01—Abstract
Summary
Summary of the 10-K filed February 29, 2016. Cited figures are marked; the original filing is the authoritative source.
Targa Resources Corp. (TRGP) reported a difficult 2015 as commodity prices fell sharply, producing a net loss attributable to net income of $58.3 milliona after noncontrolling interests (consolidated net loss of $151.4 million), down from $423.0 million of consolidated net income in 2014.
Consolidated revenues fell 23% to $6.66 billionb, while operating margin rose 13% to $1.28 billion, helped by the February 2015 Atlas mergers (acquisition of APL and ATLS), which added Trident/TPL assets to the Field Gathering and Processing segment. The results were weighed down by a $290.0 million provisional goodwill impairment and $677.1 million of depreciation and amortization. Management disclosed a material weakness in internal control over financial reporting related to the valuation of assets acquired in the Atlas mergers, and concluded that disclosure controls were not effective as of December 31, 2015.
The most important development for shareholders is the February 17, 2016 TRC/TRP Merger (the "Buy-In Transaction"), in which Targa acquired all Partnership common units it did not already own by issuing 0.62 TRC shares per TRP unit, which increased common shares outstanding to roughly 160.6 million. Targa now owns 100% of the Partnership's common units, the general partner, and the IDRs, so its cash flow is no longer dependent on a minority public float, and the change is accounted for as an equity transaction. Leverage is high: total consolidated debt was about $6.0 billionc at year end, the Partnership's senior debt was downgraded by S&P to BB- and TRC's corporate rating to B-, and TRC's stand-alone credit facility carries a 4.50x leverage covenant through 2016.
Management and the board kept dividends rising but signaled a more conservative stance, including a 2016 growth capex budget of $525 milliond or less and a $500 million Series A preferred stock issuance announced for March 2016. Key risks for investors include commodity price exposure (about 60% of Partnership gathered gas volumes were under percent-of-proceeds contracts in 2015), the unresolved shareholder litigation over the Buy-In Transaction, the ongoing remediation of the material weakness, and dependence on the Partnership's ability to make distributions, since TRC's only operating cash flow comes from its Partnership interests.
02—Key points
Key Highlights
- Consolidated revenues declined 23% to $6,658.6 million in 2015 from $8,616.5 million, reflecting lower commodity prices that more than offset the contribution from the Atlas mergers.
- Net income attributable to common shareholders was $58.3 million ($1.09 per diluted share), versus $102.3 million ($2.43 per diluted share) in 2014; consolidated net loss was $(151.4) million.
- Operating margin increased 13% to $1,281.0 million, driven by the inclusion of TPL assets, higher volumes in Field Gathering and Processing and the Badlands expansion.
- A $290.0 million provisional goodwill impairment and a $32.6 million processing-asset impairment hit 2015 earnings; additional impairment is possible if commodity prices stay depressed.
- The Buy-In Transaction (completed February 17, 2016) gives TRC 100% ownership of the Partnership's common units; 114.6 million shares were issued to TRP unitholders, and TRC's dividend policy depends on Partnership distributions.
- Material weakness in internal control over financial reporting related to the valuation of Atlas merger assets; management concluded internal control over financial reporting was not effective at December 31, 2015.
- Credit profile weakened: S&P downgraded the Partnership's senior debt to BB- and TRC's corporate rating to B- in February 2016, while total debt reached about $6.0 billion.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 29, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Gross Profit | $1.82B$1.57B | +16.0% |
| Operating Income | $159.30M$640.50M | −75.1% |
| Net Income | $58.30M$102.30M | −43.0% |
| EPS (Basic) | $1.09$2.44 | −55.3% |
| EPS (Diluted) | $1.09$2.43 | −55.1% |
| Shares Outstanding (Basic) | 53.50M42.00M | +27.4% |
| Shares Outstanding (Diluted) | 53.60M42.10M | +27.3% |
05—Questions
Frequently Asked Questions
Why did TRGP's net income fall so sharply in 2015?
Lower NGL, natural gas and crude prices reduced commodity-linked revenue and margins, and the company recorded a $290.0 million provisional goodwill impairment and higher depreciation and amortization ($677.1 million, up from $351.0 million) after the Atlas mergers. Consolidated net income swung from $423.0 million to a $(151.4) million loss, while the amount attributable to common shareholders was $58.3 million.
What does the February 2016 Buy-In Transaction mean for TRGP shareholders?
TRC acquired the remaining Partnership common units it did not own, issuing 0.62 TRC shares per TRP unit. Targa now owns 100% of the Partnership's common units, the general partner interest and IDRs, so its distributable cash flow is no longer shared with public unitholders. The transaction is accounted for as an equity transaction, with no gain or loss recognized, and is expected to lower the cost of capital and improve coverage, though it created a large deferred tax liability adjustment to paid-in capital.
How leveraged is Targa, and what are the main debt risks?
Total debt was about $5.98 billion at December 31, 2015, including $219.3 million under the receivables securitization facility, $440 million drawn under TRC's revolver and $160 million under its term loan. The Partnership's senior unsecured notes total about $4.9 billion. The TRC credit agreement requires a stand-alone leverage ratio of no more than 4.50x through 2016 and restricts dividends if covenants are breached. Credit ratings were lowered in February 2016, which would raise borrowing costs.
What is the status of the material weakness and litigation?
Management identified a material weakness in controls over fair value measurements used in the Atlas mergers and reported that internal control over financial reporting was not effective at year end; remediation processes have been implemented but not yet tested. Lawsuits challenging the Buy-In Transaction (filed in state and federal court in December 2015 and January 2016) seek to enjoin or rescind the merger and recover damages; the company believes they are without merit and plans to defend vigorously. A prior Atlas-related unitholder suit was settled and dismissed with prejudice in January 2016.
What is the outlook for growth capital and dividends?
The Partnership expects growth capital expenditures of $525 million or less in 2016, mainly for the Cedar Bayou Fractionator Train 5 expansion (about $340 million net to TRC's 88% interest, expected in mid-2016), the Buffalo plant in the Permian (about $105 million, expected in Q2 2016) and the Raptor Plant joint venture in Eagle Ford (about $125 million, expected in early 2017). Quarterly dividends were raised to $0.91 per share in 2015 and are funded from Partnership distributions; future dividend increases depend on distributable cash flow, which was $213.8 million at TRC level in 2015. The company also announced a $500 million Series A preferred stock issuance to repay debt, expected to close in March 2016.
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