Targa Resources Corp. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Targa is a midstream energy company focused on natural gas gathering and processing, NGL transportation, fractionation and exports, and crude oil gathering and terminaling. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1,902.5 | $2,986.4 | $6,197.2 | $7,886.3 |
| Operating income | $41.6 | $76.7 | $216.6 | $318.2 |
| Consolidated net income (loss) | $32.1 | ($11.2) | $56.3 | $148.6 |
| Net income (loss) attributable to Targa Resources Corp. | ($47.3) | ($23.7) | ($96.4) | $108.2 |
| Net income (loss) attributable to common shareholders | ($78.6) | ($54.0) | ($189.6) | $17.9 |
| Adjusted EBITDA (non-GAAP) | $349.6 | $347.2 | $970.3 | $958.3 |
| Distributable cash flow (non-GAAP) | $229.9 | $287.2 | $619.4 | $728.5 |
- Q3 gross margin was $574.4 million, down 5%; operating margin was $374.2 million, down 8%. For the first nine months, gross margin was $1,781.5 million, up 8%, and operating margin was $1,180.7 million, up 6%. These are company-defined non-GAAP measures.
- Commodity sales fell 40% in Q3 and 25% for the nine-month period, largely because of lower commodity prices. Midstream service fees declined 7% in Q3 but rose 4% year to date.
- The disparity between consolidated profit and losses attributable to Targa and common shareholders reflects income allocated to noncontrolling interests and preferred-stock dividends and deemed dividends.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $919.0 million, versus $914.6 million a year earlier. Investing activities used $2,620.0 million, primarily for growth projects; financing activities provided $1,795.2 million. Cash ended the period at $326.3 million.
- Cash outlays for capital projects were $2,434.1 million. Total debt obligations were $7,537.7 million at September 30, 2019, compared with $6,660.3 million at December 31, 2018. The Partnership’s debt is consolidated in Targa’s statements, although Targa states it does not have the contractual obligation to pay the Partnership’s debt service.
- At September 30, Targa reported $435 million drawn on its $670 million revolver, with $235 million available; the Partnership reported $830 million drawn on its $2.2 billion revolver, with $1,296.2 million available. The $400 million receivables securitization facility had no availability at that date. On November 1, the company reported consolidated total liquidity of $1,800.5 million, including cash and undrawn capacity, net of outstanding borrowings and letters of credit.
- Current assets of $1,476.0 million were below current liabilities of $1,669.3 million at quarter-end. Management said cash, operating cash flow, borrowing capacity, and other financing sources should cover operations and anticipated needs for at least the next twelve months. Targa and the Partnership were in compliance with debt covenants.
Changes, developments and outlook
- Growth in Permian and Badlands volumes supported gathering and processing activity, but lower commodity prices weighed on that segment’s results. Logistics and Marketing operating margin increased 32% in Q3 and 28% year to date, benefiting from Grand Prix, higher fractionation and export volumes, and Train 6. Overall Q3 operating margin declined as the weakness in Gathering and Processing and higher costs outweighed downstream gains.
- Grand Prix began full service into Mont Belvieu in Q3. Hopson and Pembrook processing plants began operations in 2019; Falcon also began operating late in Q3. Gateway is expected to start in Q4 2020, Peregrine in Q2 2020, and the Central Oklahoma extension of Grand Prix in Q1 2021. Train 7 and Train 8 were expected to start by the end of Q1 and Q3 2020, respectively.
- Management estimated 2019 growth capital expenditures of approximately $2.4 billion, net of noncontrolling interests and excluding acquisitions, plus net contributions to announced-project affiliates; expected maintenance capital expenditures were approximately $130 million, net of noncontrolling interests.
- In April, Targa sold a 45% interest in Targa Badlands to Blackstone for $1.6 billion in cash, used for debt repayment, general corporate purposes and growth funding. Targa retained operating control and majority governance rights and continued consolidating Badlands. In November, it agreed to sell Permian Delaware crude gathering and storage assets for approximately $135 million, subject to approvals and closing conditions; a possible Permian Midland sale remained under evaluation.
- Debt financing included $1.5 billion of Partnership senior notes issued in January, with proceeds used in part to redeem 2019 notes and repay credit-facility borrowings. Higher average borrowings contributed to increased interest expense.
Risks, contingencies and unusual items
- A $65.8 million gain on sale of an equity-method investment increased Q3 and nine-month pretax income. The company also recorded a $17.9 million asset write-down in Q3. In Q1, it recorded a one-time $12.5 million depreciation overstatement to correct an error concerning assets placed in service in 2018; management said prior-period statements were not materially misstated.
- Commodity prices, production and throughput, counterparty and customer credit, access to capital, interest rates, regulation, weather, and project execution are identified risks. Derivative positions reduce some commodity exposure but can create earnings volatility; a 10% commodity-price increase would have changed the reported derivative fair value to a net liability of $34.0 million, while a 10% decrease would have produced a net asset of $175.4 million.
- Variable-rate borrowings expose the company to rate increases; a 100-basis-point increase was estimated to raise annual consolidated interest expense by $15.1 million based on quarter-end debt. Petredec accounted for approximately 11% of Q3 and 12% of nine-month revenue in 2019.
- A dispute with Vitol over payments under a terminated splitter agreement affects the timing of recognition of related deferred revenue, including $129 million of Vitol payments. The filing also describes ordinary-course legal and environmental proceedings and an IRS examination of 2014–2016 tax returns; management did not anticipate material changes in prior-year taxable income.
- The filing identifies potential changes to partnership tax treatment as a risk. It also cautions that forward-looking statements are subject to uncertainties and that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether new Permian and downstream capacity achieves expected utilization, margins, start dates and returns on substantial capital investment.
- How cash generation, leverage, interest expense and liquidity evolve relative to the capital program and common and preferred distributions.
- The extent to which lower commodity prices, hedging outcomes and noncontrolling-interest allocations affect cash available to Targa shareholders.
- Closing and proceeds from the Delaware asset sale, the outcome of Midland divestiture reviews, and the terms and economics of the Badlands investment.
- Resolution of the Vitol dispute and any material developments in legal, environmental, tax-audit or partnership-tax matters.