Targa Resources Corp. annual report, FY2015

Targa Resources Corp. — FY 2015 Form 10-K

Reporting period: Year ended December 31, 2015; the filing also reports fourth-quarter results. Targa Resources Corp. (TRC) primarily holds interests in Targa Resources Partners LP (TRP), whose midstream operations span natural gas gathering and processing, NGL logistics and marketing, and crude oil gathering. TRC consolidated TRP’s results, including amounts attributable to noncontrolling interests.

Financial performance and liquidity

Metric	2015	2014
Revenue	$6.659 billion	$8.617 billion
Gross margin	$1.786 billion	$1.570 billion
Operating margin	$1.281 billion	$1.137 billion
Income from operations	$159.3 million	$640.5 million
Consolidated net income (loss)	$(151.4) million	$423.0 million
Net income available to TRC common shareholders	$58.3 million	$102.3 million
Net cash provided by operating activities	$1.035 billion	$761.8 million
Total debt at year-end	$5.981 billion	$3.068 billion

• Revenue fell 23%, mainly as lower commodity prices reduced commodity sales; higher volumes and fees, including ten months of TPL operations after the Atlas acquisition, partly offset the decline.
• Gross margin rose 14% and operating margin 13%, reflecting acquisition-related and organic volume growth and certain commercial and terminaling gains. Operating income fell 75%, reflecting higher depreciation and amortization, acquisition costs and a provisional $290 million goodwill impairment.
• TRP reported adjusted EBITDA of $1.191 billion versus $970.3 million and distributable cash flow of $867.8 million versus $763.2 million. These are non-GAAP measures and are not substitutes for GAAP results.
• Consolidated operating cash flow was $1.035 billion; investing cash outflow was $2.400 billion, including $1.574 billion for acquisitions and $817.2 million of capital-project outlays. Financing activities provided $1.424 billion.
• Year-end consolidated current assets were $920.0 million and current liabilities $881.6 million; cash was $140.2 million. At January 31, 2016, management reported TRP liquidity of $1.362 billion and TRC non-Partnership liquidity of $233.2 million.
• TRP’s year-end debt included $4.833 billion of senior unsecured notes, $280 million outstanding on its $1.6 billion revolver and $219.3 million under its receivables securitization facility. Both TRC and TRP reported compliance with debt covenants at year-end.

Material changes and notable items

• The February 2015 Atlas mergers added substantial gathering and processing assets; the acquisition consideration was approximately $5.024 billion. The acquired business contributed $1.459 billion of revenue and a $30.1 million net loss from closing through year-end.
• Commodity prices declined sharply: average 2015 natural gas, illustrative NGL and WTI crude prices were $2.67/MMBtu, $0.42/gallon and $48.79/barrel, respectively, versus $4.43, $0.83 and $92.99 in 2014.
• Field Gathering and Processing operating margin increased to $484.8 million from $372.3 million, while Coastal Gathering and Processing fell to $30.3 million from $77.6 million. Logistics Assets and Marketing and Distribution operating margins were $439.5 million and $242.2 million, respectively, slightly below 2014.
• The fourth quarter included the $290 million provisional goodwill impairment and $32.6 million impairment of certain Louisiana processing facilities and gathering systems. Fourth-quarter operating loss was $206.9 million.
• TRC declared dividends of $3.525 per share for 2015, versus $2.845 in 2014. The fourth-quarter 2015 dividend was $0.91 per share. TRP paid $3.28 per common unit during 2015 and declared $0.825 per unit for the fourth quarter.
• On February 17, 2016, after year-end, TRC completed its acquisition of the TRP common units it did not already own, exchanging 0.62 TRC shares per unit. TRP common units ceased public trading; preferred units remained outstanding.

Outlook, risks and contingencies

• Management cited depressed commodity prices and reduced producer drilling plans as risks to near-term volumes, utilization and demand for gathering, processing and fractionation. Fee-based downstream contracts and hedges were described as partial mitigants; hedging coverage declines in later years.
• TRP estimated 2016 growth capital expenditures of $525 million or less for announced projects, lower than prior years. Projects included Cedar Bayou Fractionator Train 5, expected in service in mid-2016; the Buffalo plant, expected in the second quarter of 2016; the Raptor plant, expected in early 2017; and the Channelview splitter, expected by early 2018 at an estimated cost of $130–$150 million. Project timing, costs and producer activity remain uncertain.
• Management expected available cash and liquidity to support operations, debt service, capital spending and distributions for at least the next 12 months, subject to operating conditions and access to capital. This is not a guarantee of future distributions or dividends.
• TRP’s senior debt was rated BB+ by S&P at December 31, 2015; S&P downgraded it to BB- on February 4, 2016 and downgraded TRC’s corporate rating from B+ to B-. The filing reports TRP’s Moody’s rating as Ba2, but gives an unclear date for that rating.
• TRC disclosed a material weakness in internal control over financial reporting involving review of fair-value assumptions and calculations for business combinations. Management said interim-period errors were immaterial and described remediation steps; the auditor also concluded controls were not effective as of year-end. Atlas businesses, representing 51.1% of year-end assets, were excluded from the control assessment.
• Merger-related putative lawsuits sought rescission and, in some cases, damages and legal fees; a request for a temporary restraining order was denied. A FERC rate-increase proceeding for VGS remained pending, with a hearing scheduled for July 2016. Environmental matters included a resolved Texas air-emissions order and a New Mexico notice with an estimated potential sanction of $100,000–$300,000.
• Other significant risks include leverage and refinancing needs, covenant limits on distributions, counterparty and customer credit, basis and hedge effectiveness, pipeline integrity costs, environmental and safety regulation, and potential further goodwill impairment.

Most important facts for investors to verify

• Whether the provisional $290 million goodwill impairment was finalized or changed, and whether further impairment or Louisiana asset charges followed.
• TRP’s post-merger leverage, rating outlook, covenant headroom, maturities and actual liquidity after the February 2016 merger.
• Whether 2016 capital plans and major project budgets and in-service dates were met, given reduced drilling and commodity prices.
• Coverage and sustainability of TRC dividends and TRP distributions, including the effects of the merger, debt service and preferred-unit distributions.
• Remediation and testing of the disclosed material weakness, and the outcome of the merger litigation, VGS rate case and environmental proceedings.
• The filing contains an apparent date inconsistency describing a $500 million preferred-stock financing as announced on February 18, 2018 in one passage, while another identifies February 18, 2016. Verify the date and subsequent status in later filings.