Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Targa Resources Corp. fourth quarter 2018 earnings webcast and presentation. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Sanjay Lad, Director of Investor Relations. Sir, you may begin.
Thank you, Tom. Good morning, and welcome to the fourth quarter 2018 earnings call for Targa Resources Corp. The fourth quarter earnings release for Targa Resources Corp., Targa, TRC, or the company, along with a fourth quarter earnings supplement presentation, are available on the investor section of our website at targaresources.com. In addition, an updated investor presentation has also been posted to our website. Any statements made during this call that might include the company's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provisions of the Securities Acts of 1933 and 1934. Please note that actual results could differ materially from those projected in any forward-looking statements.
For a discussion of factors that could cause actual results to differ, please refer to our recent SEC filings, including the company's annual report on Form 10-K for the year ended December 31st, 2017, and subsequently filed reports with the SEC. Our speakers for the call today will be Joe Bob Perkins, Chief Executive Officer, Matt Meloy, President, and Jen Kneale, Chief Financial Officer. We will also have the following senior management team members available for Q&A: Pat McDonie, President, Gathering and Processing, Scott Pryor, President, Logistics and Marketing, and Bobby Muraro, Chief Commercial Officer. Joe Bob will begin today's call with a few strategic highlights, followed by Matt, who will provide an update on commercial development and business outlook, and then Jen will discuss fourth quarter 2018 results and present our operational and financial expectations for 2019 before we take your questions.
With that, I'll now turn the call over to Joe Bob.
Thanks, Sanjay. Thank you to everyone for joining our fourth quarter and year-end 2018 call. It's a pleasure to be with you again this morning. 2018 was one of the busiest years ever at Targa, in what should be viewed as another transformational year for the company.
Over the course of 2018, including only the major headlines, Targa added approximately 860 million cubic feet per day of incremental natural gas processing capacity; announced the significant Delaware Basin GMP expansion, supported by long-term agreements with a large investment-grade energy company; approved and began construction on another 1.2 billion cubic feet per day of incremental processing capacity; announced and began construction on the Grand Prix extension into Southern Oklahoma; announced and began construction on two new 110,000-barrel-per-day fractionators at our Mont Belvieu complex; created innovative development company joint ventures, or so-called devcos, that provided $190 million of capital reimbursement at closing and total potential capital savings of up to $960 million on projects already in process; raised approximately $684 million of common equity and issued $1 billion of senior notes over the course of the year; generated approximately $230 million in proceeds from asset sales; Targa exceeded our previously disclosed full year 2018 adjusted EBITDA guidance.
That is a new Targa record, with annual EBITDA of $1,366,000,000. Most importantly, those Targa execution highlights are complemented by the continued safe operations of our existing infrastructure facilities and our projects under construction, with safety focus as job number one for our talented and dedicated employees across the company. We're only one and a half months into 2019, and we've not slowed down. So far in this new year, we closed on an aggregate $1.5 billion of eight-and-a-half-year and 10-year senior notes at attractive rates, demonstrating tremendous bondholder support for the Targa story. We announced the further extension of Grand Prix into the STACK region of Central Oklahoma, executed definitive supporting agreements with Williams, and secured significant additional long-term NGL volume commitments for transportation on Grand Prix and fractionation at our Mont Belvieu complex.
We very recently executed definitive agreements for the sale of a 45% interest in our Badlands business, generating proceeds of approximately $1.6 billion. These proceeds will substantially meet our estimated equity needs for 2019 for announced net growth CapEx and the Permian acquisition earnout. It was a very important deal, and we were happy to announce it earlier this week. Those of you who follow us closely know that many of our major projects underway will be completed over the next few months, including our Grand Prix NGL Pipeline project. We've been saying this for some time now, and we'll say it again. Grand Prix really is a strategic, competitive game changer for Targa. It seems like every quarter we announce another exciting new development that leverages Grand Prix and our integrated asset base, and the Williams deal does that again.
Our growth projects underway position us for significant EBITDA growth. The strength of our integrated asset footprint and growth projects, complemented by our continued commercial success, drive increasing largely fee-based cash flows, an attractive long-term outlook, and substantially increased Targa size, scale, and customer reputation as a large cap infrastructure operator. Fundamentally, the robust long-term outlook for domestic production volumes and what that means for Targa will lead to the high utilization of our infrastructure expansions, recently completed and underway, providing a line of sight to significantly increasing free cash flow at Targa. Targa is in a special, unique position. An investor recently made some observations that I believe will soon become more widely appreciated, and I'd like to share those with you. Number one, Targa has a franchise Permian GMP position and diversity from other strong GMP positions.
Number two, he said, Targa is one of only a very few integrated companies with the combination of strong gathering and processing, plus NGL transportation, plus Mont Belvieu fractionation, plus NGL exports and other premium downstream markets. Number three, Targa has an unmatched growth picture among significantly sized midstream companies and has a growing amount of fee-based business. He summarized, Targa is clearly on path to join a short list of high-performing, scaled, investment-grade midstream companies, and on that path will experience above peer group growth, rapid deleveraging, and dividend coverage improvement. That path is highly visible to me. It was highly visible to him from our projects coming online and company in our commercial success. As I wrap up my introductory comments, I'd like to directly address statements and likely questions about where Targa should be with respect to its capital expenditures and free cash flow.
As a long-term Targa investor privileged to work closely with the Targa team, the Targa assets, the Targa customers, and the Targa opportunities, I believe we are in a very good spot. Our profile and timing will be different than peer companies simply because Targa has been blessed with an abundance of high return, strategic projects relative to our size over the last few years. We have creatively partnered, prioritized, and funded those high return strategic opportunities, pursuing them, we certainly should not have ignored them. Now with high visibility beginning in the second half of 2019, such projects are coming online, highly utilized and creating a rapid increase in our cash flow situation. We will continue to prioritize capital expenditures, resulting in lower levels of CapEx and even lower levels relative to our EBITDA.
Targa is clearly on a path to join a short list of high-performing, scaled, investment-grade midstream companies, and on that path will experience above peer group growth, rapid deleveraging, and dividend coverage improvement. With that, I'll now turn it over to Matt.
Thanks, Joe Bob, and good morning, everyone. Let's now get into some of the specifics of our record-setting 2018 and discuss how that translates into our positioning for 2019 and beyond. Overall, Targa's 2018 inlet volumes in the Permian increased 24% over the previous year, and 2018 total field GMP increased 17% over the previous year. While producers have recently adjusted budgets and forecasts, commercial activity and production in many of our operating regions remains robust, and we expect activity levels to remain strong. In our Permian region, we expect continued production growth in 2019 across both the Midland and Delaware basins, despite the temporary delay of some completions as producers await infrastructure expansions to come online throughout 2019. In Permian Midland, our Johnson plant came online late September and was quickly highly utilized.
Our 250 million cubic feet per day Hopson plant will begin operations in early second quarter and is also expected to be highly utilized at startup. The next 250 million cubic feet per day Pembrook plant is expected to begin operations late in the second quarter. In Permian Delaware, a substantial portion of the assets underpinned by our deal with a large investment-grade company are completed or well underway. Our 250 million cubic feet per day Falcon plant remains on track to be completed in the fourth quarter of 2019, and the 250 million cubic feet per day Peregrine plant is expected to be completed in the second quarter of 2020. These additional plants across the Permian will be interconnected to our multi-plant, multi-system footprint with a vast majority of the NGL volumes flowing through Grand Prix to our fractionators in Mont Belvieu.
In the Badlands, our Little Missouri complex is operating at capacity, and our volumes at our facility would have been even higher if we had additional processing capacity. Our Little Missouri Plant 4 is expected to be online in the second quarter of 2019 and will progressively ramp over the second half of the year. Our average crude oil gathered volumes in 2018 increased 29% over the prior year's average volumes. As producer well results continue to improve, we expect continued growth in 2019 for both crude and gas in the Badlands. Turning to the downstream business, Grand Prix will be fully operational around mid-year, and volumes are expected to progressively ramp over the second half of this year. We are able to significantly expand Grand Prix's capacity with low-cost pump station additions incrementally as required, which further enhances the project's long-term value.
We are ordering long lead items for the pipeline's second expansion phase, which will increase the capacity of the segment originating from the Permian by adding pump stations to approximately 450,000 barrels per day. The cost of this expansion is included in our 2019 CapEx forecast. Last week, we announced the low-cost extension of Grand Prix into the STACK region of central Oklahoma. Grand Prix will interconnect to Williams' Bluestem Pipeline in Kingfisher County, opening up additional access to the Conway NGL market and volumes from the DJ Basin. The further expansion of Grand Prix into the STACK is an attractive extension of a highly strategic asset for Targa and will direct significant incremental NGLs over the long term from Williams and other third parties to Grand Prix and to our downstream assets in Mont Belvieu and Galena Park.
This extension will have an initial capacity of approximately 120,000 barrels per day with a target in service of first quarter 2021 and is expected to cost approximately $200 million. As part of this deal, Targa provides Williams with an initial option to purchase a 20% equity interest in one of Targa's Frac Train 7 or 8 in Mont Belvieu. That option may increase depending on incremental committed volumes. This deal is an example of leveraging our unique position while also supporting our overall business and capital efficiency. Turning to our fractionation business, our facilities in Mont Belvieu continue to remain highly utilized during the fourth quarter with full year 2018 fractionation volumes increasing 20% over 2017. Our next new 100,000-barrel-per-day Train 6 fractionator will begin operations in the second quarter and is expected to be highly utilized at startup.
We expect the fractionation market to remain tight throughout 2019 as increasing Y-grade NGL supply is directed to Mont Belvieu from new pipelines. Construction is underway on two new Targa 110,000-barrel-per-day fractionation trains, Train 7 and 8. They're expected to be online in the first quarter and second quarter of 2020, respectively. Our fractionation expansions will accommodate the robust outlook for increasing Y-grade NGL supply to Mont Belvieu, which for us, will largely be coming from Grand Prix. In our LPG export business, we are on track to complete our new pipeline between Mont Belvieu and Galena Park and the rebuild of Dock 2 by mid-year 2019. We are moving forward with the planned expansion to increase our refrigeration capacity and load rates to further enhance our LPG export capabilities at our Galena Park facility.
In the third quarter of 2020, our current effective export capacity of seven million barrels per month will increase to approximately 11 to 15 million barrels per month, depending on the mix of propane and butane demand, vessel size, and availability of supply, among other things. The estimated cost of this expansion is included in our 2019 CapEx forecast. Construction on the Gulf Coast Express residue gas pipeline, or GCX, continues, and the project remains essentially on time and on budget with the pipeline expected to be fully operational in the fourth quarter of this year, which will provide some much needed residue gas takeaway from Waha and or the Midland Basin to Agua Dulce. We are also very interested in seeing the Whistler project go forward and continue to work to commercialize the project as this provides strategic residue takeaway for Targa and our customers.
While we continue to support the project, we don't expect to have any meaningful ownership interest or capital requirement for this project. Our crude and condensate splitter at our Channelview terminal is in startup. We are working on third-party contracts and commercialization of the asset after Vitol terminated its splitter contract in December of last year. We expect this to be a well-performing asset for Targa. With that, I will now turn the call over to Jen to discuss Targa's results for the fourth quarter and present our 2019 operational and financial outlook.
Thanks, Matt. Good morning, everyone. Targa's reported quarterly adjusted EBITDA for the fourth quarter was $376 million. Fourth quarter EBITDA included recognition of the remaining $32 million cash payment associated with the terminated splitter agreement. Normalizing for the splitter deferred revenue recognition, adjusted EBITDA for the fourth quarter decreased 4% sequentially due to lower commodity prices and lower fractionation margin, partially offset by higher Badlands and Permian volumes. Dividend coverage for the fourth quarter was 0.91 times. During the fourth quarter, we recognized a $210 million non-cash goodwill impairment charge. The only remaining goodwill balance on our financials relates to the 2017 Permian acquisition. In our Gathering and Processing Segment, higher volumes and fee-based margin in our Badlands business, along with higher Permian volumes, were more than offset by lower commodity prices. Operating margin decreased $5.3 million in the fourth quarter when compared to the third quarter.
Fourth quarter Permian inlet volumes increased 7% over the third quarter from growth in each of our Permian Midland and Permian Delaware systems. The sequential increase in Permian inlet volumes was partially impacted by a temporary operational disruption during the quarter on a third-party NGL pipeline exiting the basin. Our fourth quarter crude oil gathered volumes in the Badlands increased 4% over the third quarter, driven by continued strong production growth across our dedicated acreage. Permian volumes gathered in the fourth quarter were down 9% over the third quarter due to temporary disruptions at third-party facilities.
In our Logistics and Marketing Segment, operating margin decreased $23 million in the fourth quarter when compared to the third quarter, driven predominantly by lower marketing gains, lower fractionation margin, and lower terminaling and storage throughput, primarily due to the divestiture of our Tacoma and Baltimore terminals, partially offset by higher domestic marketing margin and higher LPG export margin. As Matt mentioned, our fractionation facilities remain highly utilized, averaging about 450,000 barrels per day in the fourth quarter, despite that temporary curtailment of Y-grade NGL supply volumes to Mont Belvieu from the previously mentioned operational disruption on a third-party NGL pipe. At our Galena Park facility, LPG exports remained strong during the fourth quarter as we averaged 6.5 million barrels per month. We are very pleased with our full year 2018 operational and financial performance.
Full year 2018 operating margin in our Gathering and Processing and Downstream Segments increased 24% and 16% respectively over 2017, and we exceeded our previously disclosed full year 2018 adjusted EBITDA guidance. Moving to other finance-related matters, the fair value of the earn-out payment for our Permian acquisition is currently estimated to be $308 million, with the payment payable in May 2019. The $21 million decrease in the contingent consideration compared to the third quarter estimate was driven by lower forecasts of volumes, partially offset by a shorter discount period. During the fourth quarter, we executed additional hedges for Targa's percent of proceeds equity commodity positions.
Based on our estimate of current equity volumes from field gathering and processing, for full year 2019, we have hedged approximately 75% of condensate, 75% of natural gas, and 70% of NGLs. We estimate that we have hedged approximately 45% of condensate, 40% of NGLs, and 35% of natural gas volumes for 2020. As Joe Bob mentioned, in January, we successfully issued an aggregate $1.5 billion of 6.5% and 6.875% senior notes due in July 2027 and January 2029. We appreciate the tremendous support from our fixed income investors. Net proceeds from the senior notes offering were used to redeem our November 2019 maturity and substantially reduce borrowings under our TRP revolver. We look at our maturity stack, we feel very well-positioned given our next meaningful maturity is in May 2023.
On a debt compliance basis, TRP's leverage ratio at the end of the fourth quarter was approximately 4.1 times versus a compliance covenant of 5.5 times. Our consolidated reported debt to EBITDA ratio was approximately 4.9 times. Full year 2018 net growth CapEx was $2.7 billion, and net maintenance CapEx was $128 million. The number of projects that we have underway, precision around timing of capital spend is more difficult than it typically would be, and more projects were completed in the fourth quarter than expected. Yesterday, we announced that we entered into definitive agreements to sell a 45% interest in Targa Badlands LLC, the entity that holds all of Targa's assets in North Dakota, to funds managed by GSO Capital Partners and Blackstone Tactical Opportunities, collectively Blackstone, for $1.6 billion.
We expect the transaction to close in the second quarter of 2019, subject to customary regulatory approvals and closing conditions. Under the terms of the executed agreements, Targa will continue to be the operator and will hold majority governance rights. Future growth capital is expected to be funded on a pro-rata basis. Badlands will pay a minimum quarterly distribution to Blackstone and to Targa based on their initial investments, and Blackstone's capital contributions will have a liquidation preference upon a sale of Badlands. This minority interest sale is integral to satisfying a substantial portion of our estimated funding needs for 2019 and provides us with significant flexibility looking forward. Pro forma for the senior notes offering, the redemption of our November 2019 maturity, and the anticipated proceeds from the Badlands sale, our consolidated liquidity as of year-end was approximately $4.3 billion.
Pro forma for the Badlands sale, our compliance and consolidated reported debt to EBITDA metrics were 3.4 times and 4.3 times respectively at the end of the fourth quarter. Let's now turn to our expectations for 2019, which assume NGL composite barrel prices to average $0.60 per gallon, crude oil prices to average $54 per barrel, and natural gas prices to average $3 per MMBtu for the year. Beginning with our gathering and processing segment, we expect total Permian natural gas inlet volumes for 2019 to average between 1.85 billion-1.95 billion cubic feet per day, with the midpoint of the range representing a 20% increase in average 2019 Permian inlet volumes over the 2018 average. We expect Permian inlet volumes to sequentially ramp throughout 2019 as our new processing plants come online.
We expect average 2019 inlet volumes at South OK and the Badlands to be higher than average 2018. Collectively, we expect total field GMP natural gas inlet volumes for 2019 to average between 3.45 to 3.65 billion cubic feet per day, with the midpoint of the range representing an approximate 10% increase over 2018 average inlet. We also expect total crude gathered volumes in both the Badlands and the Permian to be higher on average in 2019 than average 2018. Downstream, we expect fractionation volumes to increase year-over-year, largely driven by growth in our Permian GMP volumes and the addition of Train 6. Pro forma for the 45% interest sale in Badlands, which again, is expected to close in the second quarter, we expect full year 2019 adjusted EBITDA to be between $1.3 billion-$1.4 billion.
We expect 2019 quarterly adjusted EBITDA to benefit as our growth projects, including Permian and Badlands processing expansions, Train 6 and Grand Prix, begin operations and ramp through the second half of the year. Our EBITDA outlook for 2019 is lower than the preliminary range that we published in November, given, one, and the largest impact item, the 45% sale of the Badlands, which includes a minimum quarterly distribution to Blackstone ahead of Targa in a rapidly growing business. Two, a lower commodity price forecast. Given the decrease in prices in mid-November, we did a revised plan for our board using a lower price deck. Three, lower volumes from reduced activity at that lower price deck. First quarter adjusted EBITDA is expected to be sequentially lower than fourth quarter 2018, and second quarter EBITDA, pro forma for the Badlands, is expected to be the lowest quarter of 2019.
EBITDA will meaningfully increase in the second half of the year as our growth projects come online and begin to ramp. Operating expenses and corporate G&A expenses are expected to increase year-over-year as a result of the additional assets coming online. We expect full year 2019 dividend coverage to be about 0.9 times, assuming a flat $3.64 annual dividend, with significantly higher coverage in the second half of 2019 than the first half. Our current 2019 net growth CapEx estimate for announced projects is approximately $2.3 billion, inclusive of the additional pumps for Grand Prix, the expansion at Galena Park, and the CapEx associated with the Williams transaction versus what we published back in November, and also reduced spending in the Badlands from the minority interest sale. Full year 2019 maintenance CapEx is forecasted to be approximately $130 million.
Our line of sight to significantly ramping EBITDA in the back half of 2019, 2020 and beyond will result in a stronger balance sheet, increasing dividend coverage and additional free cash flow. Our focus remains on executing on our strategic priorities to increase long-term shareholder value. With that, Tom, please open the line for questions.
Sure. Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number 1 key on your touchtone telephone. Again, that's star then the number 1 key on your touchtone telephone. If your question has been answered or wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Michael Blum from Wells Fargo. Your line is now open.
Good morning, Michael.
Good morning, everyone. Couple things here, then I'll jump back in the queue. I guess, couple of questions on Badlands. Can you talk about what the MQD is to Blackstone? Then can you just elaborate a little bit on the liquidation preference if Blackstone wants to sell, what happens? Or if you want to sell. Anything you could just further expound upon that?
Sure. Obviously, we got $1.6 billion of capital up front, and we said that there is an MQD ahead of Targa, a minimum quarterly distribution. Given this is a rapidly growing business, that implies that the share of distributions in the first couple of years is larger than the share of distributions after that. That was important to allow Blackstone to de-risk their investment and for us to maximize the upfront proceeds that we received. With regards to the liquidation preference, it's well outside the five-year-plus investment horizon that investors typically think about well outside of our plan period. There are options for us to repurchase the interest in the Badlands, and there are also options whereby if there was a sale of the assets and 100% sale, Blackstone would receive a preference in that liquidation to get their proceeds back first.
Okay. Then, will there be taxes paid? Is there a gain on sale here with taxes? If not, how does this impact your NOL, and when do you think you would be a cash taxpayer?
We don't have a change to the longer-term outlook that we have in terms of when we become a taxpayer because of this, Michael. The way that some of the benefits from some of the changes in tax legislation benefit us, in the relative near years versus later on, means that there really isn't much of a tax impact related to this transaction. No change on the guidance that we don't expect to be a cash taxpayer for some years now.
Okay, great. Then last question from me for now. You didn't make any comments on the longer-term guidance that you've provided for EBITDA. Should we assume that that is unchanged, or is there a way to think about that in light of the change of 2019? Thanks.
I think from our perspective, the long-term outlook absolutely remains intact. We've now sold a 45% interest in the Badlands, which is a detractor from that longer-term outlook. We've also announced the Williams transaction. Similar to when we put out the first long-term outlook in June of 2017, this isn't something that we expect to update on a monthly or quarterly or even semi-annual basis. I think that you can tell from our remarks that the long-term outlook for our business is as strong as it's ever been, and we're very much excited about it.
Thank you.
Thanks, Michael.
Your next question comes from the line of Shneur Gershuni from UBS. Your line is now open.
Hi, good morning, guys. I guess to start off, I was wondering if we can sort of talk about the 2019 guide for today. I was wondering if you can sort of compare us apples to apples from where it was in November versus now. Obviously, there's the commodity revision, which makes sense, but I was wondering if you can sort of talk about some of the specifics. Is there an adjustment for the canceled splitter? They gave you a payment upfront, so have you adjusted that lower? What's the amount that you're assuming for Badlands? Should we assume something for frac spreads? Just some of the details for us to effectively look at it on an apples-to-apples basis.
We tried to give you some color to do that, Shneur, in our scripted remarks. I think that you hit a lot of the key components head-on. The Badlands partial interest sale is the biggest delta when we look at what we put out today versus what we described in 2019, or in November, which was a preliminary look at 2019. As we worked with our board under a lower price deck to basically redo the plan that we typically do in the fall, we saw lower prices in November and December, decided to redo that plan. What you're also seeing is a result of the lower commodity prices plus lower volumes related to that new plan. Our perspective is that we will be able to manage the splitter for Targa. We will be able to generate margin for the splitter.
There is some margin included or embedded in our 2019 EBITDA based on our view of how we can manage that asset for our benefit without the terminated contract.
Okay, fair enough. Just turning over to CapEx for a minute. It was revised upwards by about $300 million. I recognize that CapEx starts to step down next year after some of the big projects come into place. There has been some, call it 2020 and 2021 growth CapEx creep over the last couple of quarters due to strong growth. We now have E&Ps living within cash flows and rig counts have kind of flattened. Do you see a slowing in CapEx? Is there a likelihood that we won't see any further CapEx creep for at least 2020?
Shneur, this is Joe Bob. Back on my opening remarks, I was trying to address that head-on. As we have benefited from tremendous opportunities, we have had what you described as capital creep. I described it as capital blessings. Those are high-return strategic investments that every investor looking under the covers would want us to make. I think most investors and analysts like you looking from the outside in, knowing what they are and when they're coming on, wanted us to make those investments. We've got terrific visibility of the cash flow that's going to be created with that. Whether like your team, you're modeling it from the bottom up, one project at a time with our comments of when they're coming on and that they're coming on highly utilized, or if a more top-down simplified calculation of it would say, what's that capital work in progress?
It's $2.5 billion, much of which comes in online in the second half at conservative multiples, shows you the cash flow that's being generated. We also described that we have been using discipline and prioritization, only doing the strategic and high-return projects, and we will continue to do so. It's natural that we had a slug of them because of the quality of our assets, the quality of the footprint, and the Permian basis of that footprint. We have, quote, "caught up some." Building 2 fractionators at once catches you up. Building multiple plants in the Permian at the same time begins to catch you up. I think our comment says that we expected lower CapEx in 2020 and even lower as a percent or as a ratio to that EBITDA. I feel very good about that position. It's a terrific position.
If you're comparing it to the other E&P companies and the peers, we should be slowing down slower than them because we have so many more opportunities. That may have sounded a little overly passionate. I do see the headlines. We talk with investors about it most every time we talk because they want to understand how we feel about that opportunity set and the fact that to some extent, they're waiting a little longer for free cash flow. In the meantime, they've experienced the growth, and now they're going to experience the de-leveraging and the rapid improvement in coverage. Did that address the question?
It definitely does. I did have one final accounting related type question. When we think about the Badlands asset sale, based on your response to Mike, there doesn't seem to be any tax proceeds and so forth. When we think about it from the cash flow statement perspective, first of all, is the agencies going to treat it completely as an equity infusion? Secondly, does it show up in investing cash flow, or will it show up in financing cash flow given the structure with the MQDs and so forth?
As we worked through the potential transaction, we obviously informed the rating agencies as we worked through different potential structures. Our view is that both Moody's and S&P will give it equity treatment.
Will it show up as financing cash flow, or will it show up as investing cash flow?
It's going to be consolidated. Since we operate and control, it's still going to be a consolidated entity with a minority interest cutback, how we handle our other consolidated entities with minority cutbacks.
The usual NCI cutback.
Yeah.
Got it. Perfect. Thank you very much, guys. I will jump back in the queue.
Okay, thanks.
Your next question comes from the line of Jeremy Tonet from J.P. Morgan. Your line is now open.
Good morning. Just wanted to touch on the Badlands transaction one last time, if I could. I was just wondering if you could expand a bit more as far as why 45% was the right level to go for in this deal as opposed to a smaller number or a bigger number, and how you see that stacking up against ATM issuance at this point.
I think that everything that you've seen us do over the last couple of years, Jeremy, is reflective of the fact that we think our equity is undervalued, particularly when we look at the strength of our long-term outlook and the visibility that we have for that long-term outlook. For Targa, when we first contemplated a potential minority interest sale in the Badlands, one of our key goals has always been to maximize the upfront proceeds that we received to help de-risk everything else that's going on at our company. That's why 45% seemed like a great number. We would've been willing to sell up to 49%, or we would've been willing to sell less if we didn't get a right valuation or a right structure.
What Blackstone was able to do for us was to help us maximize those upfront proceeds in a structure that we're very comfortable with.
That's helpful. Thanks. You touched on a couple different times in the call, Targa's really growing into a fully integrated player in midstream from wellhead to export there. It seems like this enables you guys to win new growth projects and capture things that give you better returns than maybe others in the industry can do. I was just wondering how you see the midstream industry evolving here. If others can't compete with you guys in winning these type of projects, how do you think about industry consolidation progressing going forward?
That's a very interesting way of asking the question. I think what I said is there are only a very few of us who look like that, and you all could list them. Guess what? They can compete with me. Okay? That short list of players who have a gathering and processing footprint, a natural gas liquids pipeline, a presence at Mont Belvieu, that's quite competitive. For example, that large investment-grade energy player in the Delaware, they only considered folks that looked like that. We did win that one. The Williams transaction probably had some competition. We did win that one. We don't win all of them. By being that integrated player with that scale, I think customer fit reputation, we're going to win our share, maybe more than our share. Then we get the blessing of prioritizing opportunities.
Our team is very focused on that over the course of this year and next year. How do we get the biggest bang for the buck, and how do we work on more smaller projects and less larger projects? It's a function of a terrific footprint, that now terrific integration, and the reputation we've put in place with our customers.
That's all for me. Thanks for taking my question.
Okay, thanks.
Your next question comes from the line of Colton Bean from Tudor, Pickering, Holt. Your line is now open.
I just wanted to follow up on the commentary there around the 2020 and 2021 capital spend. Is the expectation of lower spend a reference to the preliminary guide of $1.8 billion, or is that more a reference to 2019 levels?
I actually described 2019 and 2020, I believe, Colton, and if I didn't, that's what I meant. Yes, we're trying to have 2020 capital lower than 2019 capital. I don't think I went further than 2020. We believe we can do that. We believe that that's natural. We've already been prioritizing our capital expenditures. Prioritized capital expenditures came in at a pretty high level, particularly relative to the EBITDA that we had in time. The additional good news is with a lot more EBITDA coming on at the end of 2019 and into 2020, we have, even at a flat level or a slightly reduced level, that's less of a strain on the organization than the current level was at our current EBITDA. We would like to get to that space of being free cash flow.
We can't do that as quickly as a peer that doesn't have very many opportunities.
I don't think that our view has changed much either, Colton, that when you think about November, that $1.8 billion aggregate number that we put out for 2020 plus 2021 preliminary CapEx, that we really see that changing much based on what we have looking forward. The Williams deal will add some incrementally to that, a small amount, particularly when you think about the structure of that transaction and what it will bring to Targa on transport on Grand Prix and fractionation at Mont Belvieu. That $1.8 billion also already included the other projects that we thought were in the near-term horizon. That view hasn't changed at all in terms of incremental processing plants and an incremental frack.
Got it. Given the changes that we've seen on the upstream budget, no impact thus far to that $1.8?
No.
Got it. Okay. Just circling back to Scott's commentary on Galena Park, I think as of Q3, you'd mentioned the possibility of an expansion to maybe 10 million-11 million barrels a month. It sounds like that's substantially higher. Can you guys just provide a bit of commentary as to what's allowing you to get to that 11-15?
Yeah. The first time we talked about expanding there was adding a 20-inch pipeline between Galena Park and Mont Belvieu to allow us to flow additional butane as well as doing some dock work. This expansion that we talked about today is adding refrigeration capacity, which is going to basically more effectively allow us to utilize those pipelines. It really depends on the customer demand and how much ultimate butane demand there is. It's a pretty wide range, 11-15. To the extent there's more butane demand, we'd be at the high end of that range. To the extent there's less butane demand, we'd be at the low end of that range. It's really the next step to get us to that real next leg of significant expansion. Adding the refrigeration was a key piece to us.
Okay. Just on the refrigeration, is that part of the capital increase that we've seen from that two to two three?
It is, yes.
Got it. Thank you.
That was also included in the $1.8 billion for 2020 and 2021. That accelerated into 2020. Obviously, that changes what the 2021 number may have been depending on when we had it staged.
I think that's helpful. Thank you.
Our next question comes from the line of Christine Cho from Barclays. Your line's now open.
Hi, everyone. If I could start with the project with Williams. That lateral that you're extending into the stack, in the prepared remarks, you talk about third-party opportunities tied to that. What is the opportunity set over there, aside from the Williams volumes? Is it mostly new plants that haven't yet dedicated their volumes, or are there some legacy plants that have contracts coming due in the beginning of next decade that could be fair game?
Yeah. I'd say it's both. There are some new plants going in. We're having discussions with new customers up there about a potential dedication of their plants or volumes from the area. There is some of that. Of course, there's a portfolio of plants up there and in that region that have various contracts that may be rolling off over time. We're having discussions with both of those parties.
The initial capacity of 120,000 barrels per day, what could that be expanded to ballpark-wise?
Well, I guess it really depends on what line we ultimately lay up there and what kind of pumps we put on it. We're still finalizing that. We expect 120,000 to be a good initial capacity, but it ultimately depends on the pipelines, not only that pipeline, but also downstream of that as well.
Okay. Then your partner in some of the Permian processing plants have indicated an interest to sell their stake in the JV. How do you guys think about this? Do you find it necessary to own the whole thing if that partner wants to exit? Or are you fine letting the interest get sold to someone else given the multiple you just sold an interest for in the Badlands?
Our partner in the Permian is a terrific partnership. I think they say similar things about the Targa relationship. We work very well with Pioneer and have excellent communications. We work strategically well. The partnership's strategic for both of us. I believe that most of their comments about potentially selling their interest in the Permian are in response to questions on calls like these and less playing offense about it. Those discussions could occur. We don't have a driving force on either side of that equation. It's different. It's just different to think about how that might be monetized to Targa than how it might be monetized to another player.
Fair enough. Last question. Can you just remind me, the Outrigger payment, is that included in growth CapEx or is that incremental to growth CapEx?
It's incremental.
Okay, great. Thank you.
Okay, thanks.
Our next question comes from the line of Tristan Richardson from SunTrust. Your line is now open.
Hey, good morning, guys.
Good morning
corporate expenses year-over-year in 2019. Fully appreciate that the new projects will contribute to higher overall corporate costs. Should we think about the 4Q sequential step-up as a general representation of how to think about 2019 G&A costs?
I think for both OpEx and G&A, you should expect that year-over-year, those costs will be up a fair amount, just given how many projects are being put into service. I think when you look at where we were in the fourth quarter and the third quarter, which was actually fairly flat from an OpEx perspective. On a go-forward rate, I would continue to have somewhat of a ramp in there on a Q1 through Q4 basis in 2019.
Helpful. Thank you.
And there's-
Go ahead, Matt, sorry.
There's movement, too. On any one quarter, you're referencing one quarter. I tend to look at it, trend and look at it for a total year versus a total year. As new volumes, new things come on, is a better way to look at than any one quarter or any one segment sequentially.
Sure. Thank you. Just I think the implied multiple on the asset sale surprised a lot of folks. Given the magnitude of the proceeds you guys expect paired with your outlook for CapEx, do you anticipate the proceeds effectively take you out of the ATM market for 2019?
Repeat what you said.
I think that the Badlands transaction was incredibly important for us to get done, the fact that we were able to get it done on the timeline that we did was also very important. So I'd like to take this opportunity to thank everybody that worked on it internally. To reiterate what I said earlier, Tristan, I think that we've demonstrated that we have a view that our equity is undervalued and have shown a strong desire to minimize how much equity that we issue at these levels. As we look forward, we're incredibly well-positioned as we wait for a significant ramp in EBITDA, we'll continue to proactively approach funding to the extent that we need to manage leverage.
Jen, thanks very much. Appreciate it.
Thanks, Tristan.
Our next question comes from the line of Spiro Dounis from Credit Suisse. Your line is now open.
Hey, good morning. Just one more on Badlands. Hopefully, just to what degree were those assets constrained on growth prior to the JV? Just trying to get a sense if this new JV actually allows you to fund that asset more and grow Badlands faster, and to what degree does that offer you new opportunities to, I guess, develop egress type long-haul assets out of the Bakken?
Since you said JV twice, we probably ought to clarify. We recently did another JV in the Badlands, as you will recall, which is how we're building the current plant. It was constrained prior to construction. We're building that with Hess, and that's a Badlands JV. This additional investment by Blackstone is not changing the relationship of that first JV, and it is providing funding, in my view, to the entire corporation. We're still going to pursue the attractive high-growth opportunities in the Badlands to the extent they're available, and we wish that that currently being constructed plant were up and running today because it is constrained. Does that help?
Yeah, no, it does. Appreciate the clarification there. Second one, maybe a bit of a follow-up on Tristan's, but I think by our numbers, it looks like Badlands, the proceeds there largely get you kind of all the way through 2019 from an equity standpoint. I guess, are you guys done selling assets at this point, or could we see you do a little bit more, but maybe for more opportunistic reasons?
We've tried to be very transparent, particularly as our capital program has increased, to tell you what we're thinking when we're thinking it. I think that transparency has been very important for all of our investors. At this time, we are not in the process of selling any other assets. It's our fiduciary responsibility if anybody calls us and wants to take a look at any of our assets to consider it. No, we don't have any active processes underway right now, Spiro.
Spiro, I hope as part of that transparency, what you also hear us saying is the rapidly increasing cash flow second half of this year and into 2020 does a whole lot to remove concern about funding. That's the best source.
Yeah. Okay. No, that's clear. Appreciate it. Thanks for the color, guys.
Thank you.
Our next question comes from the line of Danilo Giurdanella from BMO Capital Markets. Your line is now open.
Good morning, thank you. I have mostly follow-up questions. Firstly, Jen, with respect to guidance, do you see any visibility to potentially contract the splitter this year, or are you fully embedding into guidance that the splitter will be running on a merchant basis?
I believe we said in our scripted comments that we're working on both. We're looking at commercialization of the asset both for us and with third-party agreements. It may be a combination.
Within guidance, what are you assuming? That it's merchant or fully contracted?
It's a modest merchant assumption at this time.
We put in a conservative assumption, part of the bridge was it was lower than the all-in payment that we expected to receive on a contracted basis. Current economics would actually imply that it would be higher than that. We put in, just for startup and timing and getting it ramped up, we put in a modest assumption below the current economics and below the previously contracted amount.
Thanks for that, Matt. My second question is with respect to the Bakken JV. Can you, again, explain what the MQD guidance is, as it relates to the EBITDA guidance impact between the 2019?
I think that what we said earlier is that because we received a significant upfront payment from Blackstone, and because they're trying to de-risk their investment as they move through time, given the type of investor that they are, what that would imply with the minimum quarterly distribution, which they receive ahead of us, is that their share of distributions in the first couple of years is larger than what they would receive on a percentage basis thereafter. That's fully incorporated into our 2019 guidance.
Got it. Okay. Thank you. Those are my questions.
Okay, thanks.
Our next question comes from the line of Becca Followill from U.S. Capital Advisors. Your line is now open.
Good morning, guys.
Morning.
On Whistler, I think it's a change that you don't expect to have an equity stake. Can you talk about the rationale for that at this point?
Yeah. That project, as we said all along, is a strategic project for us with the connectivity to our gas plants in the Midland. A good takeaway from the Permian. Clearly, we're aligned to get more residue takeaway underwritten and done out of the Permian so we can continue to make money on the GMP side, Grand Prix fractionation, et cetera. There are other ways to support that project. We are still working with the other potential customers and equity owners to support and get that over the line. You don't have to have an equity interest, which would then bring capital required with that to support the project. We're still working with them and hope to get that pushed over the line. Just to be clear, we do expect no funding for 2019 and don't expect to have any meaningful ownership equity in it.
You originally were going to be the operator of that pipe. That's no longer the case?
I'd say in our initial discussions, when we announced the deal, there's been changes for what partners have come in and come out. There's been some back and forth on those items, such as operating construction. Those details were being ironed out, we're still negotiating those and coming to the right answer for that. We were working on those all along the way, what we wanted to say here is, because CapEx is a concern for investors on projects, that you don't need to anticipate any CapEx related to this project.
Super. Thank you. One more on the Badlands. I know these are good assets, and they're expected to grow, but we've all been through way too many cycles. What happens in the event that oil does drop precipitously, and these assets don't perform? Are you obligated to pay Blackstone first and then Targa second?
The part of the attractiveness of a fee-based system like the Badlands, Becca, is that we were able to demonstrate growth even during at least the most recent cycles that we've experienced, and that helped to get our potential partners comfortable with the asset profile there. The Minimum Quarterly Distribution, to the extent that there are funds available to be paid out, Blackstone will be paid out first. To the extent that there aren't, those will accrue.
Super. Thank you. The last one is just, you talked about the rating agency treatment, that it can be treated as equity. In light of the CapEx budget going higher and the EBITDA estimates coming down for 2019, and I think coverage looking fairly low, any thoughts on how the rating agencies are thinking about this? Are they willing to bridge you to 2020 when things look materially better? If you can comment on that. Thank you.
We've tried to be incredibly transparent with the rating agencies over the last couple of years. We visited them more than we have in prior history. We've also tried to keep them informed and apprised of any developments as we've moved through. I think at this point, we don't see any different. We frankly have spent a lot more time discussing with them that rapid EBITDA growth that we see back half of 2019 into 2020 and 2021, and what that means for the overall enterprise.
I'll just remind everyone, they get forecasts of that. Then when we go in the next time, and the forecasts are even better, and we go in the next time, and the forecasts are even better, we've got pretty good credibility with them on rating agency forecasts, which you could probably assume are at least among the conservative part of our range. That credibility with the rating agencies, when we walk in, they say, "That looks great. Thanks again. Appreciate the dialogue." Sometimes they say, "And you're not our problem.
Super. Thank you, guys.
Thanks, Becca.
Okay, thanks.
Our last question comes from the line of Craig Shere from Tuohy Brothers. Your line is now open.
Hey, Craig.
Hi. Good morning.
Good morning.
Just want to get clear on the EBITDA bridge relative to prior guidance. Vitol backing out on the splitter, combined with the disproportionate versus 45% interest of EBITDA accruing to Blackstone because of those minimum quarterly payments of the bridge that would get us to lower guidance net of the lower commodity deck.
We also said the only thing I think you may have left out is implied is that we had gone back really bottom up to try to do the best we could to understand what producer customers and downstream customers were doing in the new environment after the late November and December commodity price drop. That's an effort that we were able to do until a little past the middle of January when we started preparing it for our February board meeting, just as our producer customers were doing the same thing. I think we've done a reasonably conservative job on that, and that change in activity associated with the new commodity price levels has been baked in the best we can.
Right. That left the volumetric issue. Would you
No, with the volumetric issue, you both had a delta P and our best estimate of delta V.
Right. Now, my question is, in terms of proportionality, would you say that the volumetric piece of it is perhaps in the area of the downdraft on the splitter?
I don't think we're going to give more color on the individual pieces. We've tried to frame for you the key deltas. Number one, clearly being the Badlands 45% minority interest sale. After that, we've got the delta V and the delta P. As Matt answered earlier on the splitter, we are assuming modest margin for that asset in 2019. Frankly, I think we think that we can outperform potentially versus underperform, depending on market conditions, but that's also an assumption that's made in there.
We don't have it completely up and running yet either.
Correct.
Understood. On an ongoing basis, this all obviously skews the EBITDA growth even more out to the next couple of years versus 2019. In terms of you're going to get more proportional EBITDA from the Badlands. Eventually, something will be done with the splitter. You would expect that proportional ramp to be much harder than previously.
Yeah, I think that's right with those items you outlined, plus with the Williams deal. That's additional margin that's going to show up later as well.
Okay. I apologize if I'm reading the tables wrong, but was there a big shift in SouthOK volumes to the Central Oklahoma JV? It looked like on a net basis, we had a drop sequentially, though on a gross basis, volumes were up.
There's some ethane rejection numbers going on in there too.
Yeah, there is. Yeah, we brought on Hickory Hills in Q4. There could be some noise around the start-up of Hickory Hill and rejection recovery related to getting on spec for takeaway issues in that. I'll look at that a little bit more, but it was increased volumes.
There are moving pieces.
Yeah.
The sequential may have some interesting numbers. It didn't jump out at me, but I often look at Oklahoma together.
Right.
I would say that if you're seeing particular noise, it's those two things, the Hickory Hills start up and changes in ethane rejection because it was moving around a bit.
We'll follow up with you, Craig, if it's anything different than that, but I think that's the answer.
My last question, just some clarity on longer-term volume perspective today versus the third quarter. Do you still see a late 2020 or at least 2021 filling up of the initial 300,000 a day on Grand Prix still on the table?
Yes, what we said was 250,000 barrels at some point in 2020. I think we feel-
Even better about that.
Even better about that. This is the second kind of time we've talked about adding pumps, and getting potentially up to that 450,000 barrel capacity. I think we feel better about that guidance, although we haven't updated that, just to say we feel better about it.
Okay, great. I appreciate the time.
Okay, thanks.
Thank you.
That concludes our question and answer session. I would like to turn the conference over to Sanjay Lad.
Thanks to everyone that was on the call this morning, and we appreciate your interest in Targa Resources. I will be available after the call for any questions you may have. Thank you. Have a great day.
This concludes our conference call. Thank you for your participation. You may now disconnect.