Targa Resources Corp. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Targa consolidates Targa Resources Partners LP (the Partnership), although Partnership assets and cash flows are subject to separate agreements and debt restrictions.
Business context and material developments
Targa is primarily the parent and general partner of a midstream business that gathers and processes natural gas, handles NGLs, and provides logistics, marketing, crude-oil gathering and terminal services. On February 27, 2015, Targa acquired Atlas Energy, L.P. and the Partnership acquired Atlas Pipeline Partners, L.P. The transactions materially expanded the Field Gathering and Processing business; acquired operations contributed $160.6 million of revenue and $4.1 million of net income from February 27 through March 31.
The Atlas transactions were recorded at a preliminary purchase price allocation, including $628.5 million of provisional goodwill and $1,035.0 million of provisional acquired intangible assets. The acquired business added reported processing capacity of 1,439 MMcf/d and 10,500 miles of pipelines.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $1,679.7 million | $2,294.7 million |
| Gross margin | $411.4 million | $379.6 million |
| Operating margin (non-GAAP) | $300.0 million | $275.3 million |
| Income from operations | $137.3 million | $158.4 million |
| Net income | $34.6 million | $106.9 million |
| Net income attributable to Targa common shareholders | $3.2 million; $0.07 per diluted share | $19.6 million; $0.47 per diluted share |
| Net cash provided by operating activities | $292.6 million | $318.7 million |
| Cash capital outlays for property, plant and equipment | $187.6 million | $197.7 million |
Revenue fell 27%, principally because lower commodity prices reduced revenue by $1,112.2 million, partly offset by higher volumes, fee-based revenue and favorable hedge settlements. Product purchases also declined. Operating margin increased 9%, supported by acquired operations, higher LPG exports, terminaling and storage fees, and increased Field Gathering and Processing throughput. Lower commodity prices, particularly in Coastal Gathering and Processing, weighed on some segments. Depreciation and amortization rose to $119.6 million from $79.6 million, and net interest expense increased to $55.0 million from $33.9 million. The quarter included $25.8 million of Atlas acquisition-related costs and a $9.0 million loss on debt redemptions and amendments.
Operating cash flow was below the prior-year quarter. Investing cash use was $1,792.8 million, including $1,598.0 million of acquisition outlays net of acquired cash. Financing provided $1,589.9 million, including debt and equity proceeds. Cash at quarter-end was $170.7 million.
Debt, liquidity and distributions
At March 31, 2015, consolidated total debt was $6,036.1 million, comprising $5,838.2 million of long-term debt and $197.9 million under the receivables securitization facility. Debt increased substantially following the Atlas transactions. The filing notes that Targa is not obligated to make payments on Partnership debt. Both Targa and the Partnership reported compliance with their debt covenants.
Targa reported $380.7 million of liquidity: $170.7 million cash and $210.0 million available under its $670 million revolving facility. The Partnership reported $798.5 million of liquidity, including $63.5 million cash, after outstanding revolver and securitization borrowings and letters of credit. Consolidated current assets were $1,067.6 million and current liabilities were $982.9 million.
Targa declared a quarterly dividend of $0.83 per share; the Partnership declared a distribution of $0.82 per common unit. Under an Atlas-related IDR giveback, specified Partnership distributions to Targa are reduced and reallocated to common unitholders over 16 quarters.
Outlook, risks and unusual items
- Management expected the Partnership to spend approximately $700 million to $900 million on 2015 growth capital expenditures, gross, and approximately $110 million on maintenance capital expenditures, net to the Partnership interest. It was reviewing the timing and sizing of planned projects in the Permian and Badlands in light of lower commodity prices and expected producer activity.
- Targa expected anticipated Partnership distributions to fund parent operations, debt and tax obligations, and projected quarterly dividends for at least the next 12 months. This is an expectation, not formal earnings guidance; the filing provides no clear quantified earnings forecast.
- Commodity prices, throughput and producer drilling activity affect results. Hedging reduces some cash-flow exposure but may limit gains when prices rise; derivative values also depend on market prices and counterparty performance. The Partnership reported a net derivative asset of $174.8 million.
- Variable-rate borrowings expose both Targa and the Partnership to higher interest expense. A 100-basis-point rate increase was estimated to raise annual interest expense by $7.0 million for Targa non-Partnership debt and $10.4 million for Partnership variable-rate debt.
- Risks include access to debt and equity markets, collateral requirements, customer and derivative-counterparty credit, regulation and permitting, weather, competition, and successful integration and performance of acquired assets. The Partnership had non-investment-grade credit ratings, according to the filing.
- Targa disclosed shareholder and former Atlas unitholder litigation relating to the mergers. The Atlas lawsuits had settlements based on supplemental disclosures, with court approval expected; a separate Targa shareholder plaintiff indicated an intention to dismiss its case. Targa also reported ordinary-course legal and regulatory proceedings.
- The Atlas purchase-price allocation and goodwill remained provisional and subject to valuation adjustments. Management stated that disclosure controls were effective; the acquisitions were excluded from the quarter’s internal-control-over-financial-reporting assessment.
Most important facts for investors to verify
- How the Atlas acquisitions affect ongoing earnings, cash generation, integration costs and comparability, given that reported results include only about one month of acquired operations.
- The final fair values and goodwill allocation, and whether the acquired assets and customer relationships perform in line with valuation assumptions.
- Debt levels, refinancing and covenant headroom, and the distinction between parent liquidity and Partnership liquidity available to support parent dividends.
- Whether lower commodity prices and producer activity alter planned growth spending, project timing, throughput or the expected distributions supporting dividends.
- The status and outcomes of merger-related litigation and the completion and terms of the announced 2020 APL notes exchange offer.