Targa Resources Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless noted otherwise, financial amounts are in millions of dollars. Targa is a midstream energy company operating Gathering and Processing and Logistics and Marketing businesses.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $2,299.4 | $2,455.6; down 6% |
| Income (loss) from operations | $61.3 | $86.3 |
| Net income (loss) | $(24.7) | $38.9 |
| Net income (loss) attributable to Targa | $(38.9) | $22.9 |
| Net income (loss) attributable to common shareholders | $(69.7), or $(0.30) per share | $(7.0), or $(0.03) per share |
| Gross margin (non-GAAP) | $573.4 | $514.6; up 11% |
| Operating margin (non-GAAP) | $383.2 | $341.4; up 12% |
| Adjusted EBITDA (non-GAAP) | $313.9 | $306.6; up 2% |
| Distributable cash flow (non-GAAP) | $196.7 | $216.4; down 9% |
| Cash from operating activities | $307.6 | $354.4 |
Commodity sales fell 9%, while midstream service fees rose 15%. Lower commodity prices reduced reported sales and product purchases; higher fee revenue mainly reflected increased gas processing and crude gathering fees. Operating margin improved in both main segments, supported by higher volumes and activity, despite higher operating costs.
Cash used in investing activities was $1,069.2, including $943.3 of property, plant and equipment outlays. Financing activities provided $654.4, and cash declined $107.2 to $124.9. Growth capital expenditures were $870.0 and maintenance expenditures $35.6. The company’s reported non-GAAP distributable cash flow was below its common and preferred dividends paid or accrued during the quarter.
At March 31, total debt obligations were $7,436.6, compared with $6,660.3 at December 31, 2018. Current debt obligations were $318.1 and long-term debt was $7,118.5. The Partnership issued $1.5 billion of senior notes in January and used proceeds in part to redeem its 2019 notes and repay revolver borrowings. Targa and the Partnership reported compliance with debt covenants. Cash was $124.9 at quarter-end; reported unused capacity included $235.0 under Targa’s revolver, $1,460.2 under the Partnership’s revolver and $30.0 under the receivables securitization facility.
Management reported consolidated liquidity of $3,150.3 as of May 3, 2019, including cash on hand and available credit after outstanding securitization borrowings and letters of credit.
Material changes and developments
- Gathering and Processing operating margin rose to $229.0 from $220.8. Plant natural gas inlet volumes increased 13% to 4,234.1 MMcf/d, and NGL production increased 20% to 462.6 MBbl/d. The company cited growth in the Permian and Badlands, partly offset by lower South Texas volumes and weaker commodity prices.
- Logistics and Marketing operating margin increased 10% to $152.1. Fractionation volumes grew 17% and export volumes 6%; higher LPG export and fractionation margins were partly offset by lower terminaling and storage throughput and lower commercial transportation margin.
- Quarter-end debt rose following the $1.5 billion note issuance. In April, after the reporting date, Targa closed the sale of a 45% interest in Targa Badlands LLC to Blackstone for $1.6 billion cash. Targa retained operatorship and majority governance rights; proceeds were intended for debt repayment, general corporate purposes and growth capital.
- On adoption of the new lease standard, Targa recognized a $74.6 net right-of-use asset and a $90.9 lease liability, with no opening retained-earnings adjustment.
Outlook, risks and unusual items
- Management estimated 2019 net growth capital expenditures and net contributions to unconsolidated affiliates of approximately $2.3 billion for announced projects, and net maintenance capital expenditures of approximately $130 million. It stated that funding sources should be sufficient for operations, capital needs, debt obligations, collateral requirements and dividends for at least the next 12 months, assuming anticipated operations and no disruptive events. No specific earnings or cash-flow guidance was provided.
- Key project schedules included Grand Prix’s main segments expected fully in service in Q3 2019 and its Central Oklahoma extension expected in Q1 2021; the Falcon processing plant expected in Q4 2019; Peregrine expected in Q2 2020; and Gulf Coast Express expected in Q4 2019. Train 6 began operations in early May 2019. Timing, costs and volumes remain subject to execution and market conditions.
- A $12.5 one-time overstatement of depreciation expense was recorded in Q1 to correct depreciation on assets that should have been placed in service during 2018. Management said the prior-period error was not material and did not restate prior financial statements.
- The second Permian Acquisition earn-out payment, recorded at $317.9 in accounts payable and accrued liabilities at March 31, was due in May 2019. Targa also disclosed a dispute with Vitol over whether the first three annual payments under a terminated splitter agreement were retained by Targa; $129.0 of related payments remained within deferred revenue, and recognition timing depended on resolving the dispute.
- Risks include commodity-price and interest-rate volatility, producer activity and throughput, access to capital, collateral needs, counterparty credit, project execution, regulation and environmental compliance. Targa had no interest-rate hedges; a 100-basis-point rate change was estimated to affect annual consolidated interest expense by $14.1 based on quarter-end variable-rate debt. Petredec represented approximately 12% of Q1 consolidated revenue.
- Targa Badlands LLC agreed to an EPA consent order concerning alleged air-emissions violations, including a $220,000 civil penalty and required compliance improvements. The filing also describes other ordinary-course legal and environmental proceedings.
Important facts for investors to verify
- Whether operating cash generation and distributable cash flow can support the elevated growth-capital program and shareholder distributions.
- How the Badlands sale proceeds were applied, the resulting debt level, and the economics of Blackstone’s priority minimum quarterly distribution and liquidation preference.
- Progress, costs, utilization and start-up timing for Grand Prix, Gulf Coast Express, processing plants, fractionation trains and LPG export expansion.
- Resolution and cash payment of the Permian earn-out, and the Vitol splitter-agreement dispute and related deferred revenue.
- Commodity exposure, hedge performance, counterparty concentrations and the effect of interest rates on debt-service costs.