Targa Resources Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Targa operates gathering and processing and logistics and marketing businesses across natural gas, NGLs, crude oil and refined products. Figures are in millions of dollars except per-share data and operating statistics.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $2,455.6 | $2,112.6 | +16% |
| Gross margin (non-GAAP) | $514.6 | $458.4 | +12% |
| Operating margin (non-GAAP) | $341.4 | $306.5 | +11% |
| Operating income | $86.3 | $50.5 | +71% |
| Net income (loss) | $38.9 | $(110.5) | Improved $149.4 |
| Net income (loss) attributable to Targa | $22.9 | $(119.3) | Improved $142.2 |
| Net income (loss) attributable to common shareholders | $(7.0) | $(148.3) | Improved $141.3 |
| Basic and diluted EPS | $(0.03) | $(0.77) | |
| Adjusted EBITDA (non-GAAP) | $306.6 | $276.7 | +11% |
| Distributable cash flow (non-GAAP) | $216.4 | $194.0 | +12% |
Revenue growth reflected higher commodity volumes and higher NGL and condensate prices, partly offset by lower natural gas and petroleum product prices and hedge impacts. Management reported stronger operating margins in both segments. The common-shareholder loss reflects, among other items, $22.9 million of Series A preferred dividends and $7.0 million of deemed preferred dividends.
Cash flow, balance sheet and liquidity
- Operating cash flow was $354.4 million, versus $318.7 million. Investing cash outflow was $677.3 million, including $595.9 million of property, plant and equipment outlays; financing cash inflow was $405.5 million.
- Cash rose to $219.8 million from $137.2 million. Total assets were $14.75 billion and total owners’ equity was $6.96 billion at quarter-end.
- Total debt obligations were $5.36 billion: $300 million current and $5.06 billion long-term. Targa reported compliance with debt covenants. Consolidated debt includes Partnership obligations; the filing states Targa Resources Corp. is not contractually responsible for servicing Partnership debt.
- At March 31, availability was $235 million under the TRC revolver and $1.194 billion under the Partnership revolver. At May 1, reported consolidated liquidity was $2.45 billion, including cash, facilities and securitization availability, net of specified borrowings and letters of credit.
- Common dividends declared were $0.91 per share for the quarter. The Series A preferred stock carries a 9.5% cumulative dividend.
Material changes and notable items
- Plant natural gas inlet volumes increased 16% to 3,752.3 MMcf/d; gross NGL production increased 34% to 386.9 MBbl/d. Gathering and Processing operating margin rose 24% to $220.8 million; Logistics and Marketing operating margin rose 6% to $138.4 million.
- Capital expenditures increased to $558.0 million from $174.6 million, primarily reflecting Grand Prix, Permian processing and infrastructure projects, and Train 6. Growth capital expenditures were $535.6 million.
- Q1 included a $56.1 million expense from the increased fair value of the Permian Acquisition earn-out liability, now $373.0 million. The first earn-out portion expired with no payment due; a potential second payment remains recorded and is subject to future estimates.
- A $72.5 million decrease in the estimated redemption value of mandatorily redeemable preferred interests contributed to reported interest income; the change was primarily due to amended joint-venture agreements. These valuation effects are not equivalent to recurring operating cash flows.
- Adoption of revenue-recognition standard Topic 606 changed gross-versus-net and revenue/product-purchase classifications, reducing reported Q1 revenue by $92.9 million versus the pre-adoption presentation, with no impact on operating margin or net income. Targa also early adopted hedge-accounting guidance.
- Cash dividends paid to common and preferred shareholders totaled $222.6 million. Targa issued 1.16 million common shares for net proceeds of $57.7 million during the quarter.
Outlook, projects and risks
- Management estimated at least $2.18 billion of 2018 net growth capital expenditures and contributions to unconsolidated affiliates for announced projects, and approximately $120 million of net maintenance capital expenditures. It stated available liquidity and expected cash flows should fund operations, capital spending, debt obligations and dividends for at least the next 12 months, subject to risks and conditions.
- Grand Prix, including its southern Oklahoma extension, was estimated at approximately $1.7 billion total cost; Targa estimated its share of growth spending at approximately $1.1 billion, including approximately $900 million in 2018. The pipeline was expected to enter service in Q2 2019.
- Other announced projects included two 250 MMcf/d Permian Midland plants expected in 2019; two 250 MMcf/d Delaware plants expected in late 2019 and 2020, with approximately $500 million of related growth capital; and a 100 MBbl/d Mont Belvieu fractionator expected in Q1 2019. GCX was expected in service in Q4 2019, subject to regulatory approvals.
- Stonepeak committed up to approximately $960 million to development joint ventures. Targa has options to acquire portions of Stonepeak’s interests under specified terms, which could require substantial future funding.
- In April 2018, the Partnership issued $1.0 billion of 5⅞% senior notes due 2026 and used net proceeds primarily to repay credit-facility borrowings. Targa also disclosed an agreement to sell its inland marine barge business for approximately $69.3 million, subject to closing conditions.
- Key risks include commodity-price movements and hedge exposure, interest-rate increases on variable-rate borrowings, counterparty and customer credit risk, capital-market access, project construction and permitting, and cost or schedule execution. Petredec accounted for approximately 14% of consolidated revenue in Q1 2018. Targa disclosed ordinary-course legal and regulatory proceedings without quantifying potential exposure in this text.
Important facts for investors to verify
- Whether projected project costs, in-service dates, third-party commitments and expected returns remain on track, particularly for Grand Prix, GCX and Permian expansions.
- The range and timing of any remaining Permian Acquisition earn-out payment; the $373 million fair value is an estimate, not a fixed payment amount.
- How much of reported earnings and cash generation reflects recurring operations versus contingent-consideration and preferred-interest valuation changes.
- Whether operating cash flow and future financing can support the stated capital program and dividends while managing consolidated and Partnership-level debt.
- Exposure to the 14% revenue concentration with Petredec, commodity hedges and collateral requirements, and the effect of potential interest-rate increases.
- For comparability, account for Topic 606’s gross-versus-net presentation changes when comparing reported revenue with prior periods.