Targa Resources Corp. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; it includes unaudited quarterly data. Targa provides natural gas gathering and processing, crude oil gathering, and NGL logistics and marketing through its Gathering and Processing and Logistics and Marketing segments.
Financial and operating highlights
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $10.484 billion | $8.815 billion |
| Gross margin (non-GAAP) | $2.246 billion | $1.909 billion |
| Operating margin (non-GAAP) | $1.524 billion | $1.286 billion |
| Operating income (loss) | $237.5 million | $(122.4) million |
| Net income | $60.4 million | $104.2 million |
| Net income attributable to TRC | $1.6 million | $54.0 million |
| Net income (loss) attributable to common shareholders | $(119.3) million | $(63.4) million |
| Adjusted EBITDA (non-GAAP) | $1.366 billion | $1.140 billion |
| Distributable cash flow (non-GAAP) | $942.4 million | $851.8 million |
| Cash from operating activities | $1.144 billion | $939.5 million |
| Cash used in investing activities | $(3.147) billion | $(1.893) billion |
- Growth and maintenance capital expenditures totaled $3.328 billion in 2018, including $3.193 billion of growth spending. Cash capital outlays were $3.115 billion.
- Year-end cash was $232.1 million. At February 21, 2019, reported consolidated liquidity was $2.249 billion.
- At December 31, 2018, consolidated debt obligations were $6.693 billion before unamortized debt costs and premiums; $1.415 billion was variable-rate debt. Targa reports that it was in compliance with debt covenants.
- Common dividends were $3.64 per share for 2018, unchanged from 2017. The Series A preferred stock carries a 9.5% cumulative annual dividend.
- Operating volumes rose: natural gas processed averaged 3,937.4 MMcf/d, NGL production 415.7 MBbl/d, and crude oil gathered 211.7 MBbl/d.
Material changes versus 2017
- Revenue increased 19%; gross margin increased 18%, and operating margin increased 19%. Management attributed the improvement primarily to higher Gathering and Processing and Logistics and Marketing results, increased volumes, and stronger NGL and condensate prices, partly offset by lower natural gas prices.
- Gathering and Processing operating margin rose 24% to $968.4 million; Logistics and Marketing operating margin rose 16% to $592.5 million. Field volumes increased, especially in the Permian and South Texas; North Texas and West Oklahoma inlet volumes declined.
- Common-shareholder losses widened to $119.3 million despite positive operating income. The year included a $210 million goodwill impairment, while 2017 included a $378 million impairment of North Texas property and equipment and a significant tax benefit from the 2017 Tax Act.
- Operating cash flow increased $204.5 million. Investing outflows rose substantially as growth projects advanced; equity issuance and joint-venture contributions helped finance the investment program.
- Q4 2018 revenue was $2.598 billion; gross margin was $589.2 million. The quarter recorded an operating loss of $80.9 million, net loss of $88.4 million, and common-shareholder loss of $137.3 million. The quarter included the $210 million goodwill impairment.
Outlook, management commentary and key risks
- Management estimated at least $2.3 billion of 2019 net growth capital expenditures for announced projects and approximately $130 million of net maintenance capital expenditures.
- Major projects under development included Grand Prix NGL pipeline, expected fully in service in Q3 2019; Gulf Coast Express natural gas pipeline, expected in service in Q4 2019 pending approvals; Permian processing plants; and Mont Belvieu fractionation Trains 6–8. Timing, cost and utilization depend on execution, permitting and producer volumes.
- In February 2019, Targa agreed to sell a 45% interest in Badlands for $1.6 billion, retaining operation and majority governance. Closing was expected in Q2 2019, subject to approvals and conditions; proceeds were expected to support debt reduction and general corporate purposes.
- In January 2019, the Partnership issued $1.5 billion of senior notes and used proceeds to redeem its 2019 notes, with remaining proceeds available for general purposes. The filing’s liquidity assessment depends on operating cash flow, borrowing capacity, capital-market access and potential asset-sale proceeds.
- Vitol terminated the Channelview Splitter agreement in December 2018 and disputes Targa’s right to retain the first three $43 million annual payments. The splitter was still being commissioned, and Targa was pursuing third-party contracts and commercialization; $129 million of deferred revenue related to the agreement remained on the balance sheet.
- Risk factors include substantial indebtedness, commodity-price and volume exposure, customer and counterparty credit risk, project cost or schedule overruns, regulatory and environmental obligations, pipeline integrity and safety, weather, and reliance on access to capital. Petredec represented approximately 15% of 2018 consolidated revenue.
- Other notable items include $210 million of remaining Atlas-related goodwill impairment, a $308.2 million estimated Permian Acquisition earn-out classified as current at year-end, and environmental settlements/orders carrying penalties of $150,000 and $220,000.
Important facts for investors to verify
- Whether the Badlands sale closed on schedule, its net proceeds, and the resulting debt and leverage position.
- Actual 2019 growth-capital spending, project costs and start-up dates, plus customer commitments and realized throughput for Grand Prix and GCX.
- Resolution of the Vitol dispute, Channelview Splitter commercialization, and the timing of recognition of related deferred revenue.
- The amount and payment of the Permian Acquisition earn-out, and the resulting cash and financing effects.
- Cash generation and dividend coverage after preferred distributions, maintenance capital, interest and the high planned growth investment; review non-GAAP reconciliations alongside GAAP results.
- Exposure to customer concentration, unhedged commodity prices, variable-rate debt, and any additional impairment or regulatory costs.