Targa Resources Corp. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparisons are with the corresponding 2014 periods. Targa consolidates Targa Resources Partners LP (the Partnership), although Partnership assets and cash flows are subject to partnership and debt-agreement restrictions. The February 27, 2015 Atlas mergers materially expanded the business, so year-over-year comparisons reflect both acquired operations and a different commodity-price environment.
Financial performance
| Metric | Third quarter 2015 | Third quarter 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,632.1 million | $2,288.3 million | $5,011.2 million | $6,583.7 million |
| Gross margin (non-GAAP) | $459.7 million | $407.8 million | $1,333.5 million | $1,171.5 million |
| Operating margin (non-GAAP) | $326.1 million | $295.0 million | $951.6 million | $847.8 million |
| Net income | $20.8 million | $120.4 million | $80.6 million | $330.7 million |
| Net income attributable to common shareholders | $12.7 million | $30.7 million | $31.4 million | $76.8 million |
| Diluted earnings per share | $0.23 | $0.73 | $0.60 | $1.82 |
- Third-quarter revenue fell about 29%, while gross margin rose about 13% and operating margin about 11%. Lower commodity prices reduced commodity-sales revenue, but lower product-purchase costs, acquired TPL operations, higher throughput and hedge settlements supported margins.
- For the first nine months, revenue fell about 24%, while gross and operating margins increased about 14% and 12%, respectively. Net income declined substantially, reflecting lower commodity prices, higher depreciation and amortization and interest expense, and acquisition-related effects.
- Third-quarter operating expenses were $133.6 million; depreciation and amortization was $165.8 million; and net interest expense was $70.4 million. Nine-month amounts were $381.9 million, $448.3 million and $195.6 million, respectively.
- Operating cash flow for the first nine months was $695.5 million, versus $519.1 million in 2014. Cash capital outlays were $625.3 million; acquisition cash outlays, net of acquired cash, were $1,574.4 million. Ending cash was $102.9 million.
- At September 30, total debt was $6,074.3 million, including $5,938.8 million of long-term debt and a $135.5 million current receivables-securitization balance. This consolidated debt includes Partnership obligations; Targa states it is not obligated to service Partnership debt. The Partnership and Targa were in compliance with debt covenants.
- Reported total assets were $13,418.2 million and owners’ equity was $6,379.9 million. These balances increased materially following the Atlas mergers.
- Management’s non-GAAP measures showed parent-company distributable cash flow of $158.9 million for the nine months, compared with $87.0 million. Partnership adjusted EBITDA was $866.5 million versus $712.1 million, and Partnership distributable cash flow was $630.8 million versus $564.0 million.
Liquidity, capital and distributions
- At quarter-end, Targa non-Partnership liquidity was $235.1 million, including $10.1 million cash and $225.0 million available under its revolving facility. Partnership liquidity was reported as $1,246.6 million, including $92.8 million cash and availability under its revolver and securitization facility.
- The Partnership issued $1.1 billion of 5% notes due 2018 and $600 million of 6.75% notes due 2024 during 2015. Targa also issued equity in March; net proceeds were used in part to repay borrowings and fund a Partnership contribution.
- Partnership common-unit distributions declared for the third quarter were $0.825 per unit. Targa declared a quarterly dividend of $0.91 per share.
- Management expected Targa’s anticipated Partnership distributions to support its operating needs, debt obligations, taxes and projected quarterly dividends for at least the next 12 months. The Partnership likewise expected operating cash flow, available borrowing capacity and access to capital markets to provide resources for at least 12 months.
Changes, outlook and risks
- The Atlas mergers added substantial gathering and processing assets, including 2,053 MMcf/d of processing capacity and 12,220 pipeline miles. Acquired operations contributed $1,065.7 million in revenue and a $1.0 million net loss from February 27 through September 30. Preliminary acquisition accounting included $551.4 million of goodwill and $1,199.0 million of acquired intangible assets.
- Management estimated Partnership 2015 growth capital expenditures of approximately $700–$800 million and maintenance capital expenditures of $100–$110 million; 2016 growth capital expenditures were estimated at approximately $600 million, with maintenance capital expenditures also estimated at $100–$110 million. These are estimates, not earnings guidance.
- Planned projects included Cedar Bayou Fractionator Train 5, expected to be completed in mid-2016 at an estimated total cost of approximately $385 million; the Buffalo processing plant, expected in the first half of 2016; and an Eagle Ford plant and gathering-line joint venture expected to begin operations in early 2017. The condensate-splitter or terminal projects were under evaluation and expected in 2018 or later, depending on scope and permitting.
- On November 2, 2015, Targa and the Partnership agreed to a proposed all-stock buy-in of Partnership common units not already owned by Targa, at 0.62 Targa shares per unit. Closing was expected in the first quarter of 2016, subject to unitholder and shareholder approvals and other conditions. Partnership debt and Series A preferred units would remain outstanding; the IDRs would be eliminated.
- Key exposures include volatile natural gas, NGL and crude prices; producer activity and throughput; interest-rate increases on variable-rate debt; counterparty and customer credit; access to debt and equity markets; and regulatory, environmental and tax changes. Commodity hedges reduce some price exposure but can limit gains when prices rise; derivative fair values can also create earnings volatility.
- An environmental order concerning alleged Mont Belvieu emissions violations required administrative and environmental-project payments totaling approximately $0.2 million and installation of a flare-gas recovery unit within one year of the order’s effective date. Atlas merger litigation had been settled subject to court approval, with supplemental disclosures made; the defendants denied wrongdoing.
- The filing added a risk concerning possible changes to the tax treatment of publicly traded partnerships. Proposed legislation or regulations could affect the Partnership’s ability to qualify for partnership tax treatment.
Most important facts to verify
- Confirm the Atlas acquisition’s final purchase-price allocation, including goodwill and intangible-asset valuations, which were preliminary at quarter-end.
- Assess the comparability of reported growth and margins after the acquisition, and separate acquired-volume effects from underlying performance and commodity-price changes.
- Review debt maturity, borrowing availability, covenants and the distinction between Targa’s obligations and consolidated Partnership debt.
- Evaluate whether distributable cash flow and Partnership cash generation support distributions, dividends and planned capital spending; these measures are non-GAAP.
- Check progress, cost and permitting for announced growth projects, and the status and approvals of the proposed Partnership buy-in.