Business Context and Reporting Period
Company: Targa Resources Corp.
Filing Type: Form 8-K (Current Report)
Date of Report: December 28, 2016
Subject: Revision of supplementary information regarding notional volumes of NGL futures contracts on the Intercontinental Exchange (ICE) previously reported in the Form 10-Q for the quarter ended September 30, 2016.
Key Financial Metrics and Material Changes
The filing addresses a correction to derivative volume disclosures. Management concluded the revisions were not material and had no effect on the Consolidated Balance Sheet, Statement of Operations, Comprehensive Income, Changes in Owners' Equity, or Statement of Cash Flows.
Revised NGL Futures Volumes (Bbl/d)
| Year | As Reported | As Corrected |
|---|---|---|
| 2016 | 85,887 | 20,055 |
| 2017 | 50,889 | 3,789 |
| 2018 | 5,000 | 411 |
| 2019 | — | — |
Revised Total Commodity Derivative Volumes (as of Sept 30, 2016)
The filing provides a comprehensive table of all derivative instruments (Natural Gas, NGLs, Condensate) designated as hedges. Key totals include:
- Natural Gas: 253,315 MMBtu/d (2016), 173,374 MMBtu/d (2017), 78,286 MMBtu/d (2018), 29,683 MMBtu/d (2019). Total Fair Value: $5.1 million.
- NGLs: 26,048 Bbl/d (2016), 9,132 Bbl/d (2017), 4,765 Bbl/d (2018), 1,779 Bbl/d (2019). Total Fair Value: $6.2 million.
- Condensate: 3,560 Bbl/d (2016), 3,230 Bbl/d (2017), 2,041 Bbl/d (2018), 813 Bbl/d (2019). Total Fair Value: $5.5 million.
Historical Hedge Impact on Revenue
- Three months ended Sept 30, 2016: Operating revenues increased by $11.2 million due to net hedge adjustments.
- Nine months ended Sept 30, 2016: Operating revenues increased by $56.9 million due to net hedge adjustments.
Guidance, Outlook, Risks, and Contingencies
Hedging Strategy: The Company utilizes swaps, collars, purchased puts, and futures to hedge commodity price risk associated with equity volumes in Gathering and Processing operations. The strategy aims to lock in fixed prices and reduce operating cash flow variability. The Company intends to match NGL product composition and delivery points to physical equity volumes to avoid uncorrelated risks.
Market Risks:
- Commodity Price Risk: Significant exposure to natural gas, NGL, and crude oil price fluctuations. A portion of condensate sales are hedged using crude oil futures (WTI).
- Interest Rate Risk: Exposure to variable rate borrowings. As of September 30, 2016, there were no interest rate hedges.
- Outstanding Variable Debt: $225.0 million (Partnership), $275.0 million (TRC Revolver), $160.0 million (Term Loan).
- Sensitivity: A 100 basis point increase in interest rates would increase annual interest expense by $2.3 million (Partnership) and $4.4 million (TRC Non-Partnership).
- Counterparty Credit Risk: Risk of nonpayment by derivative counterparties. Master netting provisions reduce maximum loss exposure by $30.6 million as of September 30, 2016. Individual counterparty loss exposure ranges from less than $0.5 million to $13.7 million.
- Customer Credit Risk: A 1% reduction in third-party accounts receivable would decrease annual operating income by $5.5 million.
Collateral: Payment obligations for hedging transactions are secured by a first priority lien on collateral securing senior secured indebtedness. The Company expects no obligation to post additional cash or letters of credit absent federal regulations.
Investor Verification Checklist
- Verify the corrected NGL futures volumes (20,055 Bbl/d for 2016) against the previously reported figures (85,887 Bbl/d) in the Q3 2016 Form 10-Q.
- Confirm that the revision had no impact on the Consolidated Statement of Operations or Cash Flows as stated by management.
- Review the total fair value of derivative instruments ($5.1M Natural Gas, $6.2M NGLs, $5.5M Condensate) to assess current market exposure.
- Assess the impact of interest rate fluctuations on the $660 million total outstanding variable rate debt ($225M + $275M + $160M).
- Monitor counterparty credit ratings, as the Company relies on investment-grade counterparties and netting provisions to mitigate default risk.