Targa Resources Corp. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Targa is a North American midstream energy company operating Gathering and Processing and Logistics and Marketing businesses. Figures are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,444.4 | $1,867.7 | $4,900.0 | $3,980.3 |
| Gross margin | $539.1 | $447.1 | $1,053.8 | $905.5 |
| Operating margin | $368.6 | $291.9 | $710.1 | $598.3 |
| Income from operations | $155.4 | $37.2 | $241.7 | $87.6 |
| Net income (loss) | $121.1 | $70.6 | $160.0 | $(39.9) |
| Net income (loss) attributable to Targa | $109.1 | $57.6 | $132.0 | $(61.7) |
| Net income (loss) attributable to common shareholders | $79.0 | $28.4 | $72.1 | $(120.0) |
| Adjusted EBITDA | $326.0 | $257.9 | $632.5 | $534.6 |
| Distributable cash flow | $225.1 | $196.0 | $441.4 | $390.2 |
Q2 diluted earnings per share were $0.35 versus $0.14; six-month diluted EPS was $0.33 versus a loss of $0.61. Common dividends declared remained $0.91 per share for each quarter. Gross margin, operating margin, Adjusted EBITDA and distributable cash flow are non-GAAP measures.
Cash flow, debt and liquidity
- Six-month operating cash flow was $543.7, up from $464.5. Investing cash outflow was $1,236.9, including $1,162.5 of property and equipment outlays; financing cash inflow was $837.6. Cash ended June at $281.6, up from $137.2 at year-end 2017.
- Capital expenditures were $1,292.7 for the first half, including $1,245.6 of growth and $47.1 of maintenance spending. Management estimated at least $2,180 of 2018 net growth capital expenditures and contributions to unconsolidated affiliates for announced projects, and approximately $120 of net maintenance capital expenditures.
- Total debt obligations were $5,572.5 at June 30, including $180.0 of current debt and $5,392.5 of long-term debt. The Partnership’s debt is consolidated, although Targa states it is not contractually obligated to make payments on Partnership debt.
- At June 30, cash was $281.6 and the filing reported availability of $520.0 under Targa’s revolver, $2,128.5 under the Partnership’s revolver and $166.2 under the receivables facility. Separately, the August 6 liquidity table reported consolidated total liquidity of $3,012.7 after outstanding borrowings and letters of credit.
- Both Targa and the Partnership were in compliance with debt covenants at June 30. The revolvers were extended to June 2023; the Partnership revolver commitment increased from $1.6 billion to $2.2 billion. The Partnership issued $1.0 billion of 5⅞% senior notes due 2026.
Changes, outlook and material items
- Revenue increased 31% in Q2 and 23% for the first half. Management attributed growth mainly to higher NGL and condensate prices and increased volumes; lower natural gas prices and hedging effects partly offset the gains. Fee revenue also grew, principally with higher gas-processing and crude-gathering activity.
- Operating margin rose 26% in Q2 and 19% year to date. Gathering and Processing benefited from higher Permian, Central and Badlands volumes and higher NGL and condensate prices. Logistics and Marketing benefited from fractionation, marketing, terminaling and storage activity.
- Reported results included a $48.1 gain on sale of the inland marine barge business and $60.6 of Q2 income from a reduction in the fair value of Permian Acquisition contingent consideration, primarily reflecting lower forecast volumes. The 2018 earn-out expired with no payment; the remaining 2019 earn-out was valued at $312.4 at June 30. These items boost reported income and are not equivalent to recurring operating performance.
- Growth projects include Grand Prix NGL pipeline, estimated at approximately $1.7 billion including its southern Oklahoma extension and targeted for service in Q2 2019; Train 6, expected in Q1 2019; and Gulf Coast Express, expected in Q4 2019 subject to regulatory approvals. Targa also described new Permian processing and gathering projects and a potential Whistler gas pipeline, which remained subject to definitive agreements, final investment decisions and approvals.
- Management said available cash, operating cash flow, borrowing capacity and capital-market or joint-venture/asset-sale sources were expected to fund operations, capital needs, debt obligations, collateral requirements and dividends for at least the next 12 months. This is not earnings guidance. Management noted that actual results depend on commodity prices, volumes, costs, financing access and other factors.
- Key risks include commodity-price volatility, producer activity and volumes, project execution and permitting, access to capital, collateral and counterparty exposure, and customer credit. Petredec accounted for approximately 17% of Q2 revenue and 15% of first-half revenue. A 100-basis-point interest-rate increase would raise annual consolidated interest expense by an estimated $3.3.
- Topic 606 adoption changed revenue and product-purchase presentation but did not materially affect operating or gross margin. Management reported disclosure controls effective; a new ERP system was implemented in Q2, with control evaluation and testing planned through year-end. Ordinary-course legal proceedings are disclosed, without further detail in the supplied filing text.
Investor verification points
- Separate recurring operating trends from the barge-sale gain and contingent-consideration fair-value income; review the company’s non-GAAP reconciliations.
- Track growth-capital spending, project costs, schedules, customer commitments and funding, particularly for Grand Prix and the other major expansions.
- Confirm liquidity and debt availability against the relevant facility terms, including the distinction between Targa and Partnership obligations and the receivables facility’s borrowing base.
- Monitor commodity hedge positions, settlement effects, counterparty credit and Petredec concentration.
- Review the remaining Permian earn-out estimate and the planned ERP internal-control testing.