Targa Resources Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Amounts are in millions of dollars unless otherwise noted. Targa provides natural gas gathering and processing, NGL logistics and marketing, and crude oil and refined-product services.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $2,112.6 | $1,442.4 | Up 46%; commodity sales rose 59%, chiefly on higher prices. |
| Gross margin | $458.4 | $431.4 | Up 6%. |
| Operating margin | $306.5 | $299.3 | Up 2%. |
| Income from operations | $50.5 | $35.5 | Up $15.0. |
| Net loss | $(110.5) | $(0.7) | Net loss attributable to common shareholders was $(148.3), or $(0.77) per diluted share, versus $(6.5), or $(0.06). |
| Adjusted EBITDA | $276.7 | $264.7 | Up 5%; non-GAAP. |
| Distributable cash flow | $194.0 | $178.0 | Up 9%; non-GAAP. |
| Cash from operations | $318.7 | $241.3 | Up $77.4. |
| Cash outflow for investing | $(625.5) | $(188.0) | Includes $480.8 cash paid, net of acquired cash, for the Permian acquisition. |
| Cash and cash equivalents | $80.0 at March 31 | $73.5 at Dec. 31, 2016 | Quarter-end cash increased $6.5. |
| Total debt obligations | $4,748.2 | $4,881.0 at Dec. 31, 2016 | Includes consolidated Partnership debt; Targa states it is not contractually obligated to make payments on Partnership or TPL debt. |
Interest expense, net, increased to $63.0 from $52.9. The quarter’s net loss also reflected a $71.1 income-tax expense, $12.6 of equity-method losses (including a $12.0 impairment of the T2 EF Cogen investment), and a $5.8 loss on financing activities. Management said the first-quarter tax expense was driven by the estimated full-year tax rate and expected it to be more than offset by tax benefits later in 2017.
At March 31, current assets were $812.1 and current liabilities were $1,424.3, including $534.9 of current debt maturities. As of May 1, management reported consolidated total liquidity of $1,860.5, including cash and availability under revolving and securitization facilities. The company and Partnership were in compliance with debt covenants at quarter-end.
Material changes versus the prior comparable period
- Commodity sales increased substantially with higher commodity prices; management attributed $757.8 of the increase to prices. Higher product purchases largely offset the revenue benefit, so gross and operating margin rose only modestly.
- Gathering and Processing operating margin rose to $177.4 from $115.6. Logistics and Marketing operating margin fell to $130.1 from $157.0, reflecting weaker LPG export and wholesale/marketing margins and higher operating expenses.
- Reported plant natural gas inlet volume declined 5% to 3,242.1 MMcf/d, while gross NGL production rose 2% to 291.8 MBbl/d. NGL export volumes increased 20% to 217.5 MBbl/d.
- Operating cash flow improved, but investing cash outflow increased with the acquisition. Cash financing inflow included common-stock offerings; Targa issued 9.2 million shares in a public offering for net proceeds of $524.2 and raised $152.8 net through its equity distribution agreement during the quarter.
- The prior-year quarter included a $24.0 goodwill impairment and a $24.7 financing gain; neither recurred in Q1 2017. Conversely, Q1 2017 included a $16.1 loss related to the subsequent Venice Gathering System sale and acquisition-related items.
Outlook, transactions, risks and unusual items
- Permian acquisition: Closed March 1 for Outrigger Delaware and Midland assets. Initial consideration was $484.1 cash at closing plus $90.0 payable within 90 days. Potential performance-linked earn-outs could total up to $935.0 in 2018–2019; the preliminary fair value recorded was $461.6, rising to $464.8 at March 31. Acquired assets include long-term producer dedications and gathering, processing and crude-oil capacity; integration and connection to existing systems were underway.
- Capital plans: Management estimated at least $960 million of 2017 net growth capital expenditures for announced projects, excluding acquisitions. Projects included Permian processing and gathering expansions, the Raptor plant, and Badlands infrastructure. May 2017 announcements added the Johnson and Wildcat plants, with expected net growth capital costs of approximately $90 million and $130 million, respectively. These are project plans, not earnings guidance.
- Dividends and capital needs: Common dividends declared were $0.91 per share for the quarter. Series A preferred stock carries a cumulative 9.5% dividend; $22.9 was paid during the quarter and another $22.9 was accrued for payment in May. Management said liquidity and expected operating cash flows and borrowing capacity should fund operations, capital spending, debt obligations, collateral needs and dividends for at least 12 months, subject to business and market conditions.
- Key risks: Commodity prices, producer drilling and throughput, access to capital, interest rates, counterparty/customer credit, collateral requirements, weather, regulation, project execution and acquisition integration. Commodity hedges reduce some cash-flow volatility but can limit benefit from rising prices; management reported a $15.4 net derivative asset at quarter-end.
- Control weakness: Disclosure controls were deemed ineffective because of a previously identified material weakness in interim income-tax provision controls. Management was implementing and testing remediation during 2017.
- Other unusual items: Targa early adopted an income-tax accounting standard, recording a $56.1 cumulative-effect increase to retained earnings. It recorded a $12.0 impairment of its T2 EF Cogen investment. The Venice Gathering System sale closed April 4 for approximately $0.4 cash, with the buyer assuming asset-retirement obligations; Targa recorded a $16.1 impairment loss in connection with the sale. The New Mexico air-emissions matter was settled for a $29,223 civil penalty.
Important facts for investors to verify
- Final purchase-price allocation and fair values for the Permian acquisition, and the assumptions and eventual payment amounts for the earn-outs.
- Whether acquired assets and announced processing projects connect and enter service on schedule, and whether expected margins, volumes and capital returns materialize.
- Liquidity after the $90.0 acquisition payment and subsequent equity issuance; the effect of the January 2018 $250.5 senior-note maturity and other debt obligations.
- Coverage and sustainability of common and preferred dividends relative to distributable cash flow, capital spending and debt service; note that distributable cash flow is a non-GAAP measure.
- Progress in remediating and testing the interim tax-control material weakness, and whether reported tax expense and full-year tax expectations change.
- Changes in commodity prices, hedge positions and derivative valuations, including the effect of hedges on realized cash flows and the $464.8 contingent-consideration liability.