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Executives

Joe Brass - Director, Finance

Joe Bob Perkins - CEO

Matt Meloy - CFO & Treasurer

Analysts

Darren Horowitz - Raymond James

Stephen Maresca - Morgan Stanley

Catheleen King - Bank of America

Michael Blum - Wells Fargo

John Edwards - Morgan Keegan

Craig Shere - Tuohy Brothers

Bradley Olsen - Tudor, Pickering, Holt & Co.

Targa Resources Partners LP (NGLS) Q4 2011 Earnings Call February 23, 2012 11:30 AM ET

Operator

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

I would now like to turn the conference over to Joe Brass. You may begin.

Joe Brass

Thank you, operator. My name is Joe Brass, I’d like to welcome everyone to our fourth quarter and full-year 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 Joe Bob Perkins, Chief Executive Officer; and Matt Meloy, Chief Financial Officer and Treasurer. Joe Bob and Matt are going to be comparing the fourth quarter and full-year 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 Safe Harbor provision of the Securities Acts of 1933 and 1934. Please note that actual results may 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 and the Company’s annual reports on Form 10-K for the year ended December 31, 2010 and other quarterly reports on Form 10-Q.

One quick reminder before we get started into the results. With the closing of multiple acquisitions from TRC over the previous years and in accordance to 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 Joe. Welcome and thanks to everyone for participating in our fourth quarter and full-year 2011 conference call. As is our practice besides Matt and myself, there are several other members of the team who will be available to assist in the Q&A session. That group today’s includes Rene Joyce, Jim Whalen, Jeff McParland, Paul Chung and Bob Sparger. So, I will be getting a lot of support and you are surrounded.

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

We are pleased to report strong operating and financial results of the fourth quarter and full-year 2011 with solid performance in both our Gathering and Processing, and Logistics and Marketing divisions. The Partnership's integrated mainstream platform continues to benefit from industry fundamentals. Strong ongoing trends, which we have discussed before, driving growth in liquids, rich and natural gas volumes and increased NGL supplies.

As indicated in our earnings release, we recorded record adjusted EBITDA of $146 million for the fourth quarter and $491 million for the year. This resulted in quarterly and annual distributable cash flow of approximately $107 million and $337 million respectively. The 2011 adjusted EBITDA of approximately $491 million reflects annual growth of about 25% over 2010. The Partnership's fourth quarter declared distribution of $0.6025 per quarter or $2.41 per unit per year was a healthy coverage of 1.6 times.

This distribution represents a 10% increase compared to the fourth quarter of 2010 and that 10% increase is just for the quarter comparison. With this latest distribution increase, the Partnership is well-known track to achieve our guidance of 10% to 15% distribution growth for full-year 2012 over full-year 2011.

In 2011, the Partnership demonstrated strong distribution growth while at the same time maintaining an average annual distribution coverage of 1.4 times, slightly higher than the 2010 reported coverage of 1.3 times. As you will recall, due to increased scale and diversity, our long-term target would be coverage of more like 1.2 times.

Moving to business highlights for our Gathering and Processing division, the Field G&P segment recorded a 2011 operating margin increase of approximately 22%, compared to full-year 2010. This increase was benefited from active drilling and completion activity resulting in increased volumes at SAOU, North Texas and Permian. Inlet volumes in gross NGL production for the segment both increased more than 4% over 2010. And this 4% increase is a net of a year-over-year Versado volume decrease, which we expect to reverse in 2012.

These growing Field G&P are primarily from resource plays: Wolfberry wells in the case of SAOU, Wolfberry and Bone Spring oil wells for the Permian, and high liquid gas wells from the oily part of the Barnett in North Texas. As an aside, we have recently announced several times about our exposure to dry gas production, the short answer is that we have little downside exposure to dry gas. Certainly, our 2012 guidance is not impacted. I don't believe, we have any real dry gas anywhere are drier, let’s say "drier", drier in a relative sense gas would be one, a small volume in Versado. The Morrow production drilled more than several years ago.

Some existing production in the drier part of the Barnett gas, which we said, we aren’t well positioned in, and three, some gas from offshore Southwest Louisiana that goes to our western most Straddle Plants. All of this drier gas is relatively mature production without any meaningful drilling in the last few years. Therefore, with little dry gas exposure today, we believe that Targa’s drier gas offers only long-term upside not near-term and middle-term downsize.

Getting back to the segment reports, full-year 2011 Costal G&P segment operating margin increased approximately 62% over 2010. The increase was primarily attributable to significant increase in higher GPM key pole volumes at VESCO and higher system average GPM at LOU due to wellhead volume increases and optimization of throughput to more efficient higher recovery plants, as well as higher NGL and condensate sales prices in a favorable frac spread environment as the result of low gas prices relative to NGLs.

The increased NGL production that we are seeing across the Partnership’s Gathering and Processing division, as well as from other G&P companies due to the same NGL dynamics we've discussed often, continue to drive increases in operating activity in our downstream assets and continue to create demand for incremental NGL infrastructure.

Annual operating margin for our Logistics and Marketing division increased 47% in 2011 over 2010. The Logistics Asset segment benefited from increased fractionation volumes, primarily due to CBF’s Train 3 expansion and from increased LPG export activity, which benefits both our logistics assets in our Marketing and Distribution segments.

As you probably know, the Logistics Asset segment also now includes our three newly acquired petroleum Logistics terminals, ChannelView on the Gulf Coast, Sound on the West Coast and Baltimore on the East Coast. They were all acquired in 2011, they’re adding fee-based margin for 2012 and providing organic growth opportunities at each site.

Operating margins in the Distribution and Marketing segments increased 41% over 2010, benefiting from export activity and higher NGL prices. For 2012, our previously EBITDA guidance of 10% to 15% growth from our initial 2011 EBITDA guidance range of $465 million to $475 million remains unchanged.

At the time, those 2012 guidance assumptions were based on $4 natural gas, $85 crude oil and an average price for the Partnership’s NGS of about $1.30 per gallon that included a 75% per gallon ethane assumption. Based on the current pricing environment, which includes approximately $0.50 per gallon ethane, we are still comfortable with the previous midpoint 2012 guidance. That guidance is approximately $530 million for 2012. And therefore, we are also comfortable with our previous guidance for distribution growth over the original guidance of about 10% to 15%.

Additionally, to give you a sense of the impact of ethane prices for the Partnership beyond 2012, a $0.25 per gallon drop in ethane prices would result in about a 5% impact on our EBITDA in 2013 or 2014 or later years. While talking about commodity price sensitivities, we should remind you that Targa is not very sensitive to natural gas prices. As currently hedged, a decrease in gas prices has a slightly positive impact on our 2012 EBITDA.

For 2013, a decrease in gas prices has a slightly negative impact on EBITDA. And as we have profitable keep-whole processing volumes, which benefit from expected continued strong frac spreads. We are actually adding a short gas position that significantly offsets our national gas link from PLP contracts in the Field G&P segment, a natural hedge.

So to summarize those last few messages and Perkins is often too wordy, we are comfortable with our 2012 guidance at current prices. For 2013 and later years, a $0.25 per gallon drop in ethane prices results in about 5% impact on EBITDA and natural gas prices aren't a driver for the financial performance.

As we have disclosed, or at least we will put in the 10-K, we will spend about $490 million of total gross CapEx in 2011, supported by continued strong underlying industry dynamics and working hard to keep up with those dynamics, we have approved and launched an impressive set of organic growth projects for completion in 2012 and 2013 and we try to keep you posted on those projects. Those projects currently disclosed to be completed in 2012 and 2013, represent a total of over $1 billion in capital expenditures. So that's a brief over review of our TRP highlights.

At the TRC level, TRC declared fourth quarter cash annualized dividend of $1.345 per share, which was a 31% increase over the fourth quarter of 2010. Consistent with our previous guidance, we continue to expect 30% to 40% dividend growth for full year 2012 over full year 2011.

That wraps up my initial overview. Now, I’ll hand it over to Matt.

Matt Meloy

Thanks, Joe Bob. I would like to add my welcome and thank everyone 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 fourth quarter of 2011, the Partnership reported net income of $75.5 million, compared to $35.9 million for the fourth quarter of 2010. The income for diluted limited partner unit was $0.75 and $0.39 respectively. These quarterly results reflect non-cash hedge charges of $1.3 million in 2011 and $9.3 million in 2010.

As Joe Bob mentioned, adjusted EBITDA for the quarter was $146.3 million, significantly above the $114.1 million for the same period last year. The increase was primarily the result of higher operating margins across our businesses in both the Gathering and Processing, and the Logistics and Marketing divisions and of lower general and administrative expenses. Gross margin increased 17% for the fourth quarter, compared to last year, also with increases across those divisions, and I will review the drivers of this performance in our segment review.

Operating expenses for the fourth quarter increased 5% compared to last year, primarily due to increase in maintenance, fuel and utilities. Interest expense increased $3.1 million compared to the fourth quarter 2010, driven by a higher effective interest rate. Gross maintenance capital expenditures were $24.6 million in the fourth quarter of 2011, compared with $20.8 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 $17.1 million in the fourth quarter of 2011 compared with $15.6 million in 2010.

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

Overall fourth quarter 2011 plant and natural gas inlet, for the Field Gathering and Processing segment was 633 million cubic feet per day, a 5% increase compared to the same period in 2010. Field Gathering and Processing operating margin increased by approximately 25% compared to last year driven by increased volumes in higher NGL and condensate prices, partially offset by lower natural gas prices. North Texas, SAOU and the Permian business, natural gas inlet volumes increased approximately 17% and 6% respectively compared to last year.

Activity in the oilier portions of the Barnett Shale and 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 oil play.

As a note, when Targa uses the term Wolfberry, we are using it broadly to refer to the full suite of formation in various completion combinations across the Wolf camp, Spraberry, Dean and other related Permian formation. Our producer customers may have their own favorite terms and the completion combinations will vary across these large resource plays and vary over time.

In 2011, SAOU set another record for single year well connects and we expect a similar number of well connects in 2012. The Permian business benefited in large part from the volume growth at Sand Hills, both from Wolfberry and Bone Springs development, partially offsetting these substantial endless gains was a year- over- year decrease in Versado natural gas inlet volumes caused by wellhead production declines and greater than normal operational issue.

We expect to reverse this decrease this year due to new well connects and the return to normal operation. Over time, Versado may enjoy additional benefit from Avalon Shale, Bone Springs to the West and Wolfberry to the East. We are starting see encouraging activities around the system. For the Field Gathering and Processing segment, natural gas price has decreased 6% while NGL and condensate prices were 27% and 11% higher respectively.

Turning now to the Coastal Gathering and Processing segments. Operating margin increased 59% in the fourth quarter compared to last year. The increase was driven by higher GPM keep-whole volumes at VESCO and Lowry, increased inlet and higher average GPM at LOU, largely due to increased wellhead volumes, higher NGL and condensate sales prices in favorable frac spreads.

Coastal G&P’s segment plant inlet volumes were approximately 1 6 billion cubic feet per day, a 1% decrease compared to the same period in 2010. While overall, the Coastal G&P segment inlet natural gas volumes decreased, the inlet volumes at VESCO increased 25%, and volumes at LOU increased 16% when compared to the fourth quarter of 2010. Relative to other Coastal GOP volumes, LOU wellhead and certain new VESCO volumes are richer in NGL content. As a result, NGL production for the Coastal segment increased 6% in the fourth quarter of 2011 as compared to last year.

Next, I’ll provide an overview of the two segments from the downstream business. Starting with the logistics assets segment, fractionation volumes for the fourth quarter 2011 were approximately 20% higher compared to 2010, again due primarily to the 78,000 barrel a day Train 3 fractionation expansion at CBF, which operated for approximately eight months in 2011.

Fourth quarter operating margin increased 22%, compared to the fourth quarter 2010 driven by sustained LPG export activity at Galena Park in increased fractionation volume. In the marketing and distribution segment, NGL sales volumes for the quarter increased by approximately 10% to 2010 primarily a result of increased export activity, higher CBF throughput and our investments and increased connectivity to our petrochemical customers.

Operating margin for the segments decreased 4% over the fourth quarter of 2010, largely due to the very strong performance in the fourth quarter of 2010, partially driven by last year’s earlier and colder than normal winter.

With that review of fourth quarter results, let’s now discuss a few key sequential comparisons for the fourth quarter of 2011. Starting with the Field Gathering and Processing segments, drilling and production activity remains strong and liquids-rich SAOU and Sand Hills and in the oiler part of the Barnett Shale play.

Fourth quarter operating margin for the Field Gathering and Processing segment increased 4% compared to the third quarter of 2011. The increase was primarily the result of the increased plant inlet volumes in NGL production in North Texas and increased condensate prices.

Moving to the Coastal Gathering and Processing segments, operating margin for the segments increased 32% compared to the previous quarter. The operating margin increase was driven primarily by higher volumes at VESCO, which were impacted by maintenance work in Q3, 2011 and by higher LOU volumes compared to the third quarter.

Turning now to our downstream business, the logistic s assets operating margin increased 24% sequentially resulting primarily from annual take-or-pay payments realized in the fourth quarter. Fractionation volumes for the fourth quarter of 2011 increased slightly as the third and fourth quarters of 2011 realized the incremental impact of CBF Train 3.

In marketing and distribution segment, operating margins increased 55% compared to the previous quarter. The increase was primarily the result of seasonal factors benefitting wholesale propane in stronger NGL prices.

With that, let’s now move briefly to discuss capital structure and liquidity. At December 31, we had approximately $510 million in capacity available under on the Partnership senior secured revolving credit facility, after giving effect to outstanding borrowings of approximately $498 million and $93 million in the letters of credit. This capacity and $56 million of cash on hand resulted in approximately $566 million of liquidity.

Total funded debt on December 31 was approximately $1.5 billion or 52% of total capitalization and the Partnership's consolidated leverage ratio at quarter end was approximately three times, still at the low end of our target range of three to four times.

We've already had a busy and productive start to 2012 financing, having completed two capital markets transactions resulting in over $565 million of new capital rates. We closed a public offering of $4.4 million in common units, including the full exercise of the underwriters’ over-allotment option, which resulted in net proceeds to the Partnership of approximately $165 million.

TRC participated in the offering purchasing 1.3 million units for approximately $50 million. TRC also contributed $3.4 million to maintain its 2% general Partnership interest. We also closed on a private offering of $400 million of six and three [eights notes] due August 22 issue at par.

The senior secured notes offering or the senior unsecured notes offering benefitted nicely from the improvement in our credit ratings over the last year. In May 2011, S&P upgraded the Partnerships corporate and notes ratings to BB. This January, Moody’s upgraded the Partnership corporate rating to Ba2 and the notes rating to Ba3.

The net proceeds from both the debt and equity offerings were used to reduce borrowings under our senior security credit facility. Giving effect to the January debt and equity offerings, the Partnerships pro forma liquidity as of December 31, 2011 was over $1 billion and pro forma leverage ratio was approximately 2.8 times, leaving the Partnership in an advantaged position to fund future organic growth and acquisition opportunities that Joe Bob mentioned and we’ll discuss later in the call.

Next, I would like to make a few comments about our hedging and capital spending programs for the year. As of December 31, we estimate the Partnership has hedged approximately 60% to 65% of its 2012 expected natural gas, and 75% to 80% of the 2012 expected combined NGL and condensate equity volumes.

Moving onto capital spending, we estimate on a net basis approximately $650 million of capital expenditures in 2012 with approximately 12% of the total comprising maintenance capital spending. The estimate does not include our share of the investment related to our minority 38.8% ownership in the expansion of Gulf Coast Fractionators.

As I wrap up, I’d like to make a few remarks about the results of Targa Resources Corp. At December 31, the balance of the TRC Holdco loan was $89 million, also at year-end there were no borrowings under the $75 million senior secured revolving credit facility.

At December 31, TRC had a cash balance of approximately $90 million, which gave us total liquidity of $165 million. In conjunction with the TRP offering in January, TRC used about $50 million of its cash to purchase 1.3 million of the NGLs units.

TRC stand-alone general and administrative expenses in the fourth quarter were about $1.8 million and we expect a similar amount of G&A expense in the first quarter of 2012. On January 12, TRC declared a fourth quarter cash dividend of $33.625 per common share for a $1.345 per share on an annualized basis, representing an approximately 9% sequential increase and 31% year-over-year increase. TRC’s stand-alone distributable cash flow for the quarter was $14.1 million and $60.2 million for the full year 2011.

That concludes my review and I’ll now turn the call back over to Joe Bob.

Joe Bob Perkins

Thanks Matt, to conclude our prepared remarks, I would like to provide an update on some of our growth project activity. In the fourth quarter of 2011, we announced a North Texas Longhorn project at 200 million cubic feet a day cryogenic gas processing plant in response to increased production, significant producer activity and expected increases in inlet gas and NGL volumes. The project estimated to cost about $150 million, is expected to be on line in mid-2013 and is backed by significant new acreage dedications.

In addition to the Longhorn project, other North Texas expansion activity continues with activity levels and growth capital investment expected to be similar to 2011. With continued producer activity in new acreage dedications at SAOU and Sand Hills, we already have further expansion approved and underway in those two areas as well with more expected in the future.

The benzene treating project is now on line as of January. This project complements the LSNG unit, provides additional fee-based margins and is backed by a term use-or-pay contract. A $360 million fee-based 100,000 barrel a day Train 4 expansion at CBF is scheduled for a second quarter 2013 startup. And as we previously mentioned, this capacity is fully booked for a term with high levels of frac-or-pay commitments.

Further, due to the additional demand we see for fractionation capacity, the Partnership is working on an additional 100,000 barrel a day Train 5. We are continuing engineering, preparing permits and conducting commercial discussions. Our approximately $250 million international grade propane export project, which are additional facilities at both our Galena Park marine export/import terminal in our Mont Belvieu complex is proceeding. This project is expected to be operational by the third quarter of 2013.

We are currently pursuing incremental growth capital investment in all three of our new petroleum logistics terminals. Also look for us to continue our terminal acquisition and development strategy. The $35 million fee-based expansion of Gulf Coast Fractionators, we sometimes call it GCF, where we have a 38.8% interest is underway and is scheduled for completion in the second quarter of 2012.

In conclusion, we are pleased to report significant operating margin increases for each of our segments on a year-over-year basis. These results clearly illustrate the growth we are seeing across all areas of our operations.

We feel good about the continued strong industry fundamentals, continue to increase our scale and diversity. We had approximately $300 million of growth investments come on line in 2011 and as mentioned earlier, we have over $1 billion in announced growth projects coming on line throughout 2012 and 2013. These are attractive projects with attractive returns and attractive multiples to EBITDA and they provide a high degree of visibility on incremental fee-based business in a high degree of visibility on our financial performance through 2014. And we are continuing to develop high quality projects to satisfy our customers’ needs.

The Partnership delivered strong growth in 2011 and with our $1 billion in liquidity, a 2.0 times pro forma leverage ratio, strong distribution coverage. The Partnership is positioned well for future growth. As Matt clearly outlined with our January financing is completed, we have essentially funded all our announced projects.

As always, we are actively pursuing third party acquisition opportunities, but remain thoughtful and disciplined in our approach. We do not have to make a large acquisition to achieve meaningful growth and with that consistent mindset any future acquisition will be complementary to our strong outlook.

Again, we are very proud of our 2011 fourth quarter and full-year results and proud of all the Targa employees that made it possible. Thank you Operatorand to the extent anyone has follow-up questions, please have them, log in them.

Question-and-Answer Session

Operator

Thank you. (OperatorInstructions) Our first question is from Darren Horowitz of Raymond James. Your line is open.

Darren Horowitz - Raymond James

Joe Bob, couple of questions for you, the first within Field G&P, given your comments around the exposure to the higher liquids content wells in the Barnett. How should we think about North Texas plant inlet and gross NGL production volumes ramping this year as more of those wells come on line. Is this progression going to be more linear from kind of the fourth quarter (inaudible) or do you think it’s going to be a little bit more lumpy.

Joe Bob Perkins

That’s probably more sculpting than I was planning on doing today. We do have lumpiness, what happens people drill, sometimes they drill several wells and then complete, but I think you will see 2012 over 2011 to have meaningful growth.

Darren Horowitz - Raymond James

Okay. And then last and final question for me, big picture based on the industry’s announcements for additional gas process in NGL pipeline and in NGL frac capacity certainly, including your discussion about a possibility for Train 5. When you look at the amount of NGL production that’s going to grow over the next couple of years relative to the ethylene industry’s ability to enhance consumption of ethane, do you think we get to a point over the next couple of years where supply outpaces demand and possibly alters the net backs that producers are realizing at the well have pressuring at same prices, or any sort of kind of 30,000 foot type of color would be appreciated.

Joe Bob Perkins

Sure, I’ll give you my 30,000 foot answer which isn’t a whole lot different than my 30,000 foot answer probably on the last call. But as we look at it, the petchem industry is heavily incented to create more effective capacity. I think, as you come out of these turnarounds, we may see petchem effective capacity over 1 million barrels ethane a day. I’m confident of that because I don’t underestimate the ability of engineers with profit motive and capital to squeeze out more barrels and they have been doing that over the last couple of years as you can see.

Then you have additional engineering and ultimately major world scale projects being added, that’s a little hard to measure because I can only go by when they say they’re going to be bringing them on. Then you have constraints on natural gas liquids even getting from Mont Belvieu, natural gas liquids pipelines won’t be online for a while. In the near-term that supply demand balance is constrained by the pipelines and the longer term is about what all have the petchems have been able to accomplish before the world’s scale crackers come on, it gets a sloppy, it corrects pretty quickly.

Operator

Thank you. Our next question is from Stephen Maresca of Morgan Stanley. Your line is open.

Stephen Maresca - Morgan Stanley

Hey, good morning everyone, and thanks for all the details and colors, very helpful, so just a couple of follow-ups. One of your peers is having a frac go down in the second quarter. Would there be any impacts for you guys positively from that and are there any other facts that need to go down for maintenance that you are aware?

Joe Bob Perkins

On an annual basis, I think I can say this, almost every frac goes down for some period of time, for some maintenance typically in the first to second quarter. I don’t know which one you are referring and I am not the best expert on my peers.

Stephen Maresca - Morgan Stanley

Okay. Well, one-off you mentioned and B1 would go down in May, (inaudible) said it.

Joe Bob Perkins

And you understand what that sort of does to supply and demand?

Stephen Maresca - Morgan Stanley

Yeah.

Joe Bob Perkins

If you have a frac go down on the margin, you have less spec product being produced. You also have large grades sort of piling up a little bit, that happens every year. On the margin, a frac going down improves pricing certainly that is a smart question.

Matt Meloy

We are also aware of Gulf Coast fractionators will be going down late April for turnaround and coupled with the expansion that they plan to bring on line.

Stephen Maresca - Morgan Stanley

Okay.

Joe Bob Perkins

Their time goes together per COP that late April turndown will allow them to bring on the additional 145,000 barrels a day as well and they are expected to be of 35 to 45 days, we are partner in that facility.

Stephen Maresca - Morgan Stanley

Okay, thanks for that. Second one, just review on the, in the international propane or the exporting propane product you have and what, I guess the status of that and do you see more opportunities like that given you know kind of where the US is versus the world in propane.

Unidentified Company Speaker

These are global commodities, we have been exporting propane almost to the maximum extent we can. Right now, domestic grade propane that project is expected to be on as we discussed in this script. The additional opportunities and boy that would be a high class problem, if we get to capacity it wouldn’t be hard for us to increase capacity at our facility.

Stephen Maresca - Morgan Stanley

Okay, and the final question is, as already mentioned Joe Bob that Versado volumes will reverse this year 2012 higher and just briefly on what’s driving that.

Joe Bob Perkins

Of all of our field gathering processing areas, we have had less activity at Versado than we have had at the other areas. 2011 relative to 2010 on an annual basis was down, two reasons, natural decline and less activity. But also we had more than normal operational issues associated with the winter and summer problems in Versado in 2011, we expect that to return to normal, we also have some interesting though not as robust activity around there and our expectation is increase production over the course of 2012 versus 2011, due to both, more normal operations and well connects, so it will [pick] up.

Operator

Thank you. Your next question is from Catheleen King of Bank of America, your line is open.

Catheleen King - Bank of America

Hey good morning and congrats on the results. First question for me actually (inaudible) just wanted to confirm that TRGP 2012 guidance for cash taxes is so good number is that it will be about equal to 20% of pretax TCS.

Matt Meloy

We put that 20% out there last year and we are still comfortable with the kind of 20% effective kind of cash tax rate coming out of pretax TCF that’s right.

Catheleen King - Bank of America

And then you gave a hedge up date for 2012, can you give the same for 2013?

Matt Meloy

Sure, for 2013 on the NGLs and condensates we are about 35% to 45% hedge based on 2012 volumes. And then on the GAAP side we are about 30% to 40% hedged.

Catheleen King - Bank of America

Okay, and so is there anything that you are waiting for there that had more (inaudible) going to do that throughout this year?

Joe Bob Perkins

That is not off track though a little lighter with our prior program. At the same time Matt percentages are based on 2012, expected volumes were as previously we were talking about 2011 volumes and those volumes have gone up. Consistent with my discussion of the natural gas side of our equation, those percentages are of our field gathering and processing, but as an entity, as we increase our frac spread exposure we start to have internal hedges relative to the gas short associated with the frac spread contracts. So that percentage goes down, we will be discussing it in that fashion with you all, because we are taking a internal hedge view of the frac spread that we see over the next several years.

Catheleen King - Bank of America

One thing if your NGLs hedges go down, or your Natural Gas hedges goes down.

Joe Bob Perkins

No, I was speaking purely to the Natural gas side end.

Catheleen King - Bank of America

Okay.

Joe Bob Perkins

Yeah NGL hedges, you will probably see us increase somewhat over the course of 2012. So at the end of 12 we would be taking about a higher percentage hedge for 13.

Catheleen King - Bank of America

Fair enough, and then I know you guys, (inaudible) press release so we are looking for more color on LSNG customers that has chose not to use that facility, this quarter does that just have to do the benzene treating and expansion coming on line, and just wanted the driver of that (inaudible) that need to continue.

Joe Bob Perkins

There was a small period of time where would have been unavailable as we brought benzene up, but that was not the reason, they are now linked. Benzene treating, makes the LSNG facility even more commercial for the customer’s application. It is a little spotty, driven by market forces going to all the details, but there will times when it turns, when it’s running full out, but you don’t have to worry about that in the near term because it has got a take-or- pay on both the Benzene side and LSNG side, making it key based.

Catheleen King - Bank of America

Got it and then on coastal G&P the higher GPM volumes just, has it seen ability of that you see going forward?

Joe Bob Perkins

Two things, the GPM increases that we saw were adding richer gas to the mix from interesting connections, because Venice is well positioned and has state of the art cryo-technology, but not only that we try to get their producers like it going in there, but it’s mostly our ability to connect to richer gas that has been the improvement. Those trends and that richer gas being produced by producers will continue to make it available, at the same time a little longer term than your question may have implied the Gulf of Mexico as we see it is returning to normal whatever that means by the end of 2012, that will mean an uptick in activity in areas where they can quickly get the supply to shore and we have got a catcher’s mitt long the Gulf of Mexico and expected, my term get more than our market share of what I hope is an uptick in the next few years over the Gulf of Mexico. Additionally we used to be talking about Mars B sort of outside of our forecast but that is getting closer and closer, that’s a great example of a sort of next door neighbor platform major development by shell that is dedicated to our system.

Matt Meloy

And also in the course of system we saw an increase in the well head production at Lou so we are actually seeing drilling activity which has been on the steady decline for the last several years start to pick back up and we are seeing well head volumes increase at LOU which is significantly higher in GPM compared to the gas we are getting at the inter states.

Catheleen King - Bank of America

Okay, thanks that’s great color, and then final one for me, just your previous 2012 growth CapEx guidance was about $500 million and now that’s up to $650 million, you just talk about the key drivers there.

Unidentified Company Speaker

Yeah, we - if you look through the disclosure, it will put more kind of the details on our growth CapEx in the investor presentation, you’ll see posted we are going to have a lust of that, but the growth portion of that is going in round about figures from up, low $500 million up to $600 million in growth CapEx. And the two largest pieces of that difference is a $45 million additional expansion program at SAOU in Permian out in West Texas and then $20 million of additional expansion CapEx in North Texas, this is gathering and processing link pipelines compression in those are areas so that $65 million of the delta and that’s our largest pieces.

Operator

Thank you. Next question is from Michael Blum of Wells Fargo. You may begin.

Michael Blum - Wells Fargo

Couple of questions one Joe Bob when you talked about having key pole exposure down the road maybe I missed it, but can explain what you are talking about there and where you are thinking and maybe adding that exposure?

Joe Bob Perkins

Sure, they mean this specific platforms that we are getting it from what our gas marketing group has been doing and very much to the benefit of our Coastal Straddle plans is accessing purchasing natural gas off the grid then we have the ability to process it with that very large tax read frankly I want to buy any gas we can to process it for the liquids that's key pole. Now key pole, key pole in our industry I understand has a really bad connotation but I kind of like to call that what it is though these have long term key pole contracts that can go upside down. Here, we can purchase this on a very short-term but we have a long-term outlook that the fact spreads going to be attractive we got a competitive advantage in terms of being able to process it coastal straddles plans. So that's maybe more detail than you're asking about but that's what driving part of that GOM increase at our Coastal straddle plant just a flat purchase for us to process.

Michael Blum - Wells Fargo

Okay, great now that's very helpful. The other thing want to ask you about was in West Texas as you expand the systems out there as production grow. Do you have adequate MGL take away to get (inaudible)?

Joe Bob Perkins

Our NGL take away I am proud of how we planned ahead to this point. I am aware about the people had to go in (inaudible)rejection because they didn’t have this much pipeline take away as they want it, that has not occurred (inaudible)and we talked about projects where we had take away. In particularly SAOU and since SAOU could take it down by the additional inter connect it made more room for us on our existing (inaudible) with Texas pipeline for Sand Hills and Versado that's been key forward looking planning. Getting to the point, we're targeting the rest of the industries we developed additional gathering and processing where Texas will have to wait on the new NGL pipelines to be completed and inter connected and at that point we will be able to get the capacity we need. You will probably see those new projects and we're working on multiple of those new projects gathering and processing for EMP development in the Permian Basin coincide with the natural gas liquids pipelines being completed and if you go have look back and look at the E&P activity the (inaudible) E&P activity is sort of waiting on that as well.

Michael Blum - Wells Fargo

Okay, great. Two more quick ones for me one, any update in terms of your progress in trying to expand the business?

Joe Bob Perkins

What we've said is that when we started in December of 2010 we wanted to have three acquisitions made by the end of 2011 I think we met that pretty well and that each of those would come with growth projects and we just mentioned that all of those growth projects were being worried on it this point. I expect them to be significant contributors the fee-based income 2012 and beyond just those three locations. We are working on other live deals obviously that work is covered by ICA We were -- being continue that strategy and we said probably a couple of times that we may even bring on the term loan at target location. So it could be developed is well is required but we have got talent working on it and we find it highly complementary to what we do.

Michael Blum - Wells Fargo

Okay, and then last question. Can you just talk about the process of the rational for the GP buying some of the units in the offering.

Joe Bob Perkins

Yeah, sure Michael, and that yeah, couple things that the primary reason that you know TRGP purchased 50 million is you know we have the cash that satisfy of about $80 $90 million. When it was earning you know little to no return in the money market. We were able to push out part of that tax liability that was [undisclosed] with the IPO from really of seven year schedule to a 14 year schedule through the tax selection we made. So we use the piece of that $50 million to buy units to earn basically just a better return versus the cash sitting there and earning money market returns, but also with that investment will get additional tax shield in the formative of additional depreciation on that purchase and it will held shield some of the taxes for the next several years as well. But we have two benefits of the TRC purchasing of the unit.

Michel as you can -- we got a lot of smart people here and they were looking at sort of other ways to get return on that cash and get tax shield the understanding of NGLS was probably a lot higher and our ability to explain to investors what we were doing a lot higher there then some of the other things we consider.

Operator

Thank you, next question is from (inaudible) CDP Capital. Your line is open.

Unidentified Analyst

I am doing well. Thank you. In your prepared comments I think towards the end you did reference about acquisitions and that they are not necessarily integral in terms of achieving you know the current business objectives everything like that. I think when we've had opportunity in the past to sit down or (inaudible) see other people there. As indicated I think in the past that you were seeking to want to raise credit profile the company's (inaudible) you get to an investment grade and that basically becoming having a better mix of businesses in terms of more fee-based (inaudible) proceed commodity exports types of business would facilitate that and that and then acquisition is some that would be very helpful though. Can you just kind of talk a little bit about that and you know where that case you know -- where you are thinking about what types of -- what types of more stable assets could - you know help you accomplish your goal?

Joe Bob Perkins

Sure, I actually go to the part of the question that you asked in the middle and then get to the whole question if I don't say I didn't (inaudible) when we talk about achieving the metrics for investment grade we see that as the result of the things we're doing and we can see in our near term headlines and our longer term headlines the consequence of the projects we're adding increased fee-base, increased scale, increased diversity already happening and I think ultimately could result in investment grade that's the result of the strategy we're pursuing acquisition likewise if it brought some of those same metrics scale diversity more fee-base could just get us there faster.

Unidentified Analyst

Okay, I guess I kind of -- I guess how important is it (inaudible) to accelerate the achievement is that because if you on just metrics is also you know (inaudible) classification of business risk or whatever that also kind of played in that there are companies that have plenty good metrics but because their classification of business (inaudible).

Joe Bob Perkins

Yeah, when I start trying to explain the agencies and perhaps their moving views I am getting out of my league. But I believe that our outlook in what we are doing can get us to investment grade based on my understanding that the agencies today. The acquisition is not - gosh I’ve got to do the XYZ acquisition to get there, an opportunity at value and fit comes along, its ability to help us with getting an investment grade will be one of the considerations.

James Whalen

This is Jim Whalen, I’d like to add to what Job Bob said, what we are doing could get us to the parameters that one might say ought to be investment grade given the current investment grade parameters by the rating agencies. What do the agencies stay in those parameters or whether they select to make as an investment grade, it is their decision and not something we have control over.

Unidentified Analyst

Okay. And I guess my last thing is, (inaudible) to me that your currency right now will be quite attractive, I mean just wondering whether you kind of see that your currency provides you the type of valuation such that if an opportunity would present itself that you’d feel comfortable with that?

Joe Bob Perkins

Yeah, we feel pretty good about that currency and we do think it's very valuable and we have no hesitancy to use that currency, this is a transaction we think would be a big meaningful for us down the road.

Unidentified Company Speaker

Now, we like both currencies, but I think you were also referring to the potential of using TRGP currency. Our board is plural to know that both currencies are valuable and they won’t view that as cheap, it’s a nice thing to have in our pocket, but it’s not running the home in our pocket.

Operator

Thank you. Our next question is from John Edwards of Morgan Keegan. Your line is open.

John Edwards - Morgan Keegan

Yeah. Good morning, everybody. I'm just following up (inaudible) question, I'm just curious, as far as where you think EBITDA needs to be to get to an investment grade, any thoughts about that?

Unidentified Company Speaker

I think you’ve exhausted our thoughts on that one.

Joe Bob Perkins

I think you’ve exhausted the thoughts, EBITDA is one of the metrics, so it's not - it needs to cross this line, we are going to get there, it’s one other thing to look at. And so, the higher the EBITDA, it changes other metrics, so it’s not just an EBITDA.

John Edwards - Morgan Keegan

Okay. And then just if you could just elaborate a little bit, you reiterated guidance and you were talking early in your comments about what your previous assumptions were and if you could talk a little bit about, what your assumptions are now in that guidance reiteration?

Joe Bob Perkins

Yeah. We mentioned before, we gave you the prices that resulted in a midpoint guidance of $530 million. And what we are saying here is, we are reiterating that we are comfortable with $530 million and that is in light of kind of current commodity pricing. And so, we know, the question that’s on most investors mind is, what does that mean in terms of ethane. And so that current $530 million of guidance is taken into account approximately $0.50 ethane.

Operator

Thank you. Our next question is from Craig Shere of Tuohy Brothers. Your line is open.

Craig Shere - Tuohy Brothers

Hi, two questions. First on entering by this ability to pay methane prices for our gas in the market that has a little liquids left in it and process that out. I guess my first question is, is it reasonable to assume as we probably all agree the frac specialty there for quite some time to come that the market producers whoever selling that is going to continue selling that at methane pricing, is there a point in which the market just got smarter, or just have the resources and so, they can take advantage of them?

Joe Bob Perkins

The work Coastal Straddle Plants, wet gas have to come too short and the Straddle Plants are in a position to take that gas from the pipelines, process that gas, remove the liquids and to put back in equivalent MMBtu amount to replace it because the MMBtu used for the liquids are worth a lot more than the MMBtu used for the gas. I would characterize that as a fairly available arbitrage.

Craig Shere - Tuohy Brothers

And the Gulf producers are - there is no way for them to…

Joe Bob Perkins

They can build a larger processing plant out in the water, okay, build new pipelines for liquids back to shore, it doesn’t work that way.

Craig Shere - Tuohy Brothers

Okay. So…

Unidentified Company Speaker

There is always the possibility that some of these volumes that are being processed by some of this arrangement could be converted by producer into a traditional processing arrangement, that's always the case.

Unidentified Company Speaker

And that negotiation occurs in the context of what does it look like to be processed (inaudible) and we are - we always said, we are largely indifferent, we want to have a value negotiation on that (inaudible) versus fee.

Craig Shere - Tuohy Brothers

Okay. So, you would be amendable if they want to change the effective contract structure, I mean, if there is no contract structure, so you are processing something out the way you are…

Unidentified Company Speaker

In that particular situation of them having a negotiation exist, we are always trying to meet our customer needs.

Craig Shere - Tuohy Brothers

Last question, kind of an interesting point, I am sorry, this is some of that said in the call that about the propane export opportunities because with a very warm winter some others have been commenting about the prospect of propane even being an additional leak on ethane during the year because the crackers can work with the propane. So, it sounds like you think that the global markets will resolve any overhang on propane, is that what you are saying?

Unidentified Company Speaker

Let me take a step back for months now, propane has been exported pretty much to the extent that it can be because of the price of propane in the United States versus the prize of propane where there are growing propane markets that’s just supply demand, but right now the ability to export more is constrained.

Craig Shere - Tuohy Brothers

Right.

Joe Bob Perkins

This has been one of the warmer winters in the last 50 years compared to the last two years being colder - some of the coldest winters over the last 50 years. And propane pricing enhancement affected, it’s lower, inventories are just very, very full of propane and propane is impacting ethane pricing on the margin. There is a certain amount of propane that can go into light crackers with the ethane, but I’ll promise you the petchems are making that economic decision every day, taking in, sort of how much propane they can based on the crack spread of propane to ethylene versus the crack spread of ethane to propylene, that’s their job, they are optimizing just like we are optimizing. And you use (inaudible) drag, I believe that propane pricing is currently a drag on the margin to ethane pressure.

Unidentified Company Speaker

But short-term and very long-time propane and butanes have to be exported and we think that’s going to be excellent situation for us without going to park expansion.

Joe Bob Perkins

With their global commodities, they go as the products that they can and products that are most economic. Propane can go out straight out and ethane can’t go straight out, ethane goes out as ethylene primarily, propylene sometimes goes out as ethylene and that’s a great facility to have over time. Right now, we can only send out domestic grade propane and we've been running three to four of the smaller ships 145,000 barrels a day ships out a month, after that project, we will be able to run several ships out, but they are just constraints right now. (inaudible) will improve that as well.

Craig Shere - Tuohy Brothers

When is that project going to be done again, I am sorry.

Unidentified Company Speaker

Third quarter of 2013 we estimate right now.

Operator

Thank you. We have one more question from Bradley Olsen of Tudor, Pickering. Your line is open.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Hi, good morning guys, I just have one quick one, following up on Craig’s questions on the propane export facility. With so much refining capacity coming out of the Atlantic basin either on the U.S. side of things or over in Europe, we've seen major refineries getting shut down. Have you guys see increased demand for propane exports as it seems like we’ll see less propane supply from refineries going forward?

Joe Bob Perkins

So whatever is being offset by refinery shutdowns on propane production and that’s occurring, I think with the amount of y-grade pipelines in fractionation capacity that will more than offset our refinery lost propane.

Bradley Olsen - Tudor, Pickering, Holt & Co.

So, you guys - as far as your Dark Project, you guys haven’t seen incremental interests since we've seen all these announcements of refineries coming offline in the last three or four months?

Unidentified Company Speaker

We got high interest from global players seeking to get propane to multiple markets.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Okay, great.

Unidentified Company Speaker

The interest in the export projects by a number of players is still the same, it’s very high.

Operator

There are no further questions on the phone line.

Unidentified Company Speaker

Thank you very much for listening to us. Thank you very much for participating in the call. If you have any further questions please contact Matt, me or any of the team.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.

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