Good day, and welcome to the Targa Resources Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Sanjay Lad, Vice President, Finance and Investor Relations. Please go ahead, sir.

Thanks, Cole. Good morning, and welcome to the second quarter 2022 earnings call for Targa Resources Corp. The second quarter earnings release, along with the second quarter earnings supplement presentation for Targa Resources that accompany our call are available on our website at targaresources.com in the Investors section. In addition, an updated investor presentation has also been posted to our website. Statements made during this call that might include Targa Resources' expectations or predictions should be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our latest SEC filings. Our speakers for the call today will be Matt Meloy, Chief Executive Officer; and Jen Kneale, Chief Financial Officer. Additionally, the following senior management team members will be available for Q&A. Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer. I will now turn the call over to Matt.

Thanks, Sanjay, and good morning. This is an exciting time for our company. And given the recent close of our Delaware Basin acquisition, I want to take this opportunity to publicly welcome our new colleagues to the Targa team. I would also like to thank all of our employees for their collective efforts as it has been a very busy first seven months of 2022, and the team has already accomplished a lot. Our strong execution continued across the second quarter, including record-high quarterly EBITDA, record volumes in the Permian, record NGL transportation and fractionation volumes, redemption of Series A preferred stock, completing the successful sale of our interest in Gulf Coast Express Pipeline, integration of our acquired South Texas assets, successful negotiation of our Delaware Basin acquisition and subsequent financing and $74 million of common share repurchases. Looking ahead, continuing to execute on our strategic priorities will drive increasing EBITDA, reduced common share count, a higher common dividend while maintaining leverage within our target range. Our performance this year has been strong, and we expect that to continue. We are updating our financial guidance for the year to account for the completion of the Delaware Basin acquisition effective August 1. We now estimate full year 2022 adjusted EBITDA to be between $2.85 billion and $2.95 billion. We continue to expect volumes to grow across both our Permian Midland and Delaware positions for the remainder of the year and well beyond. We have several gas plants under construction, Legacy I and Legacy II in the Permian Midland and Midway and Red Hill IV in the Permian Delaware. Given our line of sight to increasing G&P volume growth, we are continuing to invest across our NGL business. We are announcing two new projects, a new 275 million cubic feet per day processing plant in the Permian Midland, which we are calling the Greenwood plant; and a new 120,000 barrel per day Train 9 fractionator in Mont Belvieu. Investing in organic growth projects across our integrated footprint provides Targa with attractive returns and puts us in a strong position to continue to return capital to our shareholders. Turning to our Delaware Basin acquisition and our combined Permian Basin footprint. On a combined basis, we now have about 2.8 billion cubic feet per day of processing capacity in the Permian Delaware, complementing our 3.6 Bcf per day processing position in the Permian Midland for a combined total of 6.4 Bcf per day of processing capacity. Our assets in the Delaware Basin overlay some of the most economic acreage in North America with the acquisition, increasing our size and scale by extending our reach into the highly active and productive Eddy and Lea counties of New Mexico. We now have several million acres dedicated to us across the Permian Basin, providing decades of future activity that will result in increasing volumes moving across our integrated assets. We acquired the Delaware Basin assets at an attractive 7.5x multiple of estimated 2023 EBITDA and expect volume growth as well as near- and long-term synergies to reduce the acquisition multiple. We expect to capture downstream synergies over time as existing contracts come up for renewal and from new Targa processing expansions. We funded the acquisition with cash on hand and debt and expect to end the year with leverage around 3.5x, comfortably around the midpoint of our 3x to 4x long-term leverage target ratio. Let's now discuss our operations in more detail. Starting in the Permian, our systems across the Midland and Delaware Basins continue to perform well, averaging a record 3.1 Bcf per day reported inlet volume during the second quarter. In Permian Midland, our systems continue to run full, and we expect to bring online our next 275 million cubic feet per day Legacy I plant later this month, which is expected to come online highly utilized. A special thanks to our engineering and operations teams for working diligently and safely to bring Legacy online ahead of schedule. Our Legacy II plant in Permian Midland remains on track to begin operations during the second quarter of 2023, and we similarly expect it to be highly utilized when it comes online. In Permian Delaware, volumes across our system are also continuing to ramp. Our new 230 million a day Red Hills VI plant is expected online in September, and our new 275 million a day Midway plant is expected to begin operations during the third quarter of 2023. We expect Red Hills VI to essentially be full when it comes online, and we have flexibility across our Permian Delaware system to handle additional near-term production growth from Eddy and Lea counties with connections to Targa plants. Shifting to the Badlands. Late winter storms impacted our natural gas and crude gathering volumes for the second quarter, but volumes have since rebounded. In our Central region, the acquired assets in South Texas and an uptick in activity levels in Oklahoma and North Texas drove a sequential increase in volumes during the second quarter. Shifting to our Logistics and Transportation segment. NGL transportation volumes were a record 492,000 barrels per day to Mont Belvieu during the second quarter. Throughput volumes sequentially increased 7% driven by increasing NGL production from Targa's Permian plants and third parties. Fractionation volumes at our Mont Belvieu complex during the second quarter were a record 737,000 barrels per day, and the fractionation market in Mont Belvieu continues to tighten. We are moving forward with Train 9 given our outlook for continued supply growth from our Permian G&P systems and third parties. Train 9 is fully permitted and is expected to begin operations during the second quarter of 2024 with an estimated cost of around $450 million. In our LPG export services business at Galena Park, we loaded an average of 10.4 million barrels per month during the second quarter, providing a consistent outlook for our customers despite continued volatility in global commodity markets. We continue to expect to complete our previously announced low-cost expansion project to increase our propane loading capabilities with an incremental 1 million barrels per month of capacity by mid-2023. Lastly, year-to-date, we have purchased almost 2.4 million common shares at a cost of around $154 million. Our balance sheet is strong. We are continuing to invest in our business, both organically and through acquisitions. We are returning an increasing amount of capital to our shareholders, and we are excited about Targa's outlook. Before I turn the call over to Jen, I would like to extend a final thank you to our employees for their continued focus on safety while executing on our strategic priorities and continuing to provide best-in-class services to our customers.

Thanks, Matt. Targa's reported quarterly adjusted EBITDA for the second quarter was $666.4 million, increasing 6% sequentially as we benefited from higher commodity prices and higher volumes across our gathering and processing and logistics and transportation systems, partially offset by lower marketing margin and higher operating expenses. Higher operating expenses were primarily attributable to increasing activity levels across our G&P systems, our recently acquired assets in South Texas, and inflation. While costs are higher, inflation continues to be a net tailwind for us across our businesses as we benefit from inflation-linked fee escalators across our commercial contracts. Targa generated adjusted free cash flow of $334 million in the second quarter. During the second quarter, we completed the redemption of all of our outstanding Series A preferred stock for approximately $973 million and also received the proceeds associated with the sale of our interest in Gulf Coast Express pipeline of $857 million. Our consolidated net leverage ratio was 3.1x at the end of the second quarter, and we had about $2.3 billion of available liquidity. We repurchased about $74 million of common shares in the second quarter and repurchased an additional $30 million during July. We have approximately $215 million remaining under our $500 million repurchase program. Since the inception of our common share repurchase program in the fourth quarter of 2020, we have opportunistically repurchased $285 million of common shares or about 8.6 million shares at an average price of $33.12. We continue to expect to pay a common dividend per share of $1.40 for 2022 with our next dividend increase likely to be announced in early 2023, concurrent with when we expect to provide 2023 operational and financial guidance. Throughout the year, we have added hedges and we are significantly hedged for the balance of 2022. We have also continued to add 2023 hedges at higher weighted average hedge prices than 2022. It has been a very active couple of months for the finance team as we were able to attractively finance our Delaware Basin acquisition through a combination of five-year and 30-year senior notes issued in the investment-grade market, a three-year term loan and availability under our revolver. Pro forma for the acquisition, we have about $1.1 billion of liquidity available on our revolver. Benefiting from now being an investment-grade issuer, we also recently entered into a commercial paper program. As Matt mentioned, we are updating our financial estimates to account for a partial year contribution from the Delaware Basin acquisition and now estimate full year 2022 adjusted EBITDA to be between $2.85 billion and $2.95 billion and continue to estimate a year-end leverage ratio of around 3.5x. With the addition of spending in 2022 for the Greenwood plant and Train 9 announced today, plus spending to support the newly acquired Delaware Basin assets, we now estimate 2022 net growth CapEx to be between $1 billion and $1.1 billion. Our estimate for 2022 net maintenance CapEx remains unchanged at approximately $150 million. Our continued investment in growing Targa's underlying businesses, supported by solid business fundamentals and the strength of our balance sheet means we are in an excellent position looking forward to continue to return an increasing amount of capital to our shareholders. Lastly, I'd like to echo Matt and thank our employees for their dedication and for continuing to prioritize safety. And with that, I will turn the call back over to Sanjay.

Thanks, Jen. Cole, could you please open the line for Q&A?

And our first question today will come from Jeremy Tonet with JPMorgan.

Just wanted to dive into capital allocation thoughts a bit more. Big spend this year with the acquisition and all. But as you start to look into '23, it seems like there's a lot of available cash flow. And I just wanted to kind of get your thoughts with where you see that landing. It seems like the opportunity for buybacks would only increase. And when you think about buybacks, is it more price sensitive to the stock? Or is it more balance sheet capacity that drives time and buybacks?

Yes. Jeremy, we really are in a good position where we're going to have a lot of flexibility as we move through this year with strong EBITDA growth and then as we get into 2023, expecting continued growth in our business. I think we'll continue to focus on investing organically, which is driving some of the really good returns for Targa and then really increasing our ability to return more capital to shareholders over time. But we'll have a lot of flexibility in 2023 to increase that return of capital to shareholders. So this fall, we'll discuss with our Board what the right dividend level is. We'll look at our peers. We'll look at broader industry peers, S&P 400, 500 and then come up with a recommendation for a dividend. That will be one piece of the equation. And then we'll also look at continuing our share buybacks. You've seen us actually ramp that up here even in light of the Lucid acquisition. We've been increasing our share buybacks. I would still like to say that it is an opportunistic program. I don't see us just setting a level and saying it's going to be this. We're going to look at the macro environment. We'll look at our organic growth projects, where we set our dividend, and then come up with a plan that makes sense, but have flexibility in that such that if we see some good opportunities to increase that, then we can do so.

Got it. That's helpful. And just wanted to kind of clarify two points there as my follow-up. When you think about the dividend, is it relative to midstream peers or more kind of like S&P 500? And I guess there's concern in the marketplace with regards to this much free cash flow coming out next year and whether that be returned to shareholders or put to M&A. I'm just wondering any thoughts you could provide on that.

Yes. I think as we look to the dividend, we will look towards broader industry peers. We will be informed by what our midstream peers do. We'll take a look at that. But I think we talked about when we moved our dividend to $1.40, having modest growth. We certainly have the ability to do that and a lot of flexibility and the ability to do more if we so desire to do more than modest growth. That will be a discussion with our Board. Either way, we're going to prioritize financial flexibility as we go forward to continue to invest in our business organically. And then I view M&A kind of similar to how we've talked about it. I think we continue to have a high bar for M&A. We need something that's going to put us in a really strong position coming out of the other side of the M&A with both the Southcross and the Lucid acquisitions. Our balance sheet is strong. We reported 3.1x leverage ratio. We're estimating 3.5x by year-end. So we want to make sure we have a strong balance sheet if we do any M&A. I'd say right now with as active as we've been this year, our focus is going to be on integrating those acquisitions and making sure we do those well and extract the synergies that we think we can get from those acquisitions. So I think our focus is going to be on integration here for a little while, even while we have significant cash flow to invest in our business organically and then increase return of capital to shareholders.

Our next question will come from Brian Reynolds with UBS.

I was curious if you could just a little bit on commodity exposure post the recent Lucid acquisition and how we should think about the evolving kind of 60-40 G&P logistics and transportation earnings mix over time. Is it kind of fair to assume that we should see growth in fee-based in the L&T business going forward relative to G&P and POP exposure?

Yes, sure. Our commodity exposure with Lucid really being, I'd say, entirely fee-based contract. There still is some embedded commodity exposure in there with just the way those contracts are settled, but it's primarily fee-based. So all things equal, that's going to marginally increase our fee-based margin over time. As we look at that mix, what's G&P and what's downstream, we kind of think of it more as we're going to continue to invest in both of those businesses. It's an integrated business. We're going to invest in G&P. And we're going to invest like we are with Train 9 and the export dock as needed to handle those volumes. So the mix is just going to kind of be a result of investing in our integrated platform. To the extent we get higher commodity prices and we move above our fee floors, then it ends up shifting a little bit more margin into our G&P business. That's really a result of just excess earnings and having a higher commodity price environment. So we don't have a target we're going for. We're just going to continue to invest in both businesses. That said, we see increasing fee-based margin just on an absolute basis continuing to grow.

And we'll also continue to look to add fee-based elements or floors to any existing contracts where we don't already have those, particularly as contracts come up for expiration or there's some catalyst to be able to renegotiate those contracts. So that will also help provide additional cash flow stability on the downside going forward.

Great. I appreciate all that incremental color. Maybe as my one follow-up, the Lucid acquisition appeared to include some carbon and GC waste capabilities. Just given the recent 45Q credit increase included in the Inflation Reduction Act proposal, how should we think about the potential opportunity set for Targa as the largest processor in Permian?

Yes. Thank you. We have been working prior to Lucid, just on working on carbon capture to see if there's something we can commercialize across our Permian footprint. Lucid has made really good progress on that as well. And so I'd say I'm excited about the opportunity to be able to develop that, both in the Delaware and on the Midland side. They have some really good people over there who are really smart and knowledgeable about how to do this. And yes, you're right, with the 45Q, if that gets passed, increasing it makes those projects easier to get over the finish line. So I think with their expertise plus the work that we have done, it kind of increases our ability to commercialize that opportunity.

And our next question will come from Keith Stanley with Wolfe Research.

I guess to start just on Lucid synergies. Can you talk a little more about near-term and long-term opportunities and how impactful it might be? I guess near term, you referenced potentially shifting some Lucid volumes if it's above your capacity onto other Targa assets. Just any color along those lines and how you're thinking about that over time.

Yes, we believe there will be some near-term synergies on the NGL side by transferring volumes to the excess capacity in our Far West Delaware processing plants. We have available capacity while Lucid is currently running at overcapacity. We are already working on installing additional pipelines to enhance our ability to move more gas. In the near term, we will be utilizing our existing Targa system to facilitate these offloads, which will then send liquids down the Grand Prix. Over time, as we add more processing plants, those plants will not be tied to specific contracts, allowing us to capture additional volumes for our downstream business. Additionally, as existing NGL contracts expire, we will have the opportunity to transfer those volumes as well. I would categorize this as having short-term, medium-term, and longer-term impacts, as some contracts will remain in place. Overall, we anticipate a gradual increase in our ability to capture those liquids rather than a sudden influx all at once; it will be a steady process of integrating NGLs onto our system over time.

Great. And second question, just with the Inflation Reduction Act. Jen, can you just give an update on when you expect the Company to be a material cash taxpayer and how that bill is currently written could impact the Company?

Currently, it depends on our earnings, profits, and the amount of growth capital spending we undertake. Our assumption is that we won't pay any significant cash taxes until 2024, at which point it will gradually increase. It might be around 2027 before we fully utilize our existing net operating loss. This timeline could change based on our growth capital spending. With the Inflation Reduction Act, we could be liable for a minimum tax in 2024, but that would offset regular income taxes in the future, essentially creating a timing shift in our cash tax payments.

Our next question will come from Colton Bean with Tudor, Pickering & Holt.

So I apologize in advance for a few bundled questions here. But it looks like Grand Prix reached nearly 500,000 barrels a day during Q2. So one, can you frame the mix between Permian and Mid-Con? And then two, to the extent that Permian utilization continues to climb as new plants come online, is there any ability to push beyond that 550,000 barrel a day upside capacity? And if not, what sort of lead time would you need to loop the line to the 30-inch interconnect in North Texas?

Colton, this is Scott. I'll start it off and see if Matt has some other comments that he would want to add. But I would just say that we've not described exactly what the mix is from the West leg of our Grand Prix pipeline versus the Northern leg coming from Conway and in through the Kingfisher connection that we've got with the Williams pipeline with Bluestem. But it is a contributor to that, and that is one contributor that will grow over time as existing contracts with some of our customers roll off with competitors and those volumes roll on to us. We're certainly aware of the need of the west leg that we have today. And we are continuing to add pumps where it's necessary to pump up that pipeline. We are always evaluating what the needs are relative to increasing over and above maybe the 550,000 barrel limit that we have kind of stated publicly. And then we are obviously evaluating what the needs are to add additional transportation needs out of the Permian. Our goal is to make sure that those volumes run along our transportation legs, whether it's the current Grand Prix pipeline or future expansions that we may do.

Great. Maybe just on that last piece, any early expectations around what sort of lead time you would need to be able to loop the line to that larger interconnect?

Yes, we are currently addressing that situation. We have several processing plants in development that will significantly increase our liquid production. There is still plenty of capacity available, providing us ample lead time to utilize those resources. At this moment, we are assessing the timing for our transportation volume and determining when it would be appropriate to expand our transportation capacity. This is a focus for us, and we will continue to evaluate it as we progress.

Got it. And then just switching over to the G&P segment. A fairly material step-up in OpEx Q-on-Q. Any detail on the trajectory you're expecting here through the balance of the year?

Colton, this is Jen. I think you should expect an increased Q3 relative to Q2 just as a result of the Lucid acquisition. We are seeing inflation across our businesses on the cost side in terms of chemical costs and things like that. I think our teams are doing a really good job of trying to manage through that, but costs are higher. And then just as activity levels increase, that also results in higher costs as well. We certainly have an expectation of activity levels on the G&P side continuing to increase for the rest of this year, both Delaware Basin plus standalone Targa.

And our next question will come from Neal Dingmann with Truist Securities.

This is Danny Peak on filling in for Neal today. My first question is really about expansion. You guys have some attractive plants and attractive areas coming online. Do you see any material demand for additional products? And if so, which region would you say is the strongest?

Sorry, just to clarify, you say regional demand for products? Or are you referring to fractionation demand, is that...

Yes. That's correct.

Okay. As I kind of said in the scripted comments, we do see a tight frac market. Our volumes have ramped. A lot of the competitors' volumes and third-party volumes have ramped. So we're seeing a lot of wide-grade hit Belvieu. And so that market is tightening up. A lot of that is coming from the Permian from growth. A lot of it is also coming with some operational upsets we've had in the industry coming from other areas as well. So that's causing it to kind of tighten up a bit. We still have some flexibility with our fractionation complex with Train 7 and 8 coming on and giving us some excess capacity. We have flexibility in Lake Charles. And we also are looking at what the right timing for a GCF potential restart is. So we're kind of sorting through that. So I think we'll be able to provide some outlets for that increased Y-grade. But it is tightening up, and we do expect it to be tight for a while.

Okay. Great. And my last question is on capital allocation. Specifically, is there a leverage level where you would become more aggressive with stock buybacks? I know you guys are at your midpoint or expecting to be at your midpoint by year-end. But can you give any color on that? That will be it for me.

This is Jen. I think it's easier to be more aggressive if your leverage ratio is trending towards the lower end of your long-term leverage target range. But that may not be when the best opportunity presents itself in the market. So if you rewind it back to October of 2020, when we put the repurchase program in place, I wouldn't say that we had our leverage where we wanted it to be. But we saw a unique opportunity in the market to go and repurchase shares. And so we stepped into that. I'd expect that it's an important part of how we'll return capital going forward. The most important element of how we want to manage the profile of the Company is with maintaining a very strong balance sheet. So if our balance sheet is strong, which we really believe is within that long-term leverage target range of 3x to 4x, with a preference for that leverage ratio to be the bottom end of that range, I think you'll see us continue to have the flexibility to be active. And then it will just be a matter of what opportunity do we see presented in the market.

And our next question will come from Chase Mulvehill with Bank of America.

I guess the first question is really just coming back to Permian processing capacity. Obviously, we've seen a lot of announcements recently for a lot of your peers adding processing capacity in the Permian. So if we kind of think about that and relative to yours, I think you got about 1.2 billion a day of incremental capacity that you to bring online by the end of next year. Could you talk about the confidence you have of filling that? Would you bring those plants online?

Sure. We currently operate five plants in the Permian and are very optimistic about their capacity utilization. The nearest-term plants, Legacy I and Red Hills, are expected to be fully utilized from the moment they start operations. Our Midland plant is already operating at full capacity, while the Delaware plant on the Lucid asset has even exceeded full capacity. For the Midway plant, we will be idling the Sand Hills plant and reallocating those volumes to support growth. Most of the initial utilization will come from the Sand Hills volumes right from day one. That leaves us with two additional processing plants in the Midland Basin. We have added several plants in the Permian Midland, and we expect they will be highly utilized quickly due to flush production and overall field pressure reduction. The focus will shift to when we will need more capacity rather than whether we can fill the announced plants. We hope that adding Legacy II and Greenwood on the Midland side will give us some time, but we will soon assess when we will need another plant in the Delaware.

It's good to hear. Can I ask about the Waha basis briefly? There's some risk of widening out in the second or third quarter, or possibly even before next year. I'm curious about your thoughts on the basis risk rather than the volume risk, and how much of that risk you have hedged.

Sure. Yes, I'd say our risk out there is we want to make sure that we can flow the volume. So when Waha tightens out, if it gets difficult moving it out, we want to make sure that we can move it. So we've been active at taking out transportation and making sure we can get the volumes away from our plant and to market. As far as the overall Waha basis risk, our length in natural gas, when we hedge, we hedge it at Waha. So really, what we want is kind of an absolute higher Waha price versus a whole lot of exposure to the spread. So we want absolute Waha prices to be high. We want to make sure we can get volumes out.

Okay. Makes sense. I'll respect the two questions. And hopefully, somebody will ask about Medford.

Thanks.

And our next question will come from Sunil Sibal with Seaport Global Securities.

So I wanted to start off on the capital side of things. So obviously, you've raised 2022 budget. I was kind of curious how should we be thinking about puts and takes for the 2023 capital spend. You obviously have outlined a few expansion projects. So from that perspective, what kind of cost inflation you're seeing? And then how should we be thinking about the '23 budget?

Sunil, this is Jen. For 2022, we've really accelerated projects that were in our five-year plan, but just we need them sooner given the visibility that we have to volume growth when you think about Train 9 spending shifting into 2022. Think about Greenwood spending shifting into 2022. And then the adder would be the Delaware Basin acquisition and the continued build-out of those assets. As we look into 2023, I think that part of what will impact our growth capital budget for next year will be potential spending on next plants, whether that be on the Delaware side or the next plant needed on the Greenwood side. But I'd expect that we will be spending capital at levels very much commensurate with the size of the Company. And so as we've gotten bigger, we just have more flexibility capacity to spend more. But we also don't have a lot of visibility to what I call additional large projects beyond those that we've already announced other than incremental processing expansions, a looping or other projects associated with Grand Prix and NGL transportation down the road. That would be the one that just depending on what we're seeing on volume growth. The next large project that we have on the radar screen and the timing of that, again, will be dependent on the continued growth of NGL transport volumes.

Just to clarify. So what you're saying is that unless you announce more projects, you should see a bit of a step-down in '23 CapEx based on all that you announced?

I don't know if I'd say that we'll see a step down. We'll provide formal guidance in February, typically with our timeframe of when we provide CapEx guidance for the following year. We do have some spending that's shifting into this year and that spending on frac Train 9 that otherwise may have occurred next year. We've got spending on Greenwood shifting into this year that otherwise may have occurred next year. But I think we're very comfortable with spending around these levels. And then ultimately, it's our visibility to increasing volume growth and where the next pinch point is within our asset footprint that will result in us needing to move forward with the next project. I'd say that there isn't something large looming out there that would have a material impact on growth capital spending at this point in time.

Got it. And then my second question was related to the IRA. I understand that there are some provisions in that with regard to limiting methane emissions from processing facilities. So I was curious if you had a chance to look through that. And how do you think that impacts your footprint? You've obviously highlighted plans to reduce methane emissions. But does your plans kind of tie in with new requirements in IRA? Or how should we think about that?

Yes, of course. Our ES&H group has been actively assessing the implications of the methane tax and related regulations. We've been analyzing this in depth since it first emerged. Our focus remains on reducing emissions and enhancing our intensity, and we have several projects underway aimed at achieving those goals. We are proficient in compliance and adept at adhering to rules and regulations. I believe our ES&H Group is ready to handle this challenge. We'll need to wait to understand the final fee structure and operational parameters for setting emission limits. It's still early days, and we will have to see what is ultimately enacted. However, I can assure you that we are actively addressing this issue, and I am confident in our performance moving forward.

And our next question will come from John Mackay with Goldman Sachs.

I wanted to start on L&T. You guys touched a little bit on marketing being weak. But just given how strong volumes were, could you just talk a little bit about what's going on this quarter? Was it a kind of one-off on margin dipping? Or is this kind of the run rate unit margins that we should think about going forward?

I would first like to mention, John, that we had a very strong first quarter regarding our marketing and optimization efforts, though it wasn’t as active in the second quarter. This pattern is somewhat seasonal and typical for us as we move into the second quarter. That said, we've experienced record growth in fractionation volume, with increased volumes flowing through our transportation assets in and out of Mont Belvieu. Our export business has also remained consistent every quarter. However, the current pricing environment, characterized by backwardation in both U.S. and international markets, presents some challenges. Overall, the volume growth on our G&P side will be directed toward enhancing our transportation assets and fractionation capabilities, and we expect to see a continuous increase in volumes over time. We are confident in our position, although we still have work ahead regarding our announcement about Trade 9 and bringing that fractionation train back online. We see opportunities for further growth in volumes.

All right. Maybe just unpacking a little bit of what you said there, just in terms of the export business. We've seen some softness in petchem demand overall. Maybe you can just share kind of where you see that sitting right now and how that should trend for the rest of the year.

From an international perspective, is that what you're referring to?

Yes, for the export business.

Well, we've experienced consistent volumes quarter after quarter. There have been more challenges on the butane export side, partly due to the backwardation we’re seeing with both propane and butane. Internationally, it's been a bit tougher for butane, with spreads tightening. Additionally, butane prices are currently lagging behind propane prices globally. Considering the risks associated with waterborne traders and consumption abroad, there are potential challenges linked to economic conditions. However, we are confident in our term contracts, as we have not faced any cancellations at our dock. We believe this will ensure continued consistency. We are also optimistic about our expansion that is expected to start mid-next year, which will add more flexibility. Overall, the flow of our export business appears stable in conjunction with the ongoing expansions across our entire downstream sector, complementing our upstream efforts.

And our next question will come from Michael Cusimano with Pickering Energy Partners.

On my numbers for '22, you have realized almost $300 million of hedge losses year-to-date on the G&P system. And disclosures are kind of stale, but my math shows a couple of hundred remaining for the rest of the year. So I was hoping you could talk about '23 hedges. We're not sure where they're priced necessarily. But given the recent commodity weakness, are those looking like potentially even a net benefit next year even if spot prices stay high? It just seems like there's almost a $500 million tailwind going into next year just from hedge realizations rolling off. I was hoping you can give some more clarity there.

We have hedged at higher prices in 2023 relative to 2022. So that will provide a nice tailwind for us. If you look across all commodities, I'd say that our hedge prices right now are, call it, 25% plus higher than where they are for 2022. So I think you're right in saying that, that will be a nice tailwind for us as well as just continued volume growth as well. So if we have continued higher prices like we're seeing more prompt given the backwardation in the market, then as we realize those higher prices on additional volumes, that will be a nice tailwind as well.

Got it. That's very helpful. And then I'll kind of take the bait and ask about just Medford impact which I've seen on your system. And part of the strength in the frac volumes are a direct result of that.

Yes. So I really kind of answer the overall frac market question previously. The frac market is tied. It's a combination of increased volumes from Y-grade. And you have some operational upsets from the industry that is moving more volumes to Belvieu. So yes, that is tightening up the Belvieu to some extent.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Sanjay Lad for any closing remarks.

Great. Thanks to everyone that was on the call this morning, and we appreciate your interest in Targa Resources. The IR team will be available for any follow-up questions you may have. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.