Targa Resources Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Targa provides natural gas gathering and processing, NGL logistics and marketing, crude gathering, and related midstream services. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and condition
- Second quarter: Revenue was $1,867.7, up 18% year over year, driven mainly by higher commodity prices; commodity sales rose 24% while midstream service fees fell 10%. Net income was $70.6 versus a $14.6 loss in Q2 2016. Net income attributable to Targa was $57.6; common shareholders’ income was $28.4, or $0.14 per diluted share, versus a $52.6 loss, or $0.33 per share, a year earlier.
- First six months: Revenue was $3,980.3, up 32%. Net loss was $39.9 versus $15.2 in 2016; net loss attributable to Targa was $61.7, and common-shareholder loss was $120.0, or $0.61 per diluted share, compared with $59.1, or $0.44 per share.
- Margins and earnings measures: Q2 operating income was $37.2, down from $66.3. Non-GAAP operating margin was $291.9, down 3%; six-month operating margin was essentially flat at $598.3. Gathering and Processing operating margin increased 25% for Q2 and 38% for six months, while Logistics and Marketing fell 21% and 19%, respectively. Adjusted EBITDA was $257.9 for Q2 and $534.6 for six months; distributable cash flow was $196.0 and $390.2, respectively. These are non-GAAP measures.
- Cash flow: Six-month operating cash flow was $464.5, compared with $457.5. Investing cash outflow was $1,108.6, including $570.8 for the Permian acquisition; cash capital-project outlays were $527.6. Financing activities provided $669.3, substantially supported by equity offerings. Cash ended the period at $98.7.
- Debt and liquidity: Total debt obligations were $4,437.6 at June 30, down from $4,881.0 at year-end 2016; $500.1 was classified as current, including $250.5 of 5% notes due January 2018. Targa reported covenant compliance. As of July 31, reported consolidated liquidity was $1,837.5. Consolidated debt includes Partnership obligations that Targa says it is not contractually required to repay directly.
- Dividends and equity: Common dividends declared were $0.91 per share for each of the first two 2017 quarters. Series A preferred stock carries a cumulative 9.5% dividend. Targa issued 26.2 million shares in January and June public offerings and sold additional shares through its at-the-market program.
Material changes and significant items
- The March 2017 Permian acquisition had $570.8 of cash consideration and preliminary fair-value contingent consideration of $416.3 at acquisition; the fair value was $417.4 at June 30. Additional earn-outs of up to $935.0 may be payable in 2018 and 2019. Acquired operations contributed $36.4 of revenue and a $12.6 net loss from March through June.
- Targa acquired the Flag City processing assets for a base price of $60.0 million plus preliminary closing adjustments, transferred the processing contracts to its Silver Oak facilities, and shut down the acquired plant for relocation. It also bought the remaining 10% interest in Silver Oak II for $12.5 million.
- The Venice Gathering System sale generated approximately $0.4 in cash and a $16.1 first-quarter loss. Separately, Targa recorded a $12.0 impairment of its investment in the T2 EF Cogen joint venture.
- The Q2 net income improvement includes a $106.0 income tax benefit. The six-month tax benefit was $34.9; management said a tax loss limitation required use of a 37.3% statutory rate. Thus, the quarterly profit should be considered alongside the tax effects and the six-month loss.
Outlook, risks, and controls
- Management expected at least $1.375 billion of 2017 net growth capital expenditures for announced projects, excluding acquisitions, and approximately $110 million of net maintenance capital expenditures. It said available cash, operating cash flow, borrowing capacity, and capital-market access should fund operations and obligations for at least 12 months, subject to market and operating conditions.
- Growth plans include the Grand Prix NGL pipeline, expected in service in Q2 2019 with initial Permian capacity of about 300,000 barrels per day and estimated net growth cost of approximately $1.3 billion. New Joyce, Johnson, and Wildcat processing plants were also planned for 2018 start-ups; project timing and spending remain execution risks.
- Key exposures include commodity prices, producer activity and volumes, interest rates, counterparty credit, collateral requirements, weather, regulation, and access to capital. A 100-basis-point increase in variable rates would raise estimated annual consolidated interest expense by $6.9. Commodity hedges reduce some cash-flow variability but can limit gains when prices rise; the reported net derivative asset was $38.0.
- Management disclosed that disclosure controls were not effective because of a previously identified material weakness in interim income-tax provision preparation and review. Remediation measures were being tested during 2017. This is a significant reporting-control matter for investors to monitor.
- The filing reports ordinary-course legal and regulatory proceedings without a clear quantified exposure. It also cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the large Q2 tax benefit is recurring or primarily reflects interim tax-rate adjustments, and how the material weakness remediation progresses.
- Permian earn-out assumptions, final acquisition valuations, and the acquired assets’ contribution to margins and cash flow.
- Funding needs and expected returns for Grand Prix and the substantial 2017 growth-capital program, including project schedules and customer commitments.
- Dividend coverage relative to distributable cash flow, capital spending, preferred dividends, and future financing needs.
- Near-term maturities, credit-facility availability, and the distinction between Targa’s obligations and consolidated Partnership debt.