous years and in accordance with 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 Rene Joyce.

Rene R. Joyce

Thanks Joe. Welcome and thanks to everyone for participating in our third quarter conference call. Besides Matt and myself, there are several other members of the management team who will be available to assist in the Q&A session.

For today’s agenda, I will start off with a high-level review of performance, key accomplishments and business highlights for the quarter. We will then turn it over to Matt to review the Partnership’s consolidated financial results, segment results and other financial matters for the Partnership. Matt will also review key financial matters related to Targa Resources Corp. Following Matt’s comments, I will provide additional updates on some of our ongoing activities, and we will then take your questions at the end.

You may recall that Targa had a press release on October 19, which provided an update on selected projects and provided some explanation of our financial outlook given modern moving pieces in our businesses. Today’s earnings release, the third quarter 10-Qs and our current outlook for the business are consistent with the press release.

The Partnership’s businesses continue to benefit from favorable industry dynamics that are driving growth in natural gas supply and in NGL volumes across our diverse asset base. Year-over-year operating margin strengthened in both our Natural Gas Gathering and Processing division and our Logistics and Marketing division.

Turning to third quarter, the Partnership experienced an unusual set of operational issues both ours and third-parties, impacting financial performance. These issues many of which were attributed to a much harder than normal summer in our operations areas have been resulted are not expected to occur to the extent, but to this extent in the future. The Partnerships fundamentals remain strong and we expect an EBITDA in the fourth quarter at least as strong as our previously announced guidance.

We reported third quarter adjusted EBITDA of $107 million, which resulted in distributable cash flow of $65.4 million; distribution coverage was 1.1 times based on our third quarter declared distribution of $58.25 or $2.33 on an annual basis. The partnerships distribution represents an 8% increase compared to the third quarter 2010.

Our Field Gathering and Processing segment increased inlet volumes year-over-year at our San Angelo Operating Unit in North Texas driven by very attractive drilling and production activity.

Favorable pricing increased VESCO and Louisiana operating unit inlet volumes and improved GPM at both business units led to a strong year-over-year performance in our Coastal Gathering and Processing segment. The resulting increase in NGL production both from our G&P division and from other gas processes also experienced increased NGLs improved operating activity through our integrated downstream assets and continues to create incremental demand for NGL infrastructure.

For our Logistics and Marketing division impressive operating results benefited from increased CBF fractionation volumes, continued strong NGL prices and LPG export activity. At Galena Park, LPG export activity across our docks continues well above last year’s pace. This activity has supported by multi-year deals as well as spot export opportunities, and these predominantly fee-based arrangements benefit both our logistics assets and our marketing and distribution segments. Consistent with our strategy of growing our terminals business we announced purchase of two petroleum logistics terminals, the Targa Sound terminal and the Targa Baltimore terminal. We are currently pursuing incremental growth capital investment at all three of our recently acquired petroleum logistics terminals. That is a brief summary of TRP highlights.

At the TRC level, TRC declared a third quarter cash annualized dividend of $1.23 per share, which was a 19% increase over the annualized rate paid with respect to the pro-rated for the quarter of 2010.

As we will review with you later in today's call, with the level of producer activity across our Field Gathering and Processing operations, and with the growth in NGL supplies to Mont Belvieu, we have approved and launched a slate of over $860 million in organic growth projects across our businesses. These projects will come online over the next two years and support high visibility for incremental contributions to operating margin through 2014.

That wraps up my initial review, and I'll hand it over to Matt.

Matthew J. Meloy

Thanks, Rene. I'd like to add my welcome and thank you for joining our call today. As Joe mentioned under common control accounting treatment, the partnership’s reported results of operations now include all Targa assets for all periods presented. Let's start with a review of the consolidated results.

For the third quarter of 2011, the partnership reported net income of $35.9 million compared to $13.8 million for the third quarter of 2010. The income per diluted limited partner unit was $0.31 and $0.14 respectively.

These quarterly results reflect non-cash hedge charges of $2 million in 2011 and $6.1 million in 2010. Under common control accounting net income reported for the third quarter of 2010 includes $3.9 million of non-cash affiliate interest expense related to drop-down businesses for periods prior to the acquisition of those businesses by the partnership.

As Rene mentioned, adjusted EBITDA for the quarter was $107 million compared to $90.5 million for the same period last year, the increase was primarily the result of higher operating margins in both the Gathering and Processing and the Logistics and Marketing divisions, partially offset by lower cash hedge settlements, higher general and administrative expenses and by temporary operational issues previously mentioned.

Gross margin increased 23% for the third quarter compared to last year. Again, strong performance across both divisions drove the gross margin improvement and I’ll review the drivers of this performance in our segment review.

Operating expenses increased 16% compared to last year, primarily due to increased compensation and benefits, maintenance fuel and utilities. The increase in depreciation and amortization expense for the fourth quarter compared to last year is primarily attributable to new assets, which have been acquired or placed in service since the third quarter of 2010, partially offset by the impact of assets that have become fully depreciated.

While total interest expense dropped as compared to last year due to affiliate interest expense, third-party interest expense increased $1.7 million compared to last year, due to the additional debt component of partnerships funding from multiple drop-down transactions from TRC, several new acquisitions and other growth capital expenditures. Equity was also raised for these funding requirements and our debt covered remained to the low end of the targeted range.

Gross maintenance capital expenditures were $24.7 million in the third quarter of 2011 compared to $12.7 million in 2010. Adjusting for the non-controlling interest portion of maintenance capital expenditures and certain reimbursements from TRC to the partnership, net maintenance capital expenditures were $16 million in the third quarter of 2011 compared to $10.7 million in 2010.

Turning to the segment level, I’ll summarize our third quarter’s performance on a year-over-year basis for all segments, and then I’ll summarize the performance on a sequential basis. We’ll start on our Gathering and Processing segment.

Overall, third quarter 2011 plant and natural gas inlet for the Field Gathering and Processing segment was 628 million cubic feet per day, an 8% increase compared to the same period in 2010. North Texas and SAOU natural gas inlet increased by approximately 15% and 11% compared to last year.

Activity in the oilier portions of the Barnett Shale in Wise and Southern Montague County’s drove the increase at North Texas. The increase at SAOU was driven by increased well connects primarily from the prolific Wolfberry play. SAOU remains on track to set another record for single year well connects.

Partially offsetting these substantial inlet gains was a decrease in Versado natural gas inlet volumes caused by traditional wellhead production declines as producers are focused more on developing new resource plays in the Wolfberry and Avalon shale, Bone Spring than work over in older fields. Over time, Versado made benefits from Avalon Shale, Bone Spring to the West and Wolfberry to the East.

Field Gathering and Processing operating margin increased by approximately 45% compared to last year, driven by increased volumes and higher commodity pricing. Natural gas prices were essentially flat, while NGL and condensate prices were 52% and 19% higher respectively.

Turning now to the Coastal Gathering and Processing segment, plant inlet volumes were approximately 1.5 billion cubic feet per day, and 11% decrease compared to the same period in 2010. While the Coastal segment volumes declined in total, inlet volumes at VESCO increased 8%, when compared to the third quarter 2010.

Relative to other Coastal G&P volumes, VESCO volumes are significantly richer in NGL content. The performance of VESCO was driven by new gas packages tied into the facility. These new volumes of VESCO and more favorable processing economics across the segment drove a 69% increase in segment’s third quarter 2011 operating margin compared to last year.

Next I’ll provide an overview of the two segments in the downstream business. Starting with the Logistics Assets segment, fractionation volumes for the third quarter 2011 were approximately 29% higher compared to 2010 due primarily to the 78,000 barrel a day fractionation expansion at CBF, which operated for much of the quarter. Third quarter operating margin increased 28% compared to the third quarter 2010 driven by sustained LPG export activity at Galena Park and increased fractionation volumes.

In the Marketing and Distribution segment, NGL sales volumes for the quarter increased by approximately 9% compared to 2010. And operating margin for the segment increased 31% over the third quarter 2010, driven primarily by an increase in NGL prices and by increased LPG export sales.

With that review over a year-over-year results, let’s now discuss a few sequential comparisons for the second quarter of 2011.

Starting with the Field Gathering and Processing segment, third quarter plant natural gas inlet increased 3% over the second quarter of 2011. Drilling and production activity remained strong. Operating margin for the Field G&P segment decreased 11% compared to the second quarter of 2011. The decline was primarily the result of an unusual effect of operational issues with ours and third-parties. As Rene said, these issues many of which were attributed to a much harder than normal summer in our operations areas have now been resolved and are not expected to occur to this extent in the future.

Moving to the Coastal Gathering and Processing segment, plant natural gas inlet declined 8%, while operating margin for the segment decreased 13% compared to the previous quarter. The operating margin decline was driven primarily by lower VESCO volumes caused by maintenance work in the plant, by maintenance work on two third-party pipelines fee in the plant, by maintenance on major offshore productions platform and also by overall production disruptions caused by tropical storm Lee.

Turning now to the downstream business, in the Logistics Assets segment, fractionation volumes for the third quarter 2011 increased approximately 4% due to the ramp up of the CBF 70,000 barrel a day expansion. The Logistics Asset segment operating margin decreased 10% sequentially, resulting from lower LSNG treating volumes, increased maintenance activities and increased operating expense. The Marketing and Distribution segment operating margin decreased 35% compared to the previous quarter. The second quarter benefited from a contract settlement related to a multi-year propane exchange agreement.

With that, let’s now move briefly to capital structure and liquidity.

At September 30, we had approximately $477 million in capacity available under the partnership, senior secured revolving credit facility, after giving effect to outstanding borrowings of approximately $535 million and $88 million in letters of credit. This capacity and $69 million of cash on hand resulted in approximately $545 million of total liquidity, leaving us with ample flexibility to pursue organic growth and acquisition opportunities.

Total funded debt on September 30 was approximately $1.5 billion or about 53% of total capitalization and the partnerships consolidated leverage ratio at quarter end was approximately 3.3 times, still at the low end of our target range of 3 to 4 times.

Next, I would like to make a few comments about our hedging and capital spending programs for the year. As of September 30, we estimate the partnership has hedged approximately 75% of its 2011 expected natural gas and 80% of its 2011 expected combined NGL and condensate equity volumes.

At this point in 2011, our hedge percentages for next year are similar to how we’ve hedged in years past. For 2012, GAAP has hedged 60% to 70% of expected 2011 volume and NGLs and condensate are hedged 75% to 85% of 2011 volume. Of course, we believe [PLG] and fee volumes in 2012 will be higher than in 2011.

Moving on to capital spending, including acquisitions, we estimate on a net basis approximately $480 million of capital expenditures in 2011 with approximately 15% of the total comprising maintenance capital spending. This amount includes approximately $164 million related to our previously announced acquisitions of Petroleum Logistics terminals. The estimate does not include our share of investment related to our minority 38.8% interest in the expansion of Gulf Coast fractionators. We expect to spend at least $500 million in 2012 on approved growth capital expenditures and approximately $80 million in net CapEx for 2012.

Before I hand the call over to Rene, I'd like to make some brief remarks about the result of Targa Resources this quarter. At September 30, the balance of the TRC HoldCo loan due 2015 was $89.3 million, also at September 30 there were no borrowings under the $75 million senior secured revolving credit facility. At September 30, TRC had a cash balance of approximately $85 million, which gives total liquidity of approximately $160 million. TRC’s standalone general and administrative expenses in the third quarter were $1.7 million and we expect similar amount of G&A in the fourth quarter.

On October 11, TRC declared a third quarter cash dividend of $0.3075 per common share or $1.23 per common share on an annualized basis, representing an approximate 6% increase over the rate paid with respect to the second quarter of 2011. TRC’s standalone distributable cash flow for the third quarter came in at $20.2 million. This reported number reflects a one-time benefit for current taxes that relate primarily to an overpayment of prior year income taxes. On a pro forma basis without this one-time effect, TRC standalone distributable cash flow was about $14 million, which represents a coverage ratio of 1.1 times.

That concludes my review. So now, I’ll turn the call back over to Rene.

Rene R. Joyce

Thanks, Matt. To wrap up the final portion of our prepared remarks, I would like to review the impressive set of organic growth projects that we have underway. In direct response to increase production, producer activity and expected volumes from significant new acreage dedications in the recent, we recently announced a 200 million cubic feet a day cryogenic gas processing plant for North Texas. The project cost is estimated approximately $150 million and is expected to be online and operational in mid-2013.

Also due to our increased producer activity in new acreage dedications, we are exploring, gathering and processing expansions in the Permian Basin and our San Angelo Operating Unit and for the Sand Hills system. Our $360 million fee-based 100,000 barrel per day Train 4 expansion at Cedar Bayou Fractionation is progressing on-time and on-budget for our Q1, 2013 startup. We previously mentioned that this capacity is essentially fully built for term with high levels of frac or pay commitments. Further, due to additional demand for fractionation capacity in response to high-level of customer inquiries, the partnership is exploring a potential 100,000 barrel per day Train 5 at Cedar Bayou.

At approximately $250 million, the expansion of our Galena Park marine export import terminal and our Mont Belvieu complex to provide for exports of international great propane will add to our fee-based profile and is expected to be operational Q3, 2013.

The $35 million benzene treating project also fee based is scheduled for commercial operation in January 2012. The $29 million fee-based expansion of Gulf Coast fractionators, where we have a 38.8% interest is on the way and is scheduled for completion in Q2 of 2012.

In conclusion, we are pleased to report operating margin increases for each of our segments compared to last year on both a year-to-date and a third quarter basis. These results clearly illustrate the growth we are seeing across all areas of our operations. We have over $300 million of growth investments that are coming on line this year. We have also announced over $860 million of approved projects targeted for start-up during 2013.

As we continue to expand our diverse operations and response to strong industry fundamentals, we are becoming increasingly optimistic about the Partnership's longer-term growth at an EBITDA multiples of five to seven times or better these projects provide the Partnership with good visibility on incremental contributions to EBITDA through 2014 timeframe, and we are continuing development of additional projects to serve our customer’s needs.

And with that, we will turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bradley Olsen from Tudor, Pickering. Your line is open.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Hi, good morning guys.

Rene R. Joyce

Good morning, Bradley.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Could you guys discuss some of the one-time items, it appears as though they were largely felt in the Field G&P as well as Logistics segment, and I was wondering if you guys might be able to quantify those one-time impacts on both those segments?

Michael A. Heim

This is Mike Heim. I’ll go over some of these very briefly. Looking at the field, we had both operational problems with some of our own equipment, primarily some of the turbines in the hot weather. We also had to shut back part of our production during the time frame when Chevron’s West Texas pipeline was partially shut down due to a fire that they had.

There were a number of wild fires across both North Texas, Eastern New Mexico and West Texas that caused us to shut parts of our gathering systems and as the fire fighters moved in and fought those fires. We’ve got a number of places where we have above ground pipes and we had to actually remove the gas and make them safe while the fire fighters were in the areas, that’s very, very unusual for us. We also had to put up with a problem in the Gulf of Mexico, we had a Tropical Storm come in where we curtailed production most of the Gulf, middle part of the Gulf was shut in producers removed their people from the platforms, so we had gas down for several days.

At the end of that period, we were doing scheduled maintenance on one of our plants that has two trains and we had a turbine problem with the other one. So basically, we were producing and processing very little gas for four, five days in there. So, it’s a number of different problems primarily temperature, drought related and in the normal year, we wouldn’t have seen any of these. They’re very unusual and we’ve fixed all these problems and don’t expect to see them again.

Rene R. Joyce

We had significant one-time operational issues with the pipeline supplying our Coastal Straddles plants, both in the Western and Eastern areas of the Gulf of Mexico.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Okay, great, that’s really helpful color. I guess, kind of a related question, as far as you know given the fact that right now, we’re probably at historical record if not, pretty close in terms of the utilization factor on a lot of NGL infrastructure. And given the fact that you guys are somewhat unique and that you touched both kind of the upstream portion of the midstream industry as well as the downstream portion, do you feel as though in this high utilization environment that we’re more likely to see kind of small hiccups or just kind of various issues have maybe larger impacts than they have historically? Just given the fact that everything is running at 95% or higher?

Rene R. Joyce

Primarily with the Y-grade pipelines feeding Belvieu anything, I mean those lines are running all out and any kind of hiccups with those operations are going to lend self to quite a number of curtailments and deliveries to Belvieu as well as from our processing assets and others.

Michael A. Heim

Most of the facilities at Mont Belvieu are very, very close to capacity. When you’re talking about the fractionators, connecting pipelines, we have had a few hiccups as you say, with power in the Mont Belvieu area it’s expanded very quickly. There are ongoing discussions with the transmission companies in the area, and I think everybody is on the same page with the growth, and I don’t think that on a go forward basis there is really going to be any major problems out there, but its something that does need to be coordinated and is being coordinated.

Bradley Olsen – Tudor, Pickering, Holt & Co.

I think you might have just answer my next question, but as far as looking at your 2012 guidance, when you think about kind of the volumes that you’re going to be running on your fractionation units, you’re not expecting any kind of curtailment throughout 2012 to affect the amount of Y-grade that you receive in Mont Belvieu and Lake Charles?

Rene R. Joyce

We have scheduled maintenance to be done during 2012, but no major outages. And as we temporarily take production fractionation facilities down in Mont Belvieu, we shift barrels over to our Lake Charles fractionator.

Matthew J. Meloy

And if your question was aimed at whether pipelines are within cost constrains to our fractionation volumes, you don’t currently expect that absent or problem like West Texas pipeline had. And absent that [forced measure] you know that we have high reservation fees are or so-called frac or pay.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Okay. So, and those would remain in place even if there was a shortfall from a pipeline outage?

Matthew J. Meloy

Absent of [forced measure] then.

Bradley Olsen – Tudor, Pickering, Holt & Co.

Okay, great. Thanks a lot for the color guys.

Rene R. Joyce

Okay, thanks.

Operator

Thank you. Our next question comes from the line of Darren Horowitz from Raymond James. Your line is open.

Darren Horowitz – Raymond James

Good morning.

Rene R. Joyce

Good morning, Darren.

Darren Horowitz – Raymond James

Just a few questions, Rene. Thinking about the amount of capital for infrastructure enhancements associated with CBF Train 4, if we were – if you guys were to move forward with CBF Train 5, am I right in assuming that the cost could be closer to $275 million relative to the $360 million that you’re spending on 4?

Michael A. Heim

At this point in time, we are looking at the utilization of all of our assets, storage [brine], interconnects and the fractionation, and I don’t think I could give you a plus or minus 25% number today, but it’s an exercise that we’re doing right now, so that we can put in a very detailed air permit application. We are expanding a lot of our facilities that we are dealt up and utilized when we put the 78,000 barrel a day fractionator in, and that’s why the Train 4 is $360 million, and we are just trying to find out, give ourselves comfort to make sure that we give all of the reliability to our customers if they deserve as to what we need to add for Train 5.

Darren Horowitz – Raymond James

Okay. So Mike, when you’re thinking about that, you're thinking about all the NGL pipe expansions in the Belvieu that should be coming on by 2013. How do you guys think about leveraging that footprint to gat more of the purity products down to the petchems, you know is it a situation where you will come back in and look at that propane export facility, and possibly enhance it again. Or is it a situation where you think, simply put, as you pointed out, you will need more storage and more importantly, downstream connectivity to the petchems in order to handle all that off take.

Michael A. Heim

When we decided to do the debottlenecking and add the 78,000 Train 3, we started working on interconnects with different petrochemical companies. By early next year, we will have five new connections that we’re in, in 2007 and 2008. So we are definitely working with the petchems. As far as storage is concerned with the flexibility that the petchems want, we definitely are putting in additional storage for their utilization. We also want to make sure that we don’t disrupt the fields. We’re going to put in new Y-grade storage, so that we have more areas, more capacity. We’re going to have five new pipeline connections into Mont Belvieu by the middle of 2013, which is great for the utilization of our fractionation capacity.

Matthew J. Meloy

Input connectivity and outgoing connectivity will be in place by the time Train 4 starts that input structure that could be leveraged to Train 5. As we’re designing Train 5, Mike has already been making decisions and his engineering group has been sizing and going forward with dollars being spent that are upsizing that will benefit Train 5 as we go forward.

Michael A. Heim

I mean we definitely saw that Train 5 potential was right on the heels of Train 4. We’ve upsized the piping all the way through the new pipe racks and we have upsized some of the new brine ponds that we are putting in and they were very cheap increases rather than doing it over again. So, we’re going to get some synergies from Train 5 if we build it.

The other thing you brought up was the export capacity. We are working very hard to utilize all of the assets we’ve got with the announced export increase. We’re putting in the new de-ethanizer. We’re putting in the refrigeration, but with that goes the management of the pipes connecting Mont Belvieu and Galena Park and all of that is going very well at this point in time.

Rene R. Joyce

And Darren if we had to we could expand that facility further for another dock, I think it’s about $80 million…

Michael A. Heim

$30 millions for the dock and about $50 million for our new large…

Rene R. Joyce

Yeah for a total number of $80 million, we could increase the number of ships, we can handle a month at that facility.

Darren Horowitz – Raymond James

Okay. Rene, last question from me. Could you just give us a little bit more color on the scale and scope of how you’re thinking about expanding the G&P asset footprint in and around the Permian and SAOU? Because I know you’ve got $30 million on the board right now for an SAOU expansion and I’m assuming what’s you’re talking about right now is going to be a bit more?

Rene R. Joyce

Yeah, $30 million at San Angelo with the two cryogenic trains were currently being refurbished. We could probably see another $30 million a day for our processing expansion at San Angelo just based on the acreage dedications we’re working on. And then at Sand Hills, we’re also looking at $30 million a day of additional expansion of processing there.

In longer term, we’ve talked about building a line from the Sand Hills system out West, which could further down the road lead to $200 million a day of additional processing, but for sure $90 million a day looks like that’s almost a guaranteed.

Darren Horowitz – Raymond James

Thanks for the color guys, I appreciate it.

Operator

Thank you. Our next question comes from the line of Louis Shammy from Zimmer Lucas. Your line is open.

Louis Shammy – Zimmer Lucas

Hi, good morning guys.

Rene R. Joyce

Good morning Louis.

Louis Shammy – Zimmer Lucas

Just had a question regarding the results in steel G&P. Yeah if I’m just comparing it to the second quarter your volumes were up, pricing was better, but the gross margin was about $7 million lower. Just trying to understand how that happen was that something related to the one-times or how did that flow through?

Rene R. Joyce

Yeah. The part of that was related to the one-times that Mike had touched on earlier. The other part we take commodity prices, gas an NGLs were approximately flat, but crude was down. So we did have a negative price variance in the field segment, we do make it a decent amount from the condensate sales and those were down sequentially.

Louis Shammy – Zimmer Lucas

Okay, okay. But otherwise, I guess when I think of operational issues; I usually think of those, let’s say affecting the volumes. Is there any reason that would affect you other than what showed up in the volumes?

Matthew J. Meloy

We had load of condensate and crude primarily in North Texas, which was the several million dollars worth of impact, the recoveries are in some of the plants, but as we went up towards higher capacities decreased that inlet volume could be up, that’s what we brought the Conger plant on in SAOU, that plant brought on an additional 25 million a day of capacity and we had the...

Michael A. Heim

Pipeline was down, you’re having to process inefficiently to try to keep our producers on.

Louis Shammy – Zimmer Lucas

Right.

Michael A. Heim

That inlet was still more than the NGLs were produced.

Matthew J. Meloy

We basically went into ethane rejection, so that our inlet stayed the same as far as what changed this plant. But we went into ethane rejection, because we got throttled back by 40% on West Texas pipeline for about 10 days.

Michael A. Heim

Lot of moving parts.

Louis Shammy – Zimmer Lucas

That makes sense. Okay. So and most of these issues have already been resolved.

Rene R. Joyce

Taking care, and actually a little bit of extra cost doing them.

Louis Shammy – Zimmer Lucas

Excellent, okay. Thank you very much.

Rene R. Joyce

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of T.J. Schultz from RBC Capital Markets. Your line is open.

T.J. Schultz – RBC Capital Markets

Hey guys, good morning.

Rene R. Joyce

Good morning, T.J.

T.J. Schultz – RBC Capital Markets

Just on the propane export project, how much of that export capability is contracted versus take-or-pay contracts and where are those new low ethane volumes going?

Rene R. Joyce

On the new project nothing to date, the current activity is on the multiyear deals but we have no contracts in place for the expansion right now.

Matthew J. Meloy

Lots of interest.

Rene R. Joyce

Lots of interest, we were not too concerned about being able to contract for activity when this facility comes on but nothing to date.

Matthew J. Meloy

It’s far enough out that it’s very difficult to get somebody to sign up multiyear, two years in advance? That’s where we’ve been in especially before we announced it. I mean been long that has been announced.

T.J. Schultz – RBC Capital Markets

Okay. On the Terminal segment, can you expand on some of the growth opportunities around the San and Baltimore Terminals. I guess is the $60 million guidance, they are indicative of the full extent of the expansion available at this terminals plus Channelview and then I guess kind of what timing and returns do you expect on some of those expansion projects?

Michael A. Heim

Basically when we bought each of those terminals, we thought that there was built in expansion. For Channelview, we have signed agreements for additional land, build tanks we are very close to signing a contract with one of long-term customers down there for another 190,000 barrels of storage. Again that will be signed before we start construction it will be at least a three year contract. That sound again we’ve – it had projects in there, we’re working on connections to the electric pipeline and we are working with several producers, we’ve got a signed contract up there to build another 190,000 barrels a day of storage. That – there is a lot of upside for Tacoma, that we have not announced, it’s a great location, we’ve got great people and we’ve got a lot of connectivity, we’re just in the process of finding additional land next to the northern part of our acreage, so that we can expand into that. So there is a lot of growth in here, there is lot of growth potential in Baltimore…

Matthew J. Meloy

The $16 million is indicative of that very highly probable not the full growth case.

Rene R. Joyce

And I think we told everybody that these are going to be the only three that we own, where we are continuing to look at other ones that we are negotiating to buy.

T.J. Schultz – RBC Capital Markets

Okay great helpful. I guess just one last thing on your target leverage is still obviously console at the low end of your three to four times target leverage. I guess the other is question as you progress towards more 45% of the business being fee based for margin does that make you more comfortable and approaching the higher end of that target leverage or just where do you expecting to take out as you kind of approach that 45% fee based margin?

Rene R. Joyce

Yeah. Over time as the fee based mix changes, you can look at being more comfortable at the high end. But three to four time has been where we’ve led and we really been at low end, we’re pretty conservative group over here that likes a lot of liquidity and we just generally feel more comfortable at the low end of that range.

So over the next several years as the fee based increases, we will evaluate, we are more comfortable but we like to give ourselves plenty of flexibility. So really anywhere between three and four times we’re comfortable depending on the growth profile of the business.

T.J. Schultz – RBC Capital Markets

Okay, thanks guys.

Operator

Thank you. Our next question comes from the line of Yves Siegel from Credit Suisse. Your line is open.

Yves Siegel – Credit Suisse

Thanks, good morning everybody.

Matthew J. Meloy

Good morning.

Yves Siegel – Credit Suisse

Matt, just on the last point. What’s your sense of goal in terms of investment grade credit rating?

Matthew J. Meloy

We get that question a fair amount. Our thought over here is two things are really needed to get to investment grade. We need to increase the amount of EBITDA and increase the amount of fees – fee-based percentage. We don't have a target or goal that’s as we want to be investment grade by this time, this day to or this – that metric, but what we’re doing is we're just executing on our strategy of growing the EBITDA and growing the fee base.

And so as we do both of those things, we're going to approach the land of – the possibility of investment grade. So it’s not a set goal, but the goal that we are delivering on just kind of get us closer to that position.

Yves Siegel – Credit Suisse

Okay, got it. Thanks. And then could someone describe how much of capacity do you have on the – how much takeaway capacity or pipeline capacity do you have right now going into Mont Belvieu and how you’re thinking about it going forward?

Matthew J. Meloy

Are you asking how much we have under contract or how much is there online in-service from the multiple pipeline ownership come in to our facility?

Yves Siegel – Credit Suisse

No, I'm asking about you specifically.

Matthew J. Meloy

We were the biggest shipper on West Texas pipeline by far. And we have contacted with DCP for their San Angelo’s pipeline future. We also ship on Louis Dreyfus or is Lone Star Energy transverse company. So we ship on them and then we’ve got some accounts through Chaparral, which is a enterprise pipeline. So we’ve got it spread out on four pipes today, or three pipes today with the fourth one coming and we have connectivity with ONEOK’s Arbuckle line, we anticipate to be connected to DCP’s new line out of Oklahoma, and we expect to be connected into Enterprise’s new line coming out of the Rockies in North Texas. So we anticipate seeing connected to everybody, it’s going to give the producers and the midstream companies more flexibility. But by the end of '13, we anticipate being connected, I think to either nine or 10 pipeline companies bringing in raw make into Belvieu.

Rene R. Joyce

Adding to Mike’s description, it maybe as you look at other companies, they’re reporting that they are constrained in their Gathering and Processing areas because of lack of NGL takeaway capacity and are rapidly growing North Texas and SAOU areas, we have not been constrained give credit to our commercial folks being ahead of the game in getting capacity in front of that growth.

Large projects in the far Western Permian ourselves and others are somewhat constrained waiting for those pipelines to be developed. But that’s not inhibiting our current capacity and current producer customers at this time. Then you look at it from the fractionation standpoint all of that new capacity that Mike is talking about can come to our fractionation and terminaling facilities in Mont Belvieu.

Michael A. Heim

Certainly the new 200 million of their plant we’ve announced North Texas has to have a home and we are dealing with that with several interconnects, SAOU with San Angelo system has capacity under contract to install the two Garden City trains at the Sterling plant, that’s not a problem. We do bump up into some MALP problems. So with some of the takeaway pipelines out in the Permian, and we anticipate one of those being fully fixed by the first quarter of next year. That was not our problem, that was one of the pipeline companies who had reduced their MALP on line. So that’s supposed to be looped and replaced by the end of first quarter. So there is going to be constraints on the whole system, not just Targa, all the midstream’s and all the producers until we get to 2013 with new pipelines coming on and new fractionation coming on.

Yves Siegel – Credit Suisse

Was there or is there an opportunity for you to take an equity interest and the new builds or the expansion projects?

Michael A. Heim

Some of that’s under negotiation right now. I can’t go into it because of [CAs] with that.

Yves Siegel – Credit Suisse

Okay. And then, on acquirer with that 200 million of inlets capacity, how much NGLs do you think you will be producing there?

Michael A. Heim

That plant will – based upon the drilling to date around it, it looks to me like that plant will probably be able to recover about 21,000 to 22,000 barrels a day.

Rene R. Joyce

Ramping up slowly over time

Michael A. Heim

Yes, it peaks in you know several years out after it comes on.

Yves Siegel – Credit Suisse

Okay, and then in terms of thinking about further fractionation new builds, and I might be a way off from this, but what kind of contract length are you thinking about. Could you disclose like on track 4 what the contract length was?

Michael A. Heim

Yeah, I think that we installed people if they are long-term tenure contracts with high percentages of either frac or pay.

Yves Siegel – Credit Suisse

And would you be thinking that you'd be able to get a similar type of contract to go ahead with another project?

Michael A. Heim

Absolutely, that's the only way we're going to do it.

Yves Siegel – Credit Suisse

Okay. And then my last question is, as you look at your geographic footprint, is there opportunities for you to expand into different regions?

Rene R. Joyce

There are opportunities and we've been working on those additional areas for quite a while, but we keep, we've got efforts going forward, we'll see how they turn out.

Matthew J. Meloy

Where it's also fairly attractive, and as an investor saying or the resource plays to come to Targa instead of Targa going to the resource play.

Rene R. Joyce

And that's particularly true on Louisiana where there is the potential of the Lower Tuscaloosa Marine Shale, Louisiana, Eagle Ford, Wilcox and Austin Chalk plays, where we’ve got some additional wellhead with double probably the wellhead coming in the loop. We’re trying to figure out a way to tie all of our facilities. We've got 13 plants across South Louisiana and we're trying to figure ways if this Tuscaloosa play turns out to be a major resource play how do we leverage our existing asset base to take advantage of that. So yeah, we’re fortunate to be in the areas where we've got huge amount drilling activity and we’re working hard to see if we can get into some of the other areas.

Yves Siegel – Credit Suisse

I apologize. You’ve announced close to $1 billion worth of projects and I just want more, right. So I apologize.

Rene R. Joyce

So do we.

Operator

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

Rene R. Joyce

Hi, Michael.

Michael Blum – Wells Fargo Securities, LLC

Hey, good morning. I think you’ve asked all my questions. Just one kind of, I guess big picture everyone has been kind of circling around this Track 5, the big picture question is, up until now, it seems like you’ve just seen – I guess I described it insatiable demand for frac capacity by the industry and do you see that’s slowing down at all?

Rene R. Joyce

No. We announced that we’ve got preliminary work on that Train 5, but I wouldn’t be surprised if others operating in Belvieu want to add an additional fractionator. We could see a couple more additional fractionation projects above our Train 5. So, maybe three more, Mike?

Michael A. Heim

Yeah, I think there is a strong possibility to that. Basically, we had a list of 20 potential suppliers for Train 4. We filled it with 3 and those other 17 are still out there asking for space and we made it very clear to everybody, we were going to build it and we were going to take to first people who came to the negotiating table to take the terms that we were offering, and that’s why we have already started working on the air permit, we have bought the property to build the Train 5 on. And we have started working on all the engineering. The only thing we have not tied down is how many ancillary utilities we need to increase if any.

Matthew J. Meloy

Okay. If I were, I’ll put my money on two more fractionators above our Train 5?

Michael A. Heim

Then it maybe three.

Matthew J. Meloy

And could be three.

Michael Blum – Wells Fargo Securities, LLC

Great. Thank you very much guys.

Operator

Thank you. Our next question comes from the line of James Jampel from HITE. Your line is open.

James Jampel – HITE Hedge

All right. In this period of wanting more, you haven’t discussed the acquisition market much. Is there anything out there that perhaps the combination of having the sea corp structure public would help you do at a more reasonable price?

Rene R. Joyce

Yeah, at acquisitions, we are acquiring terminals. Unlike Mike said, we are not stopping it through. We think there is additional opportunities out there that we’re going to be closing on. Well, with regard to other areas and other assets, we see them all, we look at them, sometimes, we make an aggressive bit unlike you’ve seen. We haven’t been very successful doing that, but we think there is going to be quite a few assets available for us to take a look at, but spending all the money that we’ve spent, $500 million this year and another $860 million and growing above that you know I’ll keep focusing in on these organic growth opportunities before stepping out with a high multiple acquisition.

Michael A. Heim

I mean, our business development grew passage truck in it and they tried to key roll and Train 4 being fully contracted that’s quickly after we announced it.

Matthew J. Meloy

But we are currently looking at acquisitions at the sea crop level.

James Jampel – HITE Hedge

All right. You’re saying you are looking at the sea crop level?

Matthew J. Meloy

We are now.

James Jampel – HITE Hedge

You are now. Okay. All right, thank you.

Operator

Thank you. Our next question comes from the line of Helen Ryoo from Barclays Capital. Your line is open.

Rene R. Joyce

Good morning, Helen.

Helen Ryoo – Barclays Capital

Good morning, Rene. So just one follow up on the frac discussion. On frac 5 are you – given the strong, you know still strong demanding environment there, are you seeing a better pricing environment as you put frac 5 into your firms project?

Rene R. Joyce

I would put it in the same environment as the current expansions that are underway.

Helen Ryoo – Barclays Capital

Okay. So, in pricing wise you would get a similar type of contract rates?

Matthew J. Meloy

The people who were unable to get space in Train 4 are still very interested, and now I want to be first in line instead of too late in line.

Helen Ryoo – Barclays Capital

Okay, great. And then, just one follow-up. Rene, you mentioned five to seven times return on these projects coming online in 2013. Do you think by 2014, you would be able to achieve that return multiple or is that too early as some projects need some ramp up time?

Rene R. Joyce

Well, most of these projects come on throughout 2013. So we mentioned the five to seven times EBITDA multiple. It’s kind of – we’re going to provide growth through 2014 as bill continued to kind of ramp to get more full year credit in 2014. So it's kind of a staged amount of EBITDA going on throughout 2013 and then we’ll see the benefit of that in '14.

Michael A. Heim

All of these projects will be at probably full capacity in '14 in the exception of North Texas...

Rene R. Joyce

North Texas is going to be…

Michael A. Heim

It will have to be drilled into.

Rene R. Joyce

Yeah. And which would be another year or two outside of ’14 before they see peak volumes.

Helen Ryoo – Barclays Capital

And I guess, other than North Texas, everything else is fee based projects. North Texas you would …

Rene R. Joyce

No. The processing additions out in the Permian would be under the similar contractual structures that we have out there. But anything evolving the liquids business would be fee-based. Terminals would be fee-based, Galena Park, Belvieu.

Michael A. Heim

Although a great percentage of our Field Gathering and Processing are a combination of [PLP] and fee. Primarily, the fees are (inaudible) in compression and the PLP is for the processing.

Helen Ryoo – Barclays Capital

Okay. Thank you very much.

Thank you. As there are no further questions in the queue and we’d like to turn the conference back to Mr. Rene Joyce for closing remarks.

Rene R. Joyce

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

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.

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