Targa Resources Corp. (TRGP) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Targa Resources Fourth Quarter and Full Year 2015 Earnings Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference is being recorded. I would now like to introduce you host for today's conference, Ms. Jennifer Kneale. Ma'am, you may begin.

Thank you, Laura. I'd like to welcome everyone to our fourth quarter and full year 2015 investor call for both Targa Resources Corp and Targa Resources Partners LP. Before we get started I’d like to mention that Targa Resources Corp., TRC or the company and Targa Resources Partners LP, Targa Resources Partners or the partnership have published the joint earnings release which is available on our website at www.targaresources.com. We’ll also be posting an investor presentation on the website later today. I’d also like to remind you that on February 17, Targa Resources Corp posted its acquisition of all the outstanding public units not already owned by TRC of Targa Resources Partners LP. Any statements made during this call that might include the company's or the partnership's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor Provision of the Securities Acts of 1933 and 1934. Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the partnership's Annual Report on Form 10-K for the year ended December 31, 2014 and Quarterly Reports on Form 10-Q. Joe Bob Perkins, Chief Executive Officer; and Matt Meloy, Chief Financial Officer will be our speakers today. And other members of the management team are available to assist in the Q&A session if needed. With that, I will turn the call over to Joe Bob.

Thanks, Jen. Welcome and thanks to everyone for participating. Before we turn to the Targa’s results, I’d like to briefly discuss the closing of our buy-in transaction and also discuss our recently announced $500 million preferred private placement. Targa’s management team and our Boards of Directors are very pleased that we closed TRC’s acquisition of outstanding common units of TRP on February 17. From our perspective the simplification of Targa’s ownership structure may have been one of the most important transactions in Targa’s history and I want to thank our shareholders and common unit holders for their strong support of the transaction. But overwhelming the positive results of our shareholder and common unit holder votes reflect investor understanding that this was the right move for Targa. Targa is now better positioned from a leverage credit profile and dividend coverage perspective and that positioning creates financial flexibility as exceedingly important in uncertain markets. Looking forward we recognize that there are continued investor concerns around every company in the energy industry related to risk associated with capital markets access, risk from lower prices, risk of lower producer activity levels and volumes, counterparty credit risks and high interest in how each company will manage their balance sheet and dividends. We’ll try to address each of these topics related to Targa in some detail during the call. And we’ll try to provide you with color on our views of our risks, mitigation, how we think about the industry challenges that we face today. Let’s start with our financial flexibility and our financial strength. When we announced that TRC was buying TRP on November 3rd, we provided two illustrative scenarios. The street consensus case and the price sensitivity case showing those cases over a three year forecast period. Additionally, in our public presentations before and after that time, we’ve provided current EBITDA sensitivities for NGOs, natural gas and crude oil price changes. One can use the information previously provided in the price sensitivity case and the EBITDA sensitivities for commodity prices to extrapolate additional scenarios for different price and volume scenarios. And in so doing one of the likely resulting conclusion should be that Targa has financial flexibility across a wide range of potential scenarios. Also Targa is the solid high yield credit and does not have rating agency created constraints relative to maintaining an investment grade rating. And separately, Targa has significant cushion relative to complying with our financial covenants. That cushion, that flexibility has further increased by the preferred private placement that we announced last week. A week ago today, we announced that we had entered into binding commitments with affiliate of Stonepeak infrastructure partners to purchase $500 million of 9.5% series A preferred stock. This is a great transaction for Targa and for our new Stonepeak investment partners. One that we structured knowing that Stonepeak and other investors share a fundamental view that the strength of Targa's asset footprint are operational capabilities and track record of execution are not currently reflected in our current common stock and debt trading levels. From our perspective this structure accomplishes many of the objectives that we have and we announced about six months ago that we would seek alternatives to public common equity funding. The preferred pace in 9.5% dividend and the addition of warrants provides upside to our financial partner and to Targa's common shareholders. This structure mutually benefits Targa and Stonepeak under any recovery commodity price scenario. We stated publicly in a presentation in early September that we were going to find attractive funding sources other than public equity and we patiently work to develop an attractive addition to Targa's capital structure. With this preferred equity we are not trying to solve for any one specific variable or achieve any one specific metric instead consistent with what’s been going at Targa over the last year and a half and throughout the history of Targa and we identify a capital market opportunity or some other opportunity to do something to strengthen Targa for the future we have. In this case we indentified an opportunity to meaningfully improve our balance sheet and capital structure flexibility at very attractive terms. I think this is another example of our forward-looking mindset, similar to our small retailer preferred in October and our high yield offering in September. This is consistent with how we have always approached the business and will continue to do so in the future. We know there are significant uncertainty in the market, but one thing is certain Targa is blessed with tremendous workforce and a well positioned asset set, well positioned capabilities we will continue to identify opportunities to improve our balance sheet, maximize our financial flexibility and enhance our operational and commercial performance so that we are positioned to create a long term shareholder value regardless of the environment. We are also very excited to have Stonepeak as an important financial partner of ours. And we welcome Scott Hobbs as an observatory contributor to our board. Scott is a 35 year energy industry veteran and is well known by the Targa team. We expect to use the proceeds from the $500 million of preferred to reduce indebtedness which on the pro forma basis importantly reduces TRP’s year end compliance leverage ratio to 3.6x debt to EBITDA and we have approximately $2.2 billion of liquidity. I would like to pause here for a minute and discuss our leverage position as we see it, so that we can clear up any misperceptions that might be out there. Pro forma for the buy-in, the only real change to our capital structure is that we no longer have publicly traded units of NGLS. Our basic corporate structure remains the same in the placement of the debt. At TRC we have about $670 million of revolver, about a $160 million of term loan deal. At TRP we’ve a $1.6 billion revolver, a $225 million accounts receivable facility and publicly traded notes. There is a compliance covenant of 5.5x at TRP, but there is no other meaningful covenant or constraints on TRP leverage, TRC leverage or consolidated leverage. Pro forma for the $500 million preferred TRP compliance leverage is 3.6x versus that 5.5x compliance covenant. My simple math that means to me we have almost two turns of cushions. And with our long term often repeated target range for compliance leverage having been 3x to 4x we believe that Targa is currently in a very strong balance sheet position from a Targa historical perspective and probably relatively to others in the industry. Compliance leverage at the partnership level is the relevant constraint to overall Targa leverage. And we are appropriately comfortable managing Targa leverage at the TRP compliance level. As we move forward in time and peruse attractive growth opportunities managing the resulting consolidated leverage will be one factor for consideration. And any assumption that management won’t be focused on managing leverage is inconsistent with our track record. Just as managing leverage and managing our balance sheet is consistent with the Targa track record, Targa also has a track record for outperforming relative to other controllable factors. We are never satisfied with any set of internal forecast and I can promise you that the decision making associated with our company is fluid and evolving always seeking to outperform our internal forecast and expectations. We will continue to focus on taking the right forward looking steps for Targa, trying to improve on all controllable factors or any range of potential commodity price and activity levels. We spend each day focused on long term value creation that is our track record and that is our mindset. So in the phase of uncertain prices, uncertain activity levels and related uncertain volumes perhaps may even more uncertain by oil prices breaking $30 several times over the last month and a half, you will now be hearing a new Targa 2016 forecast, but what I hope you hear from me is confidence. Confidence that we have already taken significant steps to position Targa for success and a lower for longer environment and confidence that we will continue to identify ways to best position Targa for the future. Summarizing the reasons for that confidence, in the context of the uncertainties that I just mentioned strong 2015 results and strong business performance driven by an exceptional workforce and a premier asset footprint. Solid year end leverage and coverage we finished 2015 strong on multiple dimensions, substantial liquidity and impressive results in managing costs and improving margins. Over the long term we know that with our premier asset position we are well positioned to benefit from the upside potential of some of the following factors. NGL pricing improvements, ethane and other components and other commodity price improvements, increased ethane extraction, additional cost savings and continuous improvement in that area, increased exports, capture of new gathering and processing and capture a new downstream volumes. Continued contract restructuring to Targa's benefit and yet to be identified opportunities for high return capital projects. Let’s now turn to discussing Targa’s performance in 2015. Despite significant commodity price headwinds throughout the year, 2015 adjusted EBITDA was $1 billion $191 million. A 23% increase versus 2014. I want t o pause on that EBITDA number for a moment and provide some additional context. At the beginning of 2015 we developed and our board approved a formal plan in January of last year using the best information we had at the time for the expected performance of Targa and including the expected impact from the addition of the assets acquired in our mergers with Atlas. Looking back at actual prices in 2015 compared to the estimated commodity prices assumptions that we used for our 2015 board approved plan, our adjusted EBITDA was negatively impacted by about $130 million based on price alone. Meaning we were about a $130 million in the whole to solely for price variance. But our final adjusted EBITDA of $1 billion $191 million beat the 2015 board approved plan by about $25 million, the biggest compensating drivers for VAT mitigation, we reduced OpEx across the asset footprint, improved contract margins, lower G&A and better than expected downstream LPG export and storage performance. I am incredibly proud of the collaborative work of our employees to identify best practices related to OpEx maintenance capital and contracts and then applying and continuing to apply those best practices across all areas of our operations. I am also incredibly proud of the focus of our employees to deliver savings and operational results without sacrificing safety or environmental compliance and without saving today at the expense of tomorrow. Very important work in focus continues in 2016 and we expect continuous improvement in these areas. Our 2015 results provided for a year-over-year dividend increase of 24% at TRC and modest distribution growth of 5% at TRP as we held TRP distributions flat in the second, third and fourth quarters in response to the industry cycle. Pro forma for the completion of TRC acquisition of TRP under the price sensitivity scenario presented at announcement on November 3, then published again on December 3, we showed an estimated dividend growth of 10% of TRC in 2016 versus 2015. If we compare today's environment to that price sensitivity scenario presented less than four months ago, strip prices are significantly lower, producer volume forecast are lower and even more uncertain and equity and debt market volatility and pressures have increased. So what does that mean for Targa? Means that we will continue to make decisions the way we have throughout our history thoughtfully, prudently and patiently. We have taken steps to provide Targa with cushion which means we have time to continue to monitor markets, and to continue our dialogues with investors related to appropriate dividend strategy for Targa in this environment and across the cycle. For the fourth quarter of 2015, we elected to maintain our quarterly dividend of $0.91 per common share. Growing our quarterly dividend in the face of uncertainty didn't make sense to us or our board. Similarly, making a rash decision to meaningfully change our quarterly dividend didn't feel appropriate to us or board. We have many levers available to us as we think about our ability to execute in 2016 at market remains challenged, levers such as continued cost savings from OpEx, CapEx and G&A reductions. Pursuing identified opportunities to enhance EBITDA to improve volumes, contracts, high return in capital projects etcetera. Pursuing not yet identified opportunities to enhance EBITDA through similar cost savings or commercial actions. Consideration of assets sales or asset level joint ventures was strategic or financial partners and of course selected private equity placements or financing as demonstrated by the Stonepeak transaction. We are already pulling some of those levers. As evidenced by our results and actions in 2015 and early 2016. Other levers and actions along with future dividend policy will continue to be thoughtfully considered over time. So, that concludes my perhaps too long introductory remarks. Thank you for your patience and we hope that the remarks help reinforce how we were thinking about managing target in the current environment. I'll now turn the call over to Matt.

Thanks, Joe Bob. I'd like to add my welcome and thank you for joining our call today. Before we cover Q4 results, I just want to make sure there's nothing fusion about the goodwill issue mentioned in our press release from February 9. As discussed in that release and quantified today, the partnership identified the material weakness in the control related to its review of the purchase accounting calculations used to estimate the preliminary fair value. As of the accusation date of the assets and liabilities acquired in the ATLS Merger. Goodwill at the merger date has been restated and we subsequently recognize a non-cash provisional loss of $290 million associated with the impairment of goodwill in our Field G&P segment. This loss was non-cash and does not affect EBITDA. Now, turning our attentions to Q4, other Q4 results. Adjusted EBITDA for the quarter was 325 million, compared to 258 million for the same time period last year. The increase was primarily driven by the inclusion of TPL. Overall, operating margin increased 14% for the fourth quarter, compared to last year. And I will review the drivers of this performance in our segment review. Net maintenance capital expenditures were 25 million in the fourth quarter of 2015, compared to 24 million in 2014 bringing full-year 2015 maintenance CapEx to 98 million. And for 2016, we expect approximately a 110 million of maintenance CapEx. Turning to the segment level of summarized fourth quarter's performance on a year-over-year based is starting with our downstream business. Fourth quarter 2015 logistics and marketing operating margin was 15% lower than the same quarter last year driven a lower fractionation in LPG export margin. LPG export margins were down 15% from the fourth quarter of 2014, when we benefitted from record volumes. On our third quarter earnings call, we mentioned that we saw, we could continue to benefit from increased ship availability, growing waterborne LPG market, and globally competitive [indiscernible] prices with propane and butane which we expected to result in fourth quarter volumes being similar to the prior quarter. However, we exceeded those expectations in the fourth quarter of 2015 and exported 5.9 million barrels per month, an increase of 4% versus the third quarter of 2015. The first quarter has been strong today, but there is variability across quarters, some seasonality, and we believe that 5 million barrels per month of LPG exports is a good estimate for 2016. Fourth quarter fractionation volumes decreased 12% from the fourth quarter of 2014, driven by lower volumes as a result of cold weather impact on producer and processing plant operation, as well as some lower customer volume and small amount of contract roll out. We have received questions over the last several months related to frac contract expiration. So, want to provide some additional color. Over the next three years, less than 5% of Targa's frac contract expire in less than 10% over the next five years. Turning now to the Field Gathering and Processing segment. Our fourth quarter 2015 operating margin was up 64% versus the fourth quarter of 2014, driven by the inclusion of TPL, which more than offset the decline in commodity pricing. Fourth quarter 2015, natural gas plant inlet for the Field Gathering and Processing segment was 2.6 billion cubic feet per day. The overall increase in natural gas in that volume was due to the inclusion of TPL volume in West Texas, South Texas, South Oak and West Oak, and increases in volumes at SAOU, the Badlands, and Versado. At Sand Hills, volumes were essentially flat, given the system is basically full and we continue to move volume from Sand Hills to SAOU on the Midland County pipeline. Volumes declined in North Texas as a result of reduced producer activity. In the Badlands, crude oil gathered decrease to a 109,000 barrels per day in the fourth quarter, a 6% decrease versus same time period last year, primarily as a result of several produce for customers, shutting in existing production to frac new wells late in the fourth quarter of 2015. For the segment, commodity prices were 45% lower, natural gas prices were 44% lower, and NGL prices were 43% lower, compared to the fourth quarter of 2014. In the Coastal Gathering and Processing segment, operating margin decreased 24% in the fourth quarter compared to last year. Now, let's move on to discuss liquidity, capital structure and hedging. Pro forma for the 500 million preferred equity private placement with Stonepeak, Targa has liquidity of approximately 2.2 billion. As Joe Bob mentioned, this means that on a debt compliance basis, which provides us adjusted EBITDA credit for material growth project that are in process but not yet complete and makes other adjustments. Our pro forma leverage at the end of 2015 was 3.6 times that to EBITDA, versus a compliance covenant of 5.5. Our fee based operating margins was 76% in the fourth quarter of 2015, and we had 74% of margins and fee-based operations for the full-year 2015. For 2016, we estimate more than 70% of fee-based operating margins. For the non-fee based operating margins, relative to our current equity volumes from Field Gathering and Processing, we estimate that we have had approximately 40% of 2016 and 20% 2017 for natural gas volumes, approximately 40% for 2016 and 20% for 2017 of common state volume and approximately 20% of 2016 and 10% of 2017 NGL volumes. We have continued to look at opportunities to add hedges and expect to add some hedges over time through a combination of swaps in cashless collars. Moving to capital spending, in our January investor presentation, we published a preliminary estimate of 525 million or less of net growth capital expenditures in 2016, with approximately 275 million committed to four major projects. CBF Train 5, the Noble Group, and condensate splitter, the Buffalo plant in West Texas, and the joint venture with Sanchez and South Texas. All four major projects will contribute to cash flow in 2016. We have another 250 million of previously identified projects and expect to spend at least a 175 million of this amount. A larger part of that capital is expected to be spend in the Badlands where we will continue to build out our infrastructure and where as you have heard from us many times before, we have been delayed by right away on the Fort Berthold Indian Reservation. The Badlands growth capital will add infrastructure to net producing gas and oil to our system. Natural gas volumes being flared and crude oil volumes being trucked. These projects result in immediate additional cash flow and have a quick payback. Similarly, any additional capital spend in this category will generally only be spend if the returns are significantly in excess of our funding cost and we'll likely generate near term cash flow. Next, I'll make a few brief remarks about the result of Targa Resources Corp. January 19, TRC declared fourth quarter cash dividend at $0.91 per common share at $3.64 per common share on the annualized basis, representing in approximately 17% increase over the annualized rate pay with respect to the fourth quarter of 2014. TRC standalone distributable cash flow for the fourth quarter 2015 was 55 million and dividends acquired were 52 million. For the full-year 2015, TRC standalone distributable cash flow was 214 million compared to a 125 million in 2014. As of January 31st, TRC had 452 million in borrowings outstanding under a 670 million senior secured credit facility and 15 million in cash resulting in total liquidity of 233 million. The balance on TRC's term loan fee was a 160 million. I want to provide some additional information related to the tax attributes of TRC's acquisition of TRP. Based on TRP's equity value and total debt on the date of the acquisition closed, we estimated a starting tax basis of approximately 7 billion. Some of that will be depreciated on a 15-year straight line basis, and some on a more accelerated basis. The net reduction in tax full income means, we do not expect to be a cash tax payer for at least five years. I also want to briefly cover some of the details related to our preferred plus one structure as published in an 8-k on Wednesday. We announced at Stonepeak because it's agreements to invest 500 million at closing which is expected in mid-March. Quickly running over the structure. Stonepeak will receive 500,000 shares of newly created series of 9.5% preferred stock that will pay quarterly dividend. At our option, Targa may pay quarterly dividend in additional preferred shares and warrants during the first two years after closing, a two year pick option. Additionally, Stonepeak will receive approximately 7 million warrants with a strike price based on the view of the 10 day trading, of the 10 trading days prior to announcement or $18.88. Stonepeak will also receive a second tranche of warrants of approximately 3.4 million warrants with a strike price based on a 33% premium to the [indiscernible] of the 10 trading days prior to announcement, or $25.11. The warrants are detachable but cannot be exercised for six months after closing. The warrants will also net settle as Targa's option for either cash or shares. After the fifth year, Targa can redeem the preferred shares for cash at 110 and after the sixth year and beyond at 105. If the preferred shares have not been redeemed after 12 years, Stonepeak can convert into common shares and Targa can also convert the preferred into common stock under certain conditions. From Targa's perspective, our base case assumptions that we were redeemed the preferred share between year six and year 12, which is another one of the attractive elements of this structure as we believe that is a significant period of time to redeem at a lower all in cost of capital. With that, I'll now turn the call back over to Joe Bob.

Thanks, Matt. Okay. I'm never going to live that down. That was my phone that rang just a second ago, after often being the one who reminds people to have their phones off. Taking a step towards your asked questions, one of the most consistent questions that we've got from analysts and investor is related to counter party credit exposure. From my early days, is a start-up midstream company, we've always taken our counter party credit exposure very seriously. And always focused on understanding and managing the implications of each contract, going both directions to a significant extent we benefit from a highly diversified portfolio of customer positions across our multiple businesses and across our multiple geographic areas. Our forecasting process takes into account the financial position of our counter parties and we try to appropriately risk volumes and margins as their situation changes. We also monitor and manage our customer exposures on a customer-by-customer in contract-by-contract basis and we always have. And in this environment, those normal processes are on high alert. We try to not publicly discuss specific customers or customer contracts, but believe we are well positioned to manage through risk associated with potential counter party default or bankruptcy and will continue to stress our forecast with full consideration to credit risk and lower commodity price environments. Just as we constantly try to assess the volume implications of those price scenarios. I understand your concern and I believe that the best way to summarize our current situation is to state that separate from the volume and activity level when certainties that we've already talked about, we do not currently believe that Targa has any significant unmitigated producer contract exposures, nor do we have any significant unmitigated fractionation contract exposures that we should highlight to our investors. We understand the concerns and the interest in the questions related to counter party exposure and hope that that simple statement helps alleviate your Targa specific concerns. On our third quarter earnings preliminary color, on our expectations for Field Gathering and Processing volumes, in 2016 versus 2015. As prices have moved significantly lower since then, I think the easiest way to summarize our view of Field G&P volumes today is to say that producer activity level uncertainties are even greater now. And that our expectations for 2016 versus 2015 have been tempered. We previously said that for 2016, we expected our overall Field G&P volume growth to be flat to single digits versus 2015. In today's environment, I still believe that overall Field G&P volumes will be positive for 2016 versus 2015. But the uncertainties associated with 2016 volumes are significant and could push us to flat or slightly negative. Providing some additional detail on that summary statement. In the Permian, recent activity has created volume growth around our West Texas system in the Midland basin, and our Versado system in the Central Basin platform and Delaware Basin. To handle the growth in the West Texas system, and to provide some relief to that system, which has been operated well over a capacity for quite a while. The 200 million cubic feet per day Buffalo plants will be in service in the second quarter of 2016. We are forecasting growth, still in 2016 for WestTX due to increased drilling efficiencies, improved well results despite the current commodity prices and decreasing rig counts. We expect volumes in the Versado's system to be slightly higher in 2016. Driven by activity in the Northern Delaware Basin, and frankly driven by progress to-date even as we look on uncertainties into the future. So, across the Permian, we expect average volumes to increase for 2016 over 2015, but the Permian Basin rig count continues to decrease. And our view of the magnitude of the volume increase is lower relative to our last earnings call. Moving to the mid-continent. We expect volume decline in North Texas, West Oak and South Oak, to a greater extent than on our November call. Still, to some extent, price appreciation from today's level could result in SCOOP volumes in South Oak, surprising to the upside. In the Badlands, we expect natural gas volumes to increase for 2016 versus 2015 even at the current prices. And for crude to be at similar levels, 2016 versus 2015. Both due to some continuing producer activity, and as Matt mentioned earlier, continued infrastructure buildout to capture volumes from wells already producing on the Fort Berthold Indian Reservation. In October 2015, we announced the joint venture with Sanchez and that agreement will result in some additional volumes in 2016, going to our Silver Oak facilities. So, in conclusion, across our Field Gathering and Processing system, based on the best information we have today, we believe that the expected volume increases in the Permian, South Texas and the Badlands were likely offset the declines in the mid-continent but not to as great of an extent as we thought in November. Downstream, as we have previously stated for LPG exports, we expect 2016 to average at least 5 million barrels per month of propane and butane exports. We're off to a good start in 2016. And I would like to mention how proud I am of the commercial and operational team that manages a flexible and competitively advantage mix of handy mid-sized and VLCC services, as well as the competitively advantage mix of butane and propane cargoes. That benefits Targa and our customers. I guess, in closing, I want to reiterate that I am incredibly proud of our employees and want to thank them for their efforts in 2015 and 2016. Their focus, dedication, and operational and commercial execution drove strong results in 2015, despite significant headwinds from commodity prices. That focused dedication and execution will continue to translate into results in 2016 and beyond. So, with that, we'll open it up to questions, and I'll turn it back to you operator.

Thank you. [Operator Instructions] Our first question comes from TJ Schultz from RBC Capital Markets. Your line is open.

Good morning, TJ.

Good morning.

Good morning.

I understand the commentary that you've bought some time to discuss dividend policy going forward. We can extrapolate, there's some headroom on coverage, if we assume flat dividends and you certainly have other levers you can still pull. So, how's your view over the medium term of walls to point where there is a specific dividend coverage level that you see as most appropriate for the business or is there a level of coverage too low that now you just don’t want to operate that and then would push you to change dividend policy. Just anything further you can provide on stability of the current dividend in this commodity environment?

Thanks for the question, TJ. I would say that us thinking has not changed dramatically, and that we have time to listen to the markets. There are disparate views in the markets. Our equity in our debt are certainly dislocated in the markets. And that we don’t have additional clarity to the extent that your question suggests.

Okay, fair enough. You have a lot of levers on the cost side. How much more room is there on this lever in 2016, whether through OpEx or G&A, just trying to gauge how hard you've already pushed this through the fourth quarter result?

First of all, I'm very proud of what's been pushed through, good term, in 2015. Smart, well thought out cost reductions, really across our companies, across the multiple businesses, to continue to drive, for example, operating cost reductions, savings on maintenance capital without sacrificing safety or saving dollars that will cost us to spin more dollars later. That continuous performance improvement, for example, root cause analysis are taking the best performance of the top [indiscernible] of those business and rolling it to the other businesses is ongoing. Operations team has stretched targets that they believe they will achieve for 2016 [Audio Gap] continued performance improvement in those areas. We expect continued performance improvement in those areas.

And just to add to that, I agree with Joe Bob in all those front. There are some factors that are going to lead in the opposite direction to higher OpEx, right. The CBF Train 5 coming on Buffalo point. We have some additional facilities coming on. So, if you're looking at in terms of run rate, you're going to have to increase for additional expansion at facilities coming online.

And now, I'll go so far as to say, now with those additional operations coming out and they're not insignificant, you may not see increases, right, yes, okay.

Okay, got it. Just one more. Joe Bob, in your prepared remarks, you did walk through the potential the benefit from several things to the upside if and when things turn and you also mentioned some of the levers that you have to act on right now. And one of those that was kind of in both buckets was the potential from possible contract restructurings to your benefit. If you can expand on that opportunity where you may be seeing some need to restructure now or the potential to restructure some of the contracts and how some of that impacts EBITDA?

Sure. First of all, I'd expand on it by saying that's not really new for Targa. And we sometimes get questions because of companies that are sort of going from zero to 180 on a portfolio change. Ours is more like one contract at a time across our businesses and we see that as influential in today's environment. It's been part of the improvements we had in 2015 and we expect it to be part of the improvements we have in 2016. It insures that individual projects achieve an attractive return or they're not done for example. And it is on every commercial person's right on scope, but they don’t have any EBITDA estimate for you. It will be one of the mitigating factors and part of the results that we deliver.

Okay, thank you.

And our next question comes from Darren Horowitz from Raymond James. Your line is open.

Joe Bob, I've got a G&P question for you. You had mentioned the 30% or less forecast of 2016 margin, that obviously has a little bit more POP contract exposure. And I understand the commodity price sensitivities that you previously detailed. If we were to back out the benefit of the fee-based projects that you guys have coming to service over the course of this year. And just look at the base business. Where do you want that fee-based profile to be exiting this year? And as you look to next year, upon some of those contract restructuring opportunities, how do you balance that fee-based component of cash flow versus the ability to participate in what you said a price upside potential scenario should it occur?

I think the short answer to your question is that all of our investor would like to see that fee-based component go down, because commodity prices went up. But what we don’t have is a magic dial of saying where do we want it to be. We're managing at in the context of the opportunities that have been presented to us over a multiyear of path. The balancing is sort of one opportunity at a time, not a magic formula that we can change from quarter-to-quarter.

Okay. And then my last question. Just with regard to counterparty risk. In near terms you said that you don’t have significant unmitigated contract exposure. And I'm just wondering if you could quantify the threshold either in EBITDA o revenue terms that is co-significant by your definition?

Okay. First of all, the traditional measure of counter parties on revenue terms is not terribly useful. We can provide those rankings, but it doesn't help when you think about EBITDA exposure, which is what we're trying to manage and you are interested in. Way I characterized it was reviewing it with our commercial leadership in our credit committee, one contract at a time, I don’t see a significant one, meaning hitting the radar scope of a discussion with our investors as being out there and unmitigated. I understand other companies and the issues that are being discussed and published, we don’t have anything that comes close to those levels. So, I'm not giving you a magic number. I'm giving you that consistent with what we bring to these earnings calls consistent to what we bring to our investor presentations, which is a level of interest in significance and changes to expectations. There is not anything out there. Okay?

Thank you.

I should say there is not currently anything out there, because I just looked at it three days ago. Okay. And I know commodity prices are getting worse and that a lot of EMP companies are in trouble. But we don’t have a significant unmitigated position that I would feel should have been brought to this discussion.

And our next question comes from Brandon Blossman from Tudor, Pickering, Holt and Company. Your line is open.

Good morning, guys.

Hi, good morning.

Let me start with something positively easy. What's the objective here as we go through the bottom of the cycle in terms of hedging and leading some exposure to the upside for '16 and '17?

Yes. We have had as it going to track quarter-to-quarter we've added some hedges, but we really have not added much, where we see rally and your relative rally is anyway gas or crude. We may layer on some additional hedges. We're not at this point looking to catch up to make up to our targeted exposures. So, we can find pockets where it may make sense to hedge an NGL component or maybe some additional gas or crude. We'll take a look at that so sort of a significant rally in those commodity prices, I don't see us looking to make up our head position.

That's fair enough and any general estimates down where your mark-to-market on 40% hedge positioned for 2016 you are?

That will be the case that we file you will see full details on the mark for assets and liabilities when we file that.

we got a question last call about make that already see road down on a estimate of how, it's positive no surprise it's positive whether we would take that off the table that's unlikely to occur.

Okay fair enough. And then Joe Bob, I appreciate the need to -- here but just purely conceptual not from a defensive perspective needing to reflect the balance sheet or providing amount of cushion at dividend policy on a go forward basis as it relates to where the equity is trading at and what the markets telling you about their expectations of the dividend policy how do you spread that needle between giving cash out when the market doesn't at this point in time appreciate that cash in terms of dividend?

I understand your question, I think it's interesting describing threading the needle of what the market, I pulled them with strain, cut your dividend to zero or cut it to x and other people on the call would scream you should say you would never cut your dividend that's not much of a needle that's a giant gap in market perceptions and we hear them both constantly as I am sure other midstream companies are hearing. So we are trying to listen to the market, the market on the margin right now the market on the margins is irrational about Targa's equity pricing in my opinion and with cushion we have time to see how things are sorting out without making rash moves I think that's a luxury, I am not trying to parse words I am trying to tell you exactly how I am thinking about it.

Okay understood and actually appreciate that color Joe Bob that's all from me.

Thank you.

And our next question comes from Sunil Sibal with Seaport Global Securities. Your line is open.

Hi good morning guys and congrats on nearly a strong quarter.

Thanks good morning.

Couple of questions from me, first off starting off with some of the areas which I mentioned seeing lot of weakness in terms of producer activity, I was kind of curious if you have any thoughts about around industry consolidation in some of those areas any opportunities you see either way?

No I ran into a friend of mine at breakfast, why am I answering this way he is from the oil field services industry and talks about this is the time to oil field services industry will shake out and the opportunities will occur before the upturn. Having been through multiple cycles we believe there are opportunities in downturns even without trying to pick the particular time and consolidation is naturally occurring now without even transactions. Volumes are moving to the strong from the weak. You can see on the MP side struggling companies there were ownership will change in the midstream side ownership of assets in companies will change. We have said before that we are mostly looking our round, our strong asset footprint that's the best place for us to look for opportunities. That may just be an opportunity to consolidate a volume from someone who can't service it. It maybe a minor asset acquisition, it maybe a deal with another midstream provider to more efficiently do something those are the kind of opportunities that fall in that bucket you described this consolidation and we will keep an eye out for and part of our financial flexibility, part of the benefit of that financial flexibility is try not to turn down high return opportunities.

Okay that's helpful and then if you could talk a little bit about the Stonepeak transaction, how it kind of came about was that something again you are looking at for some time and how it really going to precipitated?

Yes sure. We have been talking about preferred and looking at about is kind of a tool in our financing toolkit back, it’s the acquisition so that's been years we have been considering whether it makes sense to do a preferred or convertible preferred. As industry conditions worsen over the course of last year as Joe Bob said earlier, I think it was early September we putting our presentation with NGLS common unit price frustrating, we were looking at alternate financing. And that included preferred, convertible preferred, potential asset sales and we executed on retail preferred offering shortly thereafter of $125 million. Really since we said that at the conference in early September we received a number of term sheets whether they are assets level preferred up to the corporate level whether it's TRP or TRC, we had a lot of incoming and a lot of term sheets about potential structures and ideas so we have been working that really pretty hard all through last fall and the transaction with Stonepeak came together relatively quickly over in 2016 period but we have been, this is something we have been working on for months and the structure and exact terms of course change as you are going through the process but this is something general like this we have been working on for quite a period of time.

Okay that's helpful. And then couple of bookkeeping questions from me, in terms of your OpEx, I was wondering if you could provide some sensitivity of that OpEx to gas prices or even NGL prices?

When I am talking about OpEx savings, our primary focus has been on the controllable OpEx savings much of operating cost associated with natural gas or in the case of electric power driven facilities, much of that is passed onto our customers. We keep an eye on it, we manage it to the greatest extent we can but all of the cost savings descriptions that I gave earlier in my comments we are not focused on pass through fuel type saves.

Okay got it. And then, lastly how much was the cash interest expense this quarter?

Yes, I think we are getting to, it looks that interest expense line you will see it looks relatively low, if you look through some of the details there we had a $30 million non-cash interest income which was an offset to the interest expense and that was due to change in the redemption value of our JV partnership for the West Oak and West Texas assets they are in a JV partnership and so there were redemption value change flows to interest expense so there is additional $30 million of non-cash interest income in that line.

Okay got it, thanks guys and congrats once again.

Okay thank you.

Our next question comes from Chris Sighinolfi with Jefferies. Your line is now open.

Good morning Joe Bob.

Good morning Chris.

Thanks for the added colors. Just a couple bookkeeping questions Matt with the preferred offering you have the option to take those distributions in the first couple of years and I was just curious what we should assume or if you had made a formal assumption in your modeling on what you’re going to do?

No, we have not determined whether we are going to pay in cash or pick, we will determining that in our normal quarterly distribution and I guess now dividend declaration so that will be a decision made by management and the board at that time.

Okay. And then, I apologize from my events on this, but what does the board observer mean, what I mean Scott being added to your board but you have mentioned in the release and then today on the call as an observer and I was just curious what the distinction was, as he is not sitting on a committee that he have a voting position could you just help clarify that?

Yes, I am happy to help clarify that the primary distinction between an observer and other board member as we will operationalize it, is just official ability to vote. We’ve had a board observer in the past at TRC it was a Merrill Lynch private equity a board observer when they joined on the midstream acquisition through interest sold by over thinkers and without mentioning that person's name they did just sit an observer on the board they contributed and brought their experience and industry understanding and that's what we expect Scott to do as well. When you have a board vote he doesn't officially vote and he would not be officially part of creating a quorum to vote and he will not be assigned to our compensation or audit committee, would not qualify to serve on this.

Okay, thanks a lot. Kind of what I expected but appreciate the clarity. And then Matt, I am sorry if I missed this if you had said it in your prepared remarks, but I think typically you gave a hedge percentage on the products?

Yes that is 40 and 20 for gas and 15% and 10% 2017.

Okay and do you did you say at what levels.

No that will be in our K when we file.

Okay. And then finally, and I just wanted to quickly go back to Joe Bob so I could understand if I am interpreting what you have said correctly obviously with the roll in the cash savings associated with the roll in and then the preferred offering you have an incredible amount of head room certainly relative to much of your peer group on the compliance leverage covenants, significant amount of current liquidity not a terrible amount in terms of the near term growth CapEx that's you have to do. And then, somewhat schizophrenic market view as to what you should do with your dividend and so am I just to interpret that flexibility is going to be forward you an ability to sort of wait and making major decisions overtime as conditions either improve or do not improve?

There was the first part of your statement that was talking about the context I think you nailed it. And I am not trying to put new words in your mouth, I believe that the measured response that's thoughtful response overtime trying to weigh the factors we see today and the factors we will be seeing tomorrow is the right way to interpret what I was saying. And it is a luxury to have that space to not be forced into a rash decision and that's not poking at you, companies that were hanging on or being forced into those rash decisions that's not where target is. We have the luxury of being thoughtful about how we balance sheet strengthen which we have and intend to keep and how we are serving our shareholders over time with dividend policy if you put it.

Okay. Thanks so much for the time this morning, I really appreciate.

Thanks a lot.

Okay thanks.

Our next question comes from Helen Ryoo from Barclays, your line is open.

Thank you, good morning. I have just a couple of questions when you talk about the…

Your phone broke up a lot, can you start over.

Sure, sure. Could you hear me better?

That's better.

Okay great. Thank you. So yes, on your CapEx comment just to clarify I guess the 175 you referenced does that imply there is about 75 million of sort of wiggle room to reduce your CapEx budget for the year and also on that 175 is mostly [indiscernible] related and what’s the lead time for that the project in that 175 number?

Okay let’s start over a bit what Matt pointed to was other projects currently showing at about 250 million and our prediction that we would spend debt lease to 175. First of all, any dollar we spend in that category is an attractive return and almost all will be immediate 2016 cash flow. So as an investor you want dollars being spent there and I just want to make sure that's clear to everybody we are not going to be spending dollars in that category that aren't well spent. And that investors don't want us to spend and we have the luxury in that category of looking and being careful about the dollars we spend. That probably includes the category of unidentified projects if something comes up it will need to be very attractive return compared to the funds that will require to support it and quick cash flow is better than delayed cash flow. What Matt said was the largest piece of projects was from the battle, and then he used that as an example of immediate cash and attractive return and then said that other expenditures in that category would be similar. Does that help?

Yes that does. But just to clarify so 250 is a sum of the four projects that were already identified that will cancel in 2016?

No ma'am, no.

Okay sorry so that's the additional 275 is and 250 is outside of that number?

Right 275 is the four projects, 250 is just coincidence that they are about the same magnitude. 250 is our estimate for a set of identified projects from a few months ago and 175 or more is the estimate of how much of that we will spend in 2016.

Got it. Got it okay that is very helpful. And then the noble project it's not coming online till 2017 but are going to get that cash flowing starting 2016 so are you…

That's not right either. Noble projects expected to come on the first quarter of 2018, but we will get cash flow in 2016 as a function of what has been a couple of renegotiation around the terms of that project or projects. We said from the beginning that we would not be economically disadvantaged by essentially one year auction as noble re-evaluated exactly what they wanted to do and payments in 2016 are a function of that.

Okay that's helpful. Just going back to your comments on counterparty risk just curious I guess you did have a little bit of Quicksilver exposure and it seems like that contract got rejected pretty early in their bankruptcy process just curious how was there anything special about that contract that made vulnerable or should we think a lot of these just transmission type of projects or contracts or typically more vulnerable in that situation if you could provide your view?

you mentioned Quicksilver contract -- currently other don't have a problem with that what I can say is what I told you previously there is nothing significant that I need to talk to you about and if that particular contract were included I would still say there is nothing significant I need to talk to you about. That's really the best I can do with that one right now. And I would certainly not characterize any relationship I might have with that company or we are in renegotiation around that contract as being at all typical or having duplicates in line fractionation contract portfolio.

Okay. And then just lastly Joe Bob on your comment about 130 million of negative effect with the commodity downturn after Atlas acquisition is that pre, does that take into account the hedge protection that came with Atlas or is that without that number?

Well, first of all it was only looking at performance relative to a single forecast which was the official board approved plan and yes it was after taking into effect hedge.

Okay, great. Thank you very much.

Yes, thank you.

And our next question comes from Jeff Birnbaum from Wunderlich, your line is open

Yes, good morning everyone. I got kicked off the call so I apologize if I duplicate any questions, but Matt did you mention if there were any deficiencies payments that you guys received in the quarter and if not were there?

No we didn't give a break out, we typically do receive some deficiency payments on our take or pay contract whether it be fractionation or on the GMP side, we didn't provide that detail. We didn't feel it was significant enough to give that color. So there is some seasonality to our logistics business where we get some of those payments in Q4, but we didn't give detail on that this time.

Okay. Thank you and then just on the, back to LPG exports obviously you have, as you commented you seen some good strength the fourth quarter it seems like the first quarter to-date has been strong, I guess just given your comment about five million barrels a month being a good number to use this year relative to those kind of a more recent results. Can you talk a bit about how you see that driven either by seasonality or perhaps the first half relative to the back half and I mean you guys loved talked about this but have you added contracted balance since you last updated the market or not and then is that something you can quantify for us?

I love to cross the table and Scott Pryor runs that business smiled at me. You don't have anything long enough to hit me with so I am going to, but he can find me. Our five million barrels per month average for 2016 we believe is a good number for you and we gave that number actually some time ago. We said that 2016 was all to a good start there is some published reports where people look at ships leaving docks and that sort of thing and I guess we are saying yes, those published reports are probably right and our 2016 has gotten off to a strong start. We haven't had a whole lot of annual performance from our docks, it's relatively new business but there is a little bit of seasonal effect, the light first quarters going into second quarter as a function of global seasonal usage of water borne LPG and impacts something on the margin. You can see it in the last year's performance we kind of half way expected and this year’s performance and I think that's why either Matt or I mentioned some seasonality on average for 2016, we expect five million barrels per month I do not expect five million barrels every month. Is that help at all?

Yes, Joe Bob thank you, it does help I guess just sort of as we think about sort of the current rate and then sort of once you get pass that seasonality I guess would you I guess the question is, do you expect a normal impact from seasonality or is there something greater this year that is taking it to the I guess what you call the five million barrels a month and accurate, a conservative number or a best guess number perhaps?

Yes, I think you are parsing my statement. I think I said towards end of last year that I don't better about that five million barrels a month estimate then we first put it out there and I feel at least that good. Does that help?

It does. Okay thank you.

And our next question comes from Eric McCarthy from Citadel, your line is open.

Hi good morning. Thanks.

Good morning.

You touched on ethane recovery in prepared remarks earlier, can you quantify or approximate ethane rejection across the system occurring?

How much rejection is occurring?

Yes.

I don't have that number for you I would characterize it as there is still significant amount of that thing rejection occurring among gathering and processing facility Targa and others who come into our systems where they can most economically do so you should assume that all participants are making economic decisions every week or every day about what they should reject or recover and that most of those parties are thinking about what some cost they might have in NGLs, when they make those decisions we are on a long way from significant ethane extraction relative.

I guess, your peers talk about how big the opportunity is over the next three years and if I think back to how much ethane out list was rejecting and then compare that to you system or just look if I take the approximately 250,000 barrels a day of NGLs being produced, I would say it's 50% - 75% I think rejection because that's along the order like 50,000 – 60,000 barrels a day they are being rejected?

Yes, not providing a Targa number I have got a question for you when people are quantifying that what price do you think they are using for OpEx?

I would imagine by 2018, 2019 if there is big demand there is going to be some uplift of those residual fuel value right.

Well, I think you definitely got to the key, you have to inset the ethane to be extracted and if the ethane is being incentive to be extracted you got to increase in ethane prices ethane won’t go up by itself there will probably be a propane response propane and ethane will probably go together. The potential for that is a combination of volumes for fractionation and volumes and price for other NGLs and you said some upside potential for Targa, but there are a lot of variables to assume to come up what is that dollar potential. And it doesn't make sense for Targa sort of pick one volume and one price and one outcome in 2018 to try to quantify for you right now. I don't think.

Okay. On the build out of that system do you have an approximate number of the current volumes that are being trucked out either on your acreage dedication or nearby?

Its 1000 of barrels, okay.

Okay so it's and when you talk about building that system out further is that the opportunity is to capture those volumes currently being trucked or is it to expand to the wells that are scheduled to be completed over the course of the year?

What Matt was characterizing relative to capital investment on the band lands. Primarily additional infrastructure on the Indian reservation where we have been working for some time to capture both gas volumes being flared and oil volumes being trucked. And I think what I think you also heard and this is part of the equations is that we still expected gas to be up 2016 versus 2015 in the band lands and that all factors included, well declines we expected oil to be similar 2016 versus 2015 that are current view of activity levels.

Okay alright that's it from me thank you.

At this time I am showing no further questions I’d like to turn the call back over to Mr. Joe Bob Perkins for closing remarks.

Thanks operator. To the extent anyone has any follow-up questions you are free to contact Jen, Matt or any of us. Thank you again for your time today and your interest and look forward to speaking with you again soon.