Targa Resources Corp. — 2014 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2014, including the fourth quarter. Targa Resources Corp. is principally a holding company: its cash generation depends on distributions from Targa Resources Partners LP (the Partnership), whose midstream businesses gather and process natural gas and crude oil and provide NGL fractionation, storage, transportation, marketing and export services. Targa consolidates the Partnership, so consolidated results include earnings attributable to outside investors; the Partnership’s assets and cash are subject to distribution and debt-agreement restrictions.
Financial and operating performance
Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $8,616.5 | $6,314.7 | +36% |
| Gross margin (non-GAAP) | $1,569.6 | $1,177.7 | +33% |
| Operating income | $640.5 | $368.2 | +74% |
| Net income | $423.0 | $201.3 | +110% |
| Net income attributable to Targa common shareholders | $102.3 | $65.1 | +57% |
| Diluted earnings per share | $2.43 | $1.55 | +57% |
| Operating cash flow, consolidated | $761.8 | $382.7 | +$379.1 |
- Margins and Partnership measures: Partnership operating margin, a non-GAAP measure, rose to $1,136.6 from $801.5. Partnership adjusted EBITDA increased 53% to $970.3, and distributable cash flow increased to $763.2 from $446.3. These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
- Fourth quarter: Revenue was $2,032.9 versus $2,104.4 in Q4 2013; gross margin was $398.2 versus $355.0; operating income was $163.1 versus $144.9; and net income attributable to Targa common shareholders was $25.6 versus $20.4. Diluted EPS was $0.61 versus $0.48.
- Cash flow and investment: Consolidated investing cash flow was negative $751.4, including $762.2 of cash outlays for capital projects. Financing cash flow was $3.9; year-end cash was $81.0. Partnership growth and maintenance capital expenditures were $668.7 and $79.1, respectively.
- Debt and liquidity: Consolidated debt was $3,068.2 at year-end, including $2,885.4 of long-term debt and $182.8 under the Partnership’s receivables securitization facility. The Partnership had no revolver borrowings and $1,155.9 of revolver availability at December 31, with $44.1 of letters of credit outstanding. Both Targa and the Partnership reported compliance with debt covenants.
- Parent-company cash returns: Targa declared $2.8425 per common share in 2014, versus $2.2050 in 2013. Its cash flow depends on Partnership distributions and is reduced by taxes, expenses, debt service and reserves; dividends are not assured.
Material changes versus the prior comparable period
- Results improved substantially year over year, with higher volumes, fee-based revenues, NGL export activity and fractionation fees among the principal contributors. Revenue also reflects commodity sales and product purchases, which rose 37%; revenue growth alone therefore does not measure profitability.
- Logistics Assets operating margin increased to $445.1 from $282.3, while Marketing and Distribution rose to $249.6 from $141.9. Field Gathering and Processing rose to $372.3 from $270.5. Coastal Gathering and Processing declined to $77.6 from $85.4.
- International LPG export capacity reached an effective 7.0 million barrels per month after Phase II was completed in 2014; annual export volumes rose to 176.9 MBbl/d from 66.6 MBbl/d. Longhorn and High Plains processing plants also began commercial operations.
- Cash flow from operations increased, while investing outlays declined from 2013. The Partnership issued $800 million of 4⅞% notes and redeemed its 7⅞% notes, recording a $12.4 loss on debt redemption. Its year-end securitization borrowing was classified as current.
Outlook, risks and unusual items
- Outlook and capital spending: The Partnership estimated 2015 growth capital expenditures of $490–$675 million, excluding additional spending related to the proposed APL merger. Management said lower commodity prices and expected reductions in producer activity prompted a reassessment of the planned Delaware Basin and North Dakota processing plants’ capacity and timing. The filing does not provide a clear quantified 2015 earnings or distribution forecast.
- Atlas transactions: As of the filing, the proposed APL and ATLS mergers were expected to close concurrently on February 28, 2015, subject to approvals and other conditions. The proposed transactions carried significant financing, integration, execution and litigation risks. Pro forma liquidity figures depend on merger-related financing and transaction assumptions; the filing reports Partnership liquidity of $601.0 million on an adjusted pro forma basis as of January 31, 2015, versus $2,504.8 million historically on that date.
- Commodity, volume and financing risks: Falling oil, condensate and NGL prices may reduce producer drilling, throughput and demand for gathering and processing. About 51% of Partnership gathered natural gas volume was under percent-of-proceeds arrangements in 2014. Hedging mitigates but does not eliminate price, basis, volume and counterparty risk. Access to capital and the ability to refinance or service debt are also material risks.
- Unusual items: Targa recorded a $7.3 impairment of gas-processing facilities following lower forecast volumes and processing spreads. The Partnership’s hedging activities reduced 2014 revenue by $8.0 million, compared with a $21.2 million benefit in 2013. Other operating income included an insurance settlement; 2014 other expense included costs related to the pending mergers.
- Contingencies and regulation: The Texas environmental agency issued notices concerning alleged air-emissions violations at the Mont Belvieu Fractionator. Targa expected a potential monetary sanction above $100,000 but below $280,000; the matter was not described as resolved. The filing also highlights potentially higher costs from environmental, climate, hydraulic-fracturing and pipeline-safety regulation. Atlas-related lawsuits sought to delay or challenge the mergers; supplemental disclosures and settlement processes were underway as of the filing.
- Reporting qualification: The Partnership revised prior-year revenue and product-purchase presentation to report certain NGL buy-sell transactions net. It said the reclassification had no effect on net income, cash flows or financial position.
Most important facts for investors to verify
- Whether the Atlas mergers closed on the anticipated terms and timing, and the resulting debt, dilution, IDR reductions, liquidity and integration costs.
- Whether lower commodity prices materially affected producer activity, throughput, segment margins, planned projects or Partnership distributions.
- How much of Partnership cash generation is fee-based versus commodity-sensitive, and whether hedge coverage, basis exposure and counterparty quality remain adequate.
- Whether operating cash flow and distributable cash flow support the Partnership’s distributions and Targa’s dividend after capital spending, taxes, interest and reserves.
- The status and financial effect of the Mont Belvieu environmental matter, merger-related litigation settlements, and the $7.3 million impairment.
- Debt maturities, covenant headroom and the renewal or replacement of the receivables securitization facility due in December 2015.