Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Targa Resources Corporation 4th 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. 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 Q4 2018 earnings call for Targa Resources Corp. The 4th quarter earnings release for Targa Resources Corp, Targa, TRC or the company along with the 4th quarter earnings supplement presentation are available on the Investors section of our website at targaresources.com. In addition, an updated investor presentation has also been posted to our website. 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 provision of the Securities Act 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 ks for the year ended December 31, 2017, and subsequently filed reports with the SEC. Our speakers for the call today will be Joe Bob Perkins, Chief Executive Officer Matt Molloy, President and Jen Kneale, Chief Financial Officer. We will also have the following senior management team members available for Q and Pat McDonough, 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 Q4 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 Q4 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 and what should be viewed as another transformational year for the company. Over the course of 2018, including only the major headlines, Targa added approximately 860,000,000 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 1,200,000,000 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 2 new 110,000 barrel per day fractionators at our Mont Belvieu complex, created innovative development company joint ventures or so called DevCos that provided $190,000,000 of capital reimbursement at closing.
In total, potential capital savings of up to $960,000,000 on projects already in process, raised approximately 684,000,000 dollars of common equity and issued $1,000,000,000 of senior notes over the course of the year. Generated approximately 2 $30,000,000 in proceeds from asset sales and 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 target 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 1 for our talented and dedicated employees across the company. Now, we're only 1.5 months into 2019 we've not slowed down. So far in this new year, we closed on an aggregate $1,500,000,000 of 8.5 year 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. And we very recently executed definitive agreements for the sale of a 45% interest in our Badlands business, generating proceeds of approximately $1,600,000,000 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. 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 I'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 in 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 increase target 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 the 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 1, Targa has a franchise Permian GMP position and diversity from other strong GMP positions. Number 2, 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 3, Targa has an unmatched growth picture among significantly sized midstream companies and has a growing amount of fee based business.
And to summarize, Targa is clearly on path to join a short list of high performing, scaled, investment grade midstream companies. And on that path, we'll 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 accompanying our commercial success. So 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 twenty nineteen, such projects are coming online, highly utilized and creating a rapid increase in our cash flow situation.
And we will continue to prioritize capital expenditures, resulting in lower levels of CapEx and even lower levels relative to our EBITDA. Target is clearly on a path to join a short list of high performing, scaled, investment grade midstream companies. And on that path, we'll 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 translate into our positioning for 2019 and beyond. Overall, Targa's 20 18 inlet volumes in the Permian increased 24% over the previous year. In 2018, total field GMP increased 17 percent 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 expansions to come online throughout 2019. In Permian Midland, our Johnson plant came online late September and was quickly highly utilized. And our 250,000,000 cubic feet per day Hopson plant will begin operations in early second quarter and is also expected to be highly utilized at start up. The next 250,000,000 cubic feet per day Pembroke plant is expected to begin operations late in Q2.
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 250,000,000 Cubic Feet Per Day Falcon Plant remains on track to be completed in the Q4 of 2019, and the 250 1,000,000 cubic feet per day Peregrine plant is expected to be completed in the Q2 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 Belvide. 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 Q2 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 the target in service of Q1 2021 and is expected to cost approximately 200,000,000 As part of this deal, Targa provides Williams with an initial option to purchase a 20% equity interest in 1 of Targa's frac trains 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 Q4 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 Q2 and is expected to be highly utilized at start up. We expect market to remain tight throughout 2019 as increasing Y grade NGL supply is directed to Mont Belvieu from new pipelines. Construction is underway on 2 new Targa 110,000 barrel per day fractionation trains, Trains 7 and 8. They are expected to be online in the Q1 and Q2 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 Q3 of 2020, our current effective export capacity of 7,000,000 barrels per month will increase to approximately 11,000,000 to 15,000,000 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 Q4 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 3rd 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 Q4 and present our 2019 operational and financial outlook.
Thanks, Matt. Good morning, everyone. Targa's reported quarterly adjusted EBITDA for the 4th quarter was $376,000,000 4th quarter EBITDA included recognition of the remaining $32,000,000 cash payment associated with the terminated splitter agreement. Normalizing for the splitter deferred revenue recognition, adjusted EBITDA for the 4th 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 4th quarter was 0.91x.
During the 4th quarter, we recognized a $210,000,000 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 $5,300,000 in the 4th quarter when compared to the 3rd quarter. 4th quarter Permian inlet volumes 7% over the Q3 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 4th quarter crude oil gathered volumes in the Badlands increased 4% over the 3rd quarter, driven by continued strong production growth across our dedicated acreage. Permian volumes gathered in the 4th quarter were down 9% over the 3rd quarter due to temporary disruptions at 3rd party facilities. In our Logistics and Marketing segment, operating margin decreased $23,000,000 in the 4th quarter when compared to the 3rd 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 remained highly utilized, averaging about 450,000 barrels per day in the Q4 despite that temporary curtailment of Y grade NGL supply volumes to Mont Belvieu from the previously mentioned operational disruption on a 3rd party NGL pipe.
At our Galena Park facility, LPG exports remained strong during the 4th quarter as we averaged 6,500,000 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 $308,000,000 with the payment payable in May 2019. The $21,000,000 decrease in the contingent consideration compared to the 3rd quarter estimate was driven by lower forecasted volumes, partially offset by a shorter discount period.
During the Q4, 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 percent of condensate, 75% of natural gas and 70% of NGLs and 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 $1,500,000,000 of 6.5% and 6.7 8 percent senior notes due in July 2027 January 2029, and 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. As we look at our maturity stack, we feel very well given our next meaningful maturity is in May 2023.
On a debt compliance basis, CRP's leverage ratio at the end of the 4th quarter was approximately 4.1x versus a compliance covenant of 5.5x. Our consolidated reported debt to EBITDA ratio was approximately 4.9x. Full year 2018 net growth CapEx was $2,700,000,000 and net maintenance CapEx was $128,000,000 Spending in the 4th quarter was higher than we estimated in November. Given 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 Q4 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, the funds managed by GSO Capital Partners and Blackstone Tactical Opportunities, collectively Blackstone, for $1,600,000,000 We expect the transaction to close in the Q2 of 2019 subject to customary regulatory approvals and closing conditions.
Under the terms of the executed agreements, Targa will continue to be the operator who 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 form a 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 $4,300,000,000 Pro form a for the Badlands sale, our compliance and consolidated reported debt to EBITDA metrics were 3.4x and 4.3x, respectively, at the end of the 4th 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 point 8 5000000000 to 1.95000000000 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 Oak and the Badlands to be higher than average 2018. Collectively, we expect total field GMP natural gas inlet volumes 4 5000000000 to 3.65000000000 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 increase year over year, largely driven by growth in our Permian G and P volumes and the addition of Train 6. Pro form a for the 45% interest sale in Badlands, which again is expected to close in the Q2, we expect full year 2019 adjusted EBITDA to be between $1,300,000,000 to $1,400,000,000 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, 1, and the largest impact item, the 45% sale of the Badlands, which includes a minimum quarterly distribution of Blackstone ahead of Targa in a rapidly growing business 2, 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.
And 3, lower volumes from reduced activity at that lower price deck. 1st quarter adjusted EBITDA is expected to be sequentially lower than Q4 2018 and Q2 EBITDA pro form a 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 and 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 0.9x, assuming a flat $3.64 annual dividend with significantly higher coverage in the second half of twenty nineteen than the first half.
Our current 2019 net growth CapEx estimate for announced projects is approximately $2,300,000,000 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 $130,000,000 Our line of sight to significantly ramping EBITDA in the back half of twenty nineteen, 2020 and beyond will result in a stronger balance sheet, increasing dividend coverage and additional free cash flow. The long term outlook for Target is compelling and focus remains on executing on our strategic priorities to increase long term shareholder value. So with that, Tom, please open the line for questions.
Sure. Thank you.
Your first question comes from the line of Michael Blum from Wells Fargo. Your line is now open. Thanks.
Good morning, everyone. Couple of things here, then I'll jump back in the queue. I guess a couple of questions on Badlands. Can you talk about what the MQD is to Blackstone? And then can you just elaborate a little bit on the liquidation preference?
If I guess if Blackstone wants to sell, what happens or if you want to sell? Anything you could just further expand upon that?
Sure. Obviously, we got $1,600,000,000 of capital upfront, and we said that there is an MQD ahead of Targa, a minimum quarterly distribution. And given this is a rapidly growing business, that implies that the share of distributions in the 1st couple of years is larger than the share of distributions after that. And that was important to allow Blackstone to derisk their investment and for us to maximize the upfront proceeds that we received. With regards to the liquidation preference, it's well outside the sort of 5 year plus investment horizon that investors typically think about well outside of our plan period.
But 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 in 100% sale, Blackstone would receive a preference in that liquidation to get their proceeds back first. Okay.
And then, will there be taxes paid? Is there like a gain on sale here with taxes? And 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. So no change on the guidance that we don't expect to be a cash taxpayer for some years now.
Okay, great. And then last question for me for now. So you didn't make any comments on kind of 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 'nineteen?
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, but we've also announced the Williams transaction. So 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 semiannual basis. But 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? I mean, 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. So 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, which was or in November, which was a preliminary look at 2019. And then as we worked with our Board under a lower price deck to basically redo the plan that we typically do in the fall and then we saw lower prices in November December decided to redo that plan, what you're also seeing as 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 and we will be able to generate margin for the splitter.
And so 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 $300,000,000 I recognize that CapEx starts to step down next year after some of the big projects come into place. But there has been some, call it, 2020 2021 growth CapEx creep over the last couple of quarters due to strong growth. We now have E and 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.
And 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 $2,500,000,000 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 have 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 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 comments said 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 and P companies and the peers, we should be slowing down slower than them because we have so many more opportunities.
I'm that may have sound a little overly passionate. I do see the headlines. We talk with investors about it most every time we talk to them 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. But in the meantime, they've experienced the growth and now they're going to experience the deleveraging and the rapid improvement in coverage. Did that address the question?
It definitely does. I did have one final, I guess, kind of 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 agency is going to treat it completely as an equity infusion? And 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?
So as we worked through the potential transaction, we obviously informed the rating agencies as we worked through different potential structures. And so our view is that both Moody's and S and P will treat it as will give it equity treatment.
And will it show up as financing cash flow or will it show up as investing cash
flow? Well, Shneur, it's going to be consolidated. Since we operate in control, it's still going to be a consolidated entity within with the minority cutback, how we handle our other consolidated entities with minority cutbacks. The usual NTI cutback.
Yes. Got
Your next question comes from the line of Jeremy Tonet from JPMorgan. Your line is now open.
Good morning. Just want to touch on the Badlands transaction one last time if I could. And I was just wondering if you 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 kind of 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. So 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 derisk everything else that's going on at our company. And so that's why 45% seemed like a great number. We would have been willing to sell up to 49% or we would have been willing to sell less if we didn't get a right valuation or a right structure. But 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. And you touched on a couple of different times in the call. Targa is really growing into a fully integrated player in midstream from wellhead to exports there. And it seems like this enables you guys to win kind of new growth projects and capture things that give you better returns than maybe others in the industry can do. So 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. And 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.
But for example, that large investment grade energy player in the Delaware, they only considered folks that looked like that. And we did win that one. The Williams transaction probably had some competition. We did win that one. We don't win all of them.
But 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. And 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. But 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 Holton Bean from Tudor, Pickering, Holt. Your line is now open.
I just wanted to follow-up on the commentary there around the 2020 2021 capital spend. Is the expectation of lower spend a reference to the preliminary guide of $1,800,000,000 or is that more a reference to 2019 levels?
I actually described 2018 2019, I believe I mean 2019 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. But prioritized capital expenditures came in at a pretty high level, particularly relative to the EBITDA that we had in time. Now 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 $1,800,000,000 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. So 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 Bellevue. And then that $1,800,000,000 also already included the other projects that we thought were in the near term horizon and that view hasn't changed at all in terms of incremental processing plants and an incremental frac.
Got it. And so given the changes that we've seen on the upstream budget, no impact thus far to that 1.8? Percent?
No. Okay.
And just circling back to Scott's commentary on Galena Park, I think as of Q3, you had mentioned the possibility of an expansion to maybe 10,000,000 to 11,000,000 barrels a month. It sounds like that's substantially higher. So can you guys just provide a bit of commentary as to what's allowing you to get to that 11% to 15%?
Yes. The first time we talked about expanding there was adding a 20 inches pipeline between Galena Park and Mont Belvieu to allow us to flow additional butane as long as 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. So it really depends on the customer demand and how much ultimate butane demand there is. So it's a pretty wide range, 11 to 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. But it's really the next step to get us to that real next leg of significant expansion. So adding the refrigeration was a key piece to us. Okay.
And just on the refrigeration, is that part of the capital increase that we've seen from that 2 to 2.3? It is, yes. Got it. Thank you.
And that was also included in the $1,800,000,000 for 2020 2021. So that accelerated into 2020. So obviously that changes what the 2021 number may have been depending on when we had it staged.
Okay. That's helpful. Thank you.
Our next question comes from the line of Christine Cho from Barclays. Your line is 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 3rd 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?
Yes. I'd say it's both. There are some new plants going in and we're having discussions with new customers up there about a potential dedication of their plants or volumes from the area. So there is some of that. And then we're 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.
So we're having discussions with both of those parties.
And the initial capacity of 120,000 barrels per day, well, 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. So we're still finalizing that. We expect 120,000 to be a good initial capacity, but it ultimately depends the pipelines, not only that pipeline, but also downstream of that as well.
Okay. And 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 is 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. And it's different. It's just different to think about how that might be monetized to Target 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 gross CapEx or is that incremental to gross 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. Just thinking about 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? Is it general representation of how to think about 2019 G and A costs?
I think for both OpEx and G and 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 Q4 and the Q3, 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. There's movement too on any one quarter. You're referencing 1 quarter. I tend to look at it trend and look at it for a total year versus a total year. And then as new volumes, new things come on, is a better way to look at than any 1 quarter or any one segment sequentially.
Sure. Thank you. And then just I think the implied multiple on the asset sales surprised a lot
of folks. And just sort
of 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. And the fact that we were able to get it done on the time 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 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 and 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 of 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?
Yes. No, it does. I 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.
And 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 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, but no, we don't have any active processes underway right now, Spiro.
And 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.
Yes. Okay.
That's clear. Appreciate it. Thanks for the color guys.
Thank you.
Our next question comes from the line of Danilo Juvein from BMO Capital Markets. Your line is now open.
Good morning and 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. So we're looking at commercialization of the asset, both for us and with 3rd party agreements. So it may be a combination.
But within guidance, what are you assuming that it's merchant or fully contracted or mostly?
It's a modest merchant assumption at this time.
We put in a conservative assumption and 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. But we put in just for start up and timing and getting it ramped up, we put in a modest assumption below kind of 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 for 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 derisk 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 1st couple of years is larger than what they would receive on a percentage basis thereafter. And 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. 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?
Yes. That project, as I said all along, is a strategic project for us with the connectivity to our gas plants in the Midland, 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 and, etcetera. There are other ways to support that project. So 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. So we're still working with them and hope to get that pushed over the line. But we just to be clear, we do expect no funding for 2019 and don't expect to have any meaningful ownership equity in it.
But 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. So there's been some back and forth on those items, such as operating construction. Those details were being ironed out. So we're still negotiating those and coming to the right answer for that. So we were working on those all along the way.
And so what we wanted to say here is because CapEx is a concern for investors on projects that we don't need to anticipate any CapEx related to this project.
Super. And then on 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. So 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, then Blackstone will be paid out first. To the extent that there aren't, then those will accrue.
Super. Thank you. And then the last one is just, you talked about the rating agency treatment that it's going to be treated as equity. But in light of the CapEx budget going higher and 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. So 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 twenty nineteen into 2020 2021 and what that means for the overall enterprise.
I'll just remind everyone, they get forecast of that. And 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.
And sometimes they say, you're not our problem.
Super. Thank you, guys.
Thanks, Becca. Thanks.
Our last question comes from the line of Craig Shere from Tuohy Brothers. Your line is now open.
Hi, Craig.
Hi, good morning.
Good morning.
So just want to get clear on the EBITDA bridge relative to prior guidance. So Vittal backing out on the splitter combined with the disproportionate versus 45% interest of EBITDA accruing to Blackstone because of minimum quarterly payments is a significant part 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 December commodity price drop. Now 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. So that left the volumetric issue. So would you
No, with the volumetric issue, you both had a delta P and our best estimate of delta B.
Right. Now, so 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 1, clearly being the Badlands 45 percent 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.
And we don't have it completely
up and running yet either. Right.
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 splitter. So you would expect that proportional ramp to be much harder than previously?
Yes. 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. And now and I apologize if I'm reading the tables wrong, but was there a big shift in South Oak volumes to Centrahoma JV? It looked like on a net basis, we had a drop sequentially, though on a gross basis, volumes were up.
Some ethane rejection numbers going on in there, too.
Yes, there is. Yes, I mean we brought on Hickory Hills in Q4. So there could be some noise around the startup of Hickory Hills and Rejection Recovery related to being on spec for takeaway issues in that. I'll look at that a little bit more, but it was increased volumes.
They're moving pieces. Sequential may have some interesting numbers. It didn't jump out
at me, but I often
look at Oklahoma together. Right. And I would say that if you're seeing particular noises, those two things, the Hickory Hills startup in ethane rejection because it was moving around a bit.
But we'll follow-up with you, Craig, if it's anything different than that, but I think that's the answer.
Great. And my last question, just some clarity on longer term volume per perspective today versus Q3. 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. So 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.
So 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.
And 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.
And this concludes our conference call. Thank you for your participation. You may now disconnect.