Targa Resources Corp. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are included where disclosed. Targa is a North American midstream company operating Gathering and Processing and Logistics and Marketing businesses.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $8.815 billion | $6.691 billion |
| Gross margin (non-GAAP) | $1.909 billion | $1.768 billion |
| Operating margin (non-GAAP) | $1.286 billion | $1.214 billion |
| Income (loss) from operations | $(122.4) million | $55.8 million |
| Net income (loss) | $104.2 million | $(159.1) million |
| Net income (loss) attributable to common shareholders | $(63.4) million; $(0.31) per share | $(278.1) million; $(1.80) per share |
| Adjusted EBITDA (non-GAAP) | $1.140 billion | $1.065 billion |
| Distributable cash flow (non-GAAP) | $851.8 million | $762.4 million |
| Cash from operating activities | $939.5 million | $837.4 million |
| Capital expenditures | $1.507 billion | $592.1 million |
| Cash and cash equivalents, year-end | $137.2 million | $73.5 million |
Revenue rose 32%, mainly due to higher commodity prices and increased sales volumes. Gross margin increased 8% and operating margin increased 6%. Gathering and Processing operating margin rose 36% to $783.8 million, while Logistics and Marketing operating margin fell 11% to $511.8 million. Average natural gas inlet volumes increased 2% to 3,473.6 MMcf/d; NGL production rose 9% to 333.2 MBbl/d.
Fourth quarter: Revenue was $2.703 billion, gross margin $534.6 million, income from operations $113.5 million, net income $299.2 million, and net income attributable to common shareholders $253.5 million, or $1.17 basic EPS ($1.05 diluted).
Margins: Reported non-GAAP gross margin and operating margin were approximately 21.7% and 14.6% of revenue, respectively. These measures are not GAAP earnings measures and may not be comparable with similarly titled measures at other companies.
Debt, liquidity and capital allocation
At December 31, 2017, disclosed debt principal was approximately $5.083 billion, including $4.278 billion at fixed rates and $805 million at variable rates. Balance-sheet debt obligations were reported at $5.053 billion, including the $350 million receivables securitization facility. Net interest expense was $233.7 million, down from $254.2 million. A 1 percentage-point increase in variable rates was estimated to increase annual interest expense by approximately $8.1 million.
Year-end revolver availability was $235 million under the TRC Revolver and $1.553 billion under the Partnership revolver; the $350 million securitization facility was fully drawn. As of February 9, 2018, the company reported consolidated liquidity of $1.875 billion, including $349.1 million cash and available borrowings. Targa said it was in compliance with debt covenants at year-end.
Common dividends remained $0.91 per quarter, or $3.64 per share for 2017. The company raised $1.644 billion net through common-stock offerings and its equity distribution program during 2017. It issued $750 million of 5% notes due 2028 and redeemed its 5% notes due 2018 and 6⅞% notes due 2022.
Material changes, unusual items and outlook
- A $378 million non-cash impairment of North Texas gathering and processing assets drove the operating loss. Management cited expected production declines in the Barnett Shale as producers pursued opportunities in other basins.
- Net income included a $397.1 million income tax benefit, including a $269.5 million deferred-tax benefit from the Tax Cuts and Jobs Act’s reduction of the federal corporate rate from 35% to 21%. This tax benefit substantially affected the contrast between pre-tax loss and reported net income.
- A $99.6 million gain from changes in contingent consideration was recorded, primarily reflecting a reduced estimated value for the Permian Acquisition earn-outs. Potential payments to sellers total up to $935 million; the year-end fair value was approximately $317 million.
- The company sold its Venice Gathering System for approximately $0.4 million and recorded a $16.1 million loss. It continued operating the Venice Gas Plant.
- The March 2017 Permian Acquisition cost $574.1 million in initial cash payments and added gas and crude gathering assets. Acquired operations contributed $127.9 million revenue and a $19.8 million net loss for the period owned.
- Growth capital expenditures were $1.406 billion in 2017; total capital expenditures were $1.507 billion. Management estimated at least $1.630 billion of 2018 net growth capital expenditures and approximately $120 million of 2018 net maintenance capital expenditures.
- Major projects included Permian processing plants, Grand Prix NGL pipeline and Gulf Coast Express gas pipeline. Grand Prix was expected in service in 2019; GCX was designed for up to 1.98 Bcf/d and also expected in service in 2019. In February 2018, Stonepeak committed up to approximately $960 million to development joint ventures tied to GCX, Grand Prix and fractionation assets; an initial approximately $190 million contribution was expected to reimburse capital spent and reduce debt.
- Management reported that 2017 performance exceeded public EBITDA guidance and achieved dividend-coverage guidance, but the filing does not give a clear numerical value for that guidance. Management cited uncertain commodity prices and capital-market conditions, while expecting producer activity and demand for midstream services to drive growth.
Risks and contingencies
- Commodity-price exposure remains material: percent-of-proceeds arrangements accounted for approximately 59.9% of gathered natural gas volume. Hedging mitigates, but does not eliminate, price, basis, volume and counterparty risks.
- Substantial debt, variable-rate borrowings, covenant restrictions and reliance on capital markets could constrain investment, refinancing and dividends. The company’s disclosed senior unsecured ratings were below investment grade.
- Returns on major growth projects depend on producer activity, volumes, timely construction, permits, costs and customer commitments. Production declines in certain basins have already contributed to lower volumes and impairment.
- Environmental, pipeline-safety and other regulatory changes, operational accidents, severe weather, insurance availability and cyber incidents could increase costs or disrupt operations. Estimated pipeline-integrity testing costs averaged $3.3 million annually for 2018–2020, excluding potentially substantial repairs.
- Other risks include customer or derivative-counterparty default, competition, seasonal propane demand, joint-venture dependence and the potential for further asset impairment. The filing reports ordinary-course legal and regulatory proceedings; it does not provide a clear quantified aggregate exposure in the supplied text.
Important facts for investors to verify
- Reconcile reported net income with the tax benefit, North Texas impairment, contingent-consideration gain and preferred dividends; distinguish GAAP results from non-GAAP EBITDA and distributable cash flow.
- Review debt maturities, covenant terms, revolver availability and the actual cost and funding plan for 2018 growth projects and potential Permian earn-outs.
- Track project schedules, committed volumes, capital requirements and ownership changes for Grand Prix, GCX and the Mont Belvieu fractionation expansion.
- Assess whether Permian and other basin volumes, commodity prices and fee-based contract mix support projected margins and dividend coverage.
- Confirm the assumptions and eventual cash settlement of the Permian Acquisition earn-outs, and monitor any material environmental, safety, legal or impairment developments.