01—Abstract
Summary
Summary of the 10-K filed February 21, 2017. Cited figures are marked; the original filing is the authoritative source.
Targa Resources Corp. (TRGP) reported a net loss of $159.1 milliona for 2016 (net loss attributable to common shareholders of $278.1 million), compared with net income of $423.0 million in 2014 and a 2015 net loss of $151.4 million.
Revenue rose 0.5% to $6.69 billionb, but income from operations fell sharply to $55.8 million from $159.3 million, largely due to $207.0 million of goodwill impairments and higher depreciation from the Atlas mergers. Gross margin declined 3% to $1,768.0 million and operating margin fell 5% to $1,214.3 million, reflecting lower Logistics and Marketing results partially offset by growth in Gathering and Processing. Adjusted EBITDA was $1,064.9 million, down 11%, and distributable cash flow was $762.4 million, down 8%.
The balance sheet and capital structure changed materially in 2016. The February 2016 TRC/TRP Merger (buy-in of the public Targa Resources Partners units) eliminated the public minority in the Partnership, and TRC issued about 104.5 million shares. TRC also raised roughly $994 millionc of Series A Preferred stock, about $1.0 billion of common equity through equity distribution programs, and the Partnership issued $1.0 billion of 5% senior notes while tendering or redeeming about $1.7 billion of older notes.
Long-term debt fell to $4.6 billiond from $5.7 billion. Management disclosed a material weakness in internal control over interim income tax provisions, and disclosure controls were concluded to be not effective as of December 31, 2016. Looking ahead, management highlighted the pending Permian Acquisition of Outrigger Delaware and Outrigger Midland for $565 million at closing plus up to $935 million of potential earn-outs, expected to close in the first quarter of 2017 and partly funded by a January 2017 equity offering that raised $524.1 million.
Growth capital is expected to be at least $700 million in 2017, with the Raptor Plant, Joyce Plant, and Channelview Splitter scheduled for completion in 2017 to early 2018. Investors should weigh the earnings pressure and goodwill impairments against the company's fee-based growth, dividend coverage, and the simplified corporate structure following the buy-in.
02—Key points
Key Highlights
- Net loss of $159.1 million for 2016 versus net loss of $151.4 million in 2015; net loss attributable to common shareholders was $278.1 million after $90.8 million of preferred dividends and deemed dividends.
- Goodwill impairments of $207.0 million in 2016 (including $24.0 million finalizing the 2015 provisional charge) cut income from operations to $55.8 million from $159.3 million.
- Adjusted EBITDA of $1,064.9 million (down 11%) and distributable cash flow of $762.4 million (down 8%), reflecting lower commodity prices and weaker Logistics and Marketing margins.
- The February 2016 TRC/TRP Merger eliminated the public minority interest in Targa Resources Partners, issuing 104.5 million TRC shares and simplifying the corporate structure.
- Total debt fell to about $4.9 billion from $5.9 billion, with $1.1 billion of tendered notes and $560 million of open-market repurchases funded by equity and new 2025/2027 senior notes.
- Pending $565 million Permian Acquisition (Outrigger) with up to $935 million in potential earn-outs, funded partly by a January 2017 offering of 9.2 million shares at $57.65 ($524.1 million net).
- Management identified a material weakness in controls over interim income tax provisions, and disclosure controls were concluded not effective as of December 31, 2016.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2016, Targa Resources Corp. lost $0.03.
- Revenue$6.69B100.0%
- Cost of revenue−$4.92B73.6%
- Gross profit$1.77B26.4%
- Operating costs−$1.71B25.6%
- Operating income$55.8M0.8%
- Interest, other & tax−$243.1M3.6%
- Net income−$187.3M2.8%
Where FY2016 revenue went
$6.69B- Cost of revenue: $4.92B, 74% of revenue
- Operating costs: $1.71B, 26% of revenue
- Operating income: $55.8M, 0.8% of revenue
Kept 0.8% as operating incomeOperating income $55.8M · 0.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 21, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $6.69B— | — |
| Cost of Revenue | $4.92B— | — |
| Gross Profit | $1.77B$1.82B | −2.9% |
| Operating Income | $55.80M$159.30M | −65.0% |
| Net Income | -$187.30M$58.30M | −421.3% |
| EPS (Basic) | $-1.80$1.09 | −265.1% |
| EPS (Diluted) | $-1.80$1.09 | −265.1% |
| Shares Outstanding (Basic) | 154.40M53.50M | +188.6% |
| Shares Outstanding (Diluted) | 154.40M53.60M | +188.1% |
05—Questions
Frequently Asked Questions
Why did Targa report a net loss in 2016 despite stable revenue?
Revenue was essentially flat at $6.69 billion, but income from operations fell to $55.8 million because of $207.0 million of goodwill impairments tied to the 2015 Atlas acquisitions and $757.7 million of depreciation and amortization. Lower NGL and LPG export margins and a $48.2 million loss on debt extinguishment further pressured results, and income tax turned into a $100.6 million benefit.
What did the TRC/TRP Merger change for shareholders?
On February 17, 2016, Targa acquired the public common units of Targa Resources Partners in exchange for 104.5 million TRC common shares. TRC now owns all Partnership common units, receives all distributions except those to the preferred unitholders, and the Partnership's incentive distribution rights were eliminated in December 2016 in exchange for additional units. The transaction was accounted for as an equity transaction, so no gain or loss was recognized.
Is Targa's dividend covered by its cash flow?
Targa declared $3.64 per share of common dividends in 2016 (quarterly rate $0.91), totaling about $650 million on a declared basis, against distributable cash flow of $762.4 million. Management stated the company achieved its public dividend coverage guidance, but coverage relies on continued distributions from the Partnership and access to capital markets, and the Series A Preferred dividends of $72.6 million must be paid before common dividends.
What are the main risks investors should consider from this filing?
Key risks include the company's substantial debt (about $4.9 billion, with $860 million of variable-rate exposure), non-investment-grade credit ratings (BB- from S&P and Ba3 from Moody's), sensitivity of percent-of-proceeds contracts (about 67% of gathered gas volumes) to commodity prices, further goodwill impairment risk, and the material weakness in internal controls. The Series A Preferred also carries conversion dilution risk after twelve years.
What growth is expected in 2017?
Targa expects at least $700 million of net growth capital expenditures in 2017, assuming the Permian Acquisition closes in the first quarter. Major projects include the Raptor Plant in South Texas (expected to be fully operational in April 2017), the Joyce Plant in West Texas (early 2018), the Channelview Splitter (early 2018), and Midkiff and Benedum capacity additions. The Permian Acquisition is expected to add primarily fee-based gathering and processing cash flow.
06—Continue