Targa Resources Corp. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Dollar amounts are in millions unless otherwise stated. Targa consolidates Targa Resources Partners LP (the Partnership), although Partnership assets and cash are subject to partnership and debt-agreement restrictions.
Business context and major transaction
The Partnership provides natural gas gathering and processing, NGL logistics and marketing, and crude-oil and petroleum-product services. On February 27, 2015, Targa completed the Atlas mergers, acquiring ATLS and, through the Partnership, APL (renamed Targa Pipeline Partners LP, or TPL). The transactions added processing capacity and pipeline assets; TPL’s results are included from the closing date. Reported year-over-year comparisons therefore include different business scopes.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1,699.4 | $2,000.6 | $3,379.1 | $4,295.3 |
| Gross margin (non-GAAP) | $462.4 | $384.0 | $873.8 | $763.6 |
| Operating margin (non-GAAP) | $325.5 | $277.4 | $625.6 | $552.7 |
| Income from operations | $112.4 | $150.3 | $250.8 | $308.8 |
| Net income | $23.8 | $103.2 | $59.7 | $210.2 |
| Net income available to common shareholders | $15.2 | $26.4 | $18.6 | $46.0 |
| Diluted EPS | $0.27 | $0.63 | $0.36 | $1.09 |
| Net cash provided by operating activities | Not stated separately | Not stated separately | $484.2 | $424.5 |
- Q2 revenue fell 15% and first-half revenue fell 21%; lower commodity prices more than offset acquisition-related and other volume growth. NGL revenue was a major contributor to the decline.
- Despite lower revenue, gross margin rose 20% in Q2 and 14% in the first half; operating margin rose 17% and 13%, respectively. Atlas-related volumes and fee-based growth helped, while operating costs also increased.
- Net income fell 77% in Q2 and 72% in the first half. Higher depreciation and amortization, interest expense, acquisition costs and debt-redemption losses weighed on earnings. Interest expense was $70.2 in Q2 versus $35.7 and $125.1 for the half versus $69.6.
- Management’s Targa-level distributable cash flow, a non-GAAP measure, was $51.9 in Q2 versus $28.7 and $104.7 for the first half versus $55.9. The filing cautions that this measure is not a substitute for GAAP results.
- First-half cash investing outflow was $2,011.8, including $1,574.4 of acquisition cash outlays and $436.2 of property, plant and equipment outlays. Financing provided $1,552.3; cash increased $24.7 to $105.7.
Balance sheet, debt and liquidity
- At June 30, total assets were $13,352.9, compared with $6,453.5 at year-end 2014; the increase largely reflects the Atlas mergers. Cash was $105.7, current assets $963.5 and current liabilities $847.0.
- Total debt was $5,920.3, versus $3,068.2 at December 31, 2014. Long-term debt was $5,796.1; current securitization borrowings were $124.2. This consolidated debt includes Partnership obligations that Targa itself is not obligated to pay.
- Reported available liquidity was $230.2 for Targa non-Partnership (including $20.2 cash and $210.0 facility availability) and $787.0 for the Partnership (including $85.5 cash). The Partnership reported $701.5 availability under its revolver; securitization borrowings were fully drawn at $124.2. The filing says both Targa and the Partnership were in compliance with debt covenants.
Changes, outlook, risks and unusual items
- The Atlas mergers were valued at approximately $5.0 billion of consideration. TPL added 2,053 MMcf/d of processing capacity and 12,220 miles of pipeline. Acquired operations contributed $616.8 of revenue and $17.8 of net income from February 27 through June 30. Preliminary acquisition accounting included $557.9 of goodwill and $1,204.0 of acquired intangible assets; valuations remained subject to revision.
- Management attributed weaker results chiefly to sharply lower commodity prices. Q2 commodity-price effects reduced revenue by an estimated $1,310.6, partly offset by TPL, other volume gains and favorable hedge settlements. Field gathering and processing expanded, while Coastal Gathering and Processing margin declined with lower prices and throughput.
- Management expected Partnership cash flows and available funding sources to support operations, capital spending, debt service, collateral needs and minimum distributions for at least the next 12 months. Targa also expected Partnership distributions to fund its operations and projected quarterly dividends over that period. No formal earnings or share-price guidance is provided.
- The Partnership estimated 2015 growth capital expenditures of $700–$900 and maintenance capital expenditures of approximately $110 net to its interest. Due to lower commodity prices and expected producer activity reductions, it was reassessing the sizing and timing of planned Permian and Badlands plant capacity. A condensate splitter or alternative terminal project was under evaluation, with completion expected in 2017 depending on scope and permitting.
- Key exposures include commodity-price volatility, producer drilling and volumes, counterparty performance, interest rates, access to capital markets, collateral requirements, and regulatory and tax changes. A 100-basis-point rate increase would raise estimated annual interest expense by $10.0 for the Partnership and $5.8 for Targa non-Partnership. The filing also flags possible tax-law changes affecting publicly traded partnerships.
- Atlas-related acquisition costs were $26.6 for the first half; debt redemptions and amendments generated a $12.9 loss. Atlas merger litigation settlements required supplemental disclosures and were expected to seek court approval; a separate Targa shareholder lawsuit was dismissed with prejudice. A contingent acquisition payment had a $4.2 fair value and could require up to $6.0, subject to volume conditions.
Important facts for investors to verify
- How much of the reported margin improvement reflects acquired assets, commodity hedges and nonrecurring commercial arrangements, versus sustainable organic performance?
- What are the final Atlas purchase-price allocations, including acquired asset values, intangible amortization and goodwill allocation?
- Can the Partnership sustain cash distributions and planned capital spending while managing higher debt, variable-rate exposure and producer activity?
- Review the maturity, covenant and guarantee terms of Partnership and Targa debt separately; consolidated debt is not equivalent to parent-level obligations.
- Assess the assumptions behind management’s cash-flow and dividend outlook, and monitor commodity prices, hedge coverage, counterparty exposure, project timing and tax developments.