Targa Resources Corp. — FY 2019 Form 10-K
Period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where disclosed. Targa provides U.S. midstream natural gas, NGL and crude oil gathering, processing, transportation, storage, fractionation and marketing through Gathering and Processing and Logistics and Transportation segments.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $8.671 billion | $10.484 billion | Down 17% |
| Gross margin (non-GAAP) | $2.553 billion | $2.246 billion | Up 14% |
| Operating margin (non-GAAP) | $1.760 billion | $1.524 billion | Up 15% |
| Adjusted EBITDA (non-GAAP) | $1.436 billion | $1.291 billion | Up 11% |
| Distributable cash flow (non-GAAP) | $947.2 million | $942.4 million | Up $4.8 million |
| Net income | $41.2 million | $60.4 million | Down 32% |
| Net loss attributable to Targa | $209.2 million | Net income of $1.6 million | Turned to loss |
| Net loss attributable to common shareholders | $334.0 million; $1.44 per diluted share | $119.3 million; $0.53 per diluted share | Loss widened |
Revenue declined primarily because of lower NGL and natural gas prices, partly offset by increased volumes and higher midstream service fees. Gross and operating margin and Adjusted EBITDA rose, led by improved results in both segments. The gap between consolidated net income and Targa-attributable results reflects, among other factors, $250.4 million of income attributable to noncontrolling interests; preferred dividends and deemed dividends further reduced earnings attributable to common shareholders.
- Cash flow: Cash from operations was $1.390 billion, versus $1.144 billion in 2018. Cash used in investing was $3.072 billion, including $2.878 billion of capital outlays. Cash from financing was $1.781 billion. Year-end cash was $331.1 million.
- Capital spending: Growth capital expenditures were $2.567 billion and maintenance capital expenditures were $141.7 million. Management estimated 2020 net growth capital of $1.2–$1.3 billion and net maintenance capital of approximately $150 million.
- Debt: The filing reports approximately $7.87 billion of total indebtedness at year-end, excluding certain debt issuance costs and premiums; the debt table reports $7.822 billion of total debt obligations including finance leases. This consolidated amount includes Partnership debt, for which Targa Resources Corp. says it has no direct contractual obligation to pay principal or interest. Senior unsecured debt ratings were BB at S&P and Ba3 at Moody’s.
- Liquidity: At December 31, 2019, cash was $331.1 million; the Partnership had $2.112 billion of availability under its revolver and $30 million under its receivables facility, while Targa’s revolver had $235 million available. Reported consolidated liquidity at February 14, 2020 was $2.471 billion. The company and Partnership were in compliance with debt covenants at year-end.
- Dividends: Common dividends were $0.91 per share each quarter, or $3.64 for 2019. Series A preferred stock carries a cumulative 9.5% dividend.
Fourth-quarter indicators
In Q4 2019, revenue was $2.474 billion, gross margin was $771.1 million, operating income was a loss of $23.7 million and net income was a loss of $15.1 million. Net loss attributable to common shareholders was $144.5 million, or $0.62 per share. The quarter included a $229.0 million non-cash impairment charge.
Material changes and significant developments
- Gross margin increased 14% despite lower commodity prices; Gathering and Processing operating margin rose 7% to $1.006 billion, and Logistics and Transportation operating margin rose 46% to $867.2 million.
- Average gathering and processing inlet volumes increased 13% to 4,438.2 MMcf/d; NGL production rose 22% to 505.4 MBbl/d. Logistics fractionation volumes rose 22% to 519.0 MBbl/d, and export volumes rose 17% to 237.9 MBbl/d.
- Commodity sales fell 20%, with lower NGL and natural gas prices the principal factor; fees from midstream services increased 6% to $1.277 billion. Interest expense, net, rose to $337.8 million from $185.8 million, principally due to higher average borrowings.
- Grand Prix NGL Pipeline and Gulf Coast Express natural gas pipeline entered service in Q3 2019; Train 6 and new Permian processing plants also began operations. Growth projects supported higher volumes but increased depreciation and operating costs.
- Targa sold a 45% interest in Targa Badlands for $1.6 billion and used proceeds for debt reduction, general corporate purposes and growth spending. It also sold an equity-method investment for $73.8 million, recognizing a $69.3 million gain.
Outlook, risks and unusual items
- Management expects near-term growth from projects entering service and producer activity in its operating basins. It described 2019 as a key inflection point following completion of major projects and emphasized optimizing existing assets and investing along its core value chain.
- Planned projects included the Peregrine and Gateway processing plants, Train 7 and Train 8 fractionators, export capacity expansion and the Central Oklahoma Grand Prix extension. Timing and completion remain subject to construction, permitting, market and other risks.
- Commodity prices remain volatile. Lower prices or reduced producer drilling could lower throughput and utilization; exposure is partly mitigated by fee-based contracts and hedges, but hedges do not cover all volumes and may introduce basis, counterparty and cash-margin risks.
- Year-end impairments included a $225.3 million partial impairment of North Texas and Coastal gas processing and gathering assets, plus a $17.9 million write-down of treating units. Management cited sustained low commodity prices and declining gas production. The filing also records a $59.5 million loss on the Permian Delaware crude gathering and storage assets held for sale; the sale closed January 22, 2020.
- A $129.0 million deferred revenue balance relates to a terminated condensate splitter agreement with Vitol. Vitol disputes Targa’s right to retain the first three annual payments; the timing of recognition depends on resolution of the dispute.
- Other important risks include substantial leverage and refinancing needs, customer or counterparty credit deterioration, competition, project execution and capital access, environmental and pipeline-safety regulation, severe weather and cyber incidents. Targa estimated average annual pipeline-integrity testing costs of $3.8 million for 2020–2022, excluding potentially substantial repairs.
- The IRS notified Targa of an examination of its 2014–2016 federal returns; management did not anticipate material changes in prior-year taxable income. The filing describes ordinary-course legal and environmental proceedings but does not provide a clear quantified aggregate exposure in the supplied text.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The critical audit matter was the impairment assessment for North Texas and Coastal assets, involving estimates of gas volumes, commodity prices and terminal value.
Key facts for investors to verify
- Reconcile consolidated debt figures and assess debt maturities, interest costs, covenant headroom and the distinction between parent and Partnership obligations.
- Track whether projected growth capital, new facility start dates and contracted volumes translate into sustained cash flow and returns.
- Evaluate distributable cash flow coverage of common and preferred dividends, including the effect of preferred claims and Partnership distributions.
- Monitor commodity-price exposure, hedge coverage, basis risk, counterparty credit and customer concentration; Petredec represented approximately 12% of 2019 consolidated revenue.
- Follow the Vitol splitter dispute, any subsequent impairment or asset-sale developments, and the operational and financial impact of the Permian Delaware divestiture.