Targa Resources Corp. — Q3 2018 Form 10-Q
Business context and period. Targa is a midstream energy company operating Gathering and Processing and Logistics and Marketing businesses, including natural gas, NGL, crude oil and refined-products infrastructure. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Unless noted, amounts are in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,986.4 | $2,131.8 | $7,886.3 | $6,112.1 |
| Gross margin (non-GAAP) | $602.9 | $468.7 | $1,656.6 | $1,374.3 |
| Operating margin (non-GAAP) | $408.0 | $313.2 | $1,117.9 | $911.6 |
| Net income (loss) | $(11.2) | $(155.1) | $148.6 | $(195.0) |
| Net income (loss) attributable to Targa | $(23.7) | $(167.6) | $108.2 | $(229.3) |
| Net income (loss) attributable to common shareholders | $(54.0) | $(197.0) | $17.9 | $(317.1) |
| Adjusted EBITDA (non-GAAP) | $358.0 | $276.5 | $990.6 | $811.1 |
| Distributable cash flow (non-GAAP) | $287.2 | $186.6 | $728.5 | $576.7 |
- Q3 revenue increased 40%; gross margin rose 29% and operating margin 30%. Nine-month revenue increased 29%, gross margin 21% and operating margin 23%.
- Growth reflected higher volumes and NGL and condensate prices, including expansion-related throughput; lower natural gas prices and hedge effects partly offset commodity revenue growth. Topic 606 adoption reduced reported revenue and product purchases but did not affect gross or operating margin.
- Q3 diluted loss per common share was $0.24; nine-month diluted earnings per common share were $0.08. Common-share results include Series A preferred dividends and deemed dividends.
- Operating cash flow for the first nine months was $914.6, versus $531.9 in 2017. Investing cash outflow was $2,192.8, including $2,033.6 of property, plant and equipment outlays. Financing cash inflow was $1,344.2; cash ended the period at $203.2.
- At September 30, total debt obligations were $5,968.9, including $290.0 current debt; year-end 2017 total debt was $5,053.0. Cash was $203.2. Targa reported $7,270.2 of total owners’ equity. Consolidated current liabilities exceeded current assets by approximately $830.
- At November 5, 2018, reported total liquidity was $2,499.3, including cash and available credit after outstanding borrowings and letters of credit. The company and Partnership were in compliance with debt covenants at September 30.
- Common dividends declared were $0.91 per share each quarter; Series A Preferred Stock carries a 9.5% cumulative dividend.
Material changes and notable items
- Both segments improved operating margin: Gathering and Processing generated $255.3 in Q3, up from $198.3; Logistics and Marketing generated $173.5, up from $115.9. Total field gas inlet volumes rose 12% and NGL production rose 24% year over year in Q3.
- 2017 comparisons included a $378.0 noncash North Texas asset impairment and approximately $10 of Hurricane Harvey-related operational impacts. The 2018 quarter had no impairment charge.
- Q3 2018 included a $57.5 estimated loss on the Tacoma and Baltimore terminal sale. The inland marine barge sale generated a $48.1 gain in the first half of 2018. The terminal sale, for approximately $160, closed in Q4; management said proceeds would repay debt and fund part of the growth program.
- Q3 included $16.6 of expense from an increase in the fair value of the Permian Acquisition earn-out liability; the 2017 quarter had $126.8 of income from a decrease in that liability. The 2018 portion of the earn-out expired without payment; the remaining estimated May 2019 payment was valued at $329.0 at September 30.
- Revenue rose faster than margins partly because commodity prices and volumes increase both sales and purchases. Reported revenue is also affected by Topic 606 gross-versus-net classification changes.
Outlook, capital program and risks
- Management estimated 2018 net growth capital expenditures and contributions to unconsolidated affiliates for announced projects of at least $2.4 billion, and net maintenance capital expenditures of approximately $110. Nine-month gross capital expenditures were $2,310.4.
- Grand Prix, including its southern Oklahoma extension, was expected to cost approximately $1.7 billion, with Targa’s share estimated at $1.1 billion; the company expected its 2018 share of growth spending to be approximately $900. Grand Prix was expected to be fully in service in Q2 2019.
- Other projects include new Permian processing plants and gathering pipelines, Train 6 (expected in service in early Q2 2019), Little Missouri 4 (Q2 2019) and Gulf Coast Express (Q4 2019, subject to regulatory approvals). Whistler remained subject to final investment decisions, shipper commitments and approvals.
- Management stated that operating cash flow, borrowing capacity, capital-market access, joint ventures and potential asset sales should be sufficient for operations and anticipated obligations for at least the next 12 months, subject to business conditions. This is not a guarantee.
- Commodity price, interest-rate, counterparty, customer-credit, drilling/activity, regulatory, weather and capital-market risks are identified. Commodity derivatives had a net liability fair value of $175.8; a hypothetical 10% commodity-price increase would raise that liability to $281.7, while a 10% decrease would reduce it to $69.9. Targa had no interest-rate hedges; a 100-basis-point increase would add an estimated $7.3 to consolidated annual interest expense.
- Petredec (Europe) Limited represented approximately 17% of consolidated revenue in Q3 and 16% for the nine months. Targa also disclosed ordinary-course legal and environmental proceedings; the filing does not quantify a clear aggregate exposure.
- Management expected to adopt lease accounting on January 1, 2019, which it anticipated would recognize operating-lease liabilities and right-of-use assets. The filing says evaluation was ongoing.
Important facts for investors to verify
- Whether operating cash flow and available liquidity can support the substantial growth-capital program, dividends and debt service.
- Project budgets, completion timing, customer commitments and returns for Grand Prix, processing expansions, Train 6 and Gulf Coast Express.
- The final amount and timing of the $329.0 Permian earn-out estimate due in May 2019, which depends on contractual performance measures and fair-value assumptions.
- The effect of commodity prices, hedge settlements, derivative collateral requirements and customer concentration on future margins and cash flow.
- The terminal sale proceeds and debt repayment, and whether subsequent results confirm the stated 2018 capital-spending outlook.