01—Abstract
Summary
Summary of the 10-K filed February 16, 2018. Cited figures are marked; the original filing is the authoritative source.
Targa Resources Corp. (TRGP) reported a 2017 that was defined by heavy growth investment and a return to positive net income, though GAAP results were muddied by a large non-cash impairment and a tax benefit.
Revenues rose 32% to $8.81 billiona, driven mainly by higher commodity prices, while operating margin increased 6% to $1.29 billion, led by Gathering and Processing (up 36% to $783.8 million) following the March 2017 Permian Acquisition. Logistics and Marketing operating margin fell 11% to $511.8 million on lower LPG export and domestic marketing margins. Net income attributable to Targa was $54.0 million, but after $63.4 million of preferred dividends and deemed dividends, net loss to common shareholders was $(63.4) million, or $(0.31) per share.
The result includes a $378.0 millionb pre-tax impairment of North Texas gathering and processing assets and a $269.5 million deferred tax benefit from the Tax Cuts and Jobs Act. The key metric for income-focused investors is cash flow coverage. Company Adjusted EBITDA rose 7% to $1.14 billion and distributable cash flow rose 12% to $851.8 million, against common dividends of $3.64 per share (unchanged).
Operating cash flow increased to $939.5 millionc. Management guided to at least $1.63 billion of 2018 net growth capital spending, with major projects including the Permian plants, Grand Prix NGL pipeline (in service 2019) and the GCX pipeline (2019), which are partly funded by the Stonepeak DevCo JVs (up to roughly $960 million committed). Leverage and liquidity remain key watch items.
Total debt was about $5.08 billiond at year-end, with $805 million floating-rate, and the Partnership's senior unsecured debt is rated BB- by S&P and Ba3 by Moody's (non-investment grade). Total liquidity was about $1.9 billion as of February 9, 2018. The Permian Acquisition carries up to $935 million of earn-out payments in 2018 and 2019, and the fair value of that liability was reduced to $317 million at year-end, reflecting weaker producer activity in the basin.
02—Key points
Key Highlights
- Revenue rose 32% to $8,814.9 million; gross margin rose 8% to $1,908.8 million and operating margin rose 6% to $1,285.9 million.
- Gathering and Processing operating margin grew 36% to $783.8 million, aided by the Permian Acquisition (closed March 1, 2017, with $484.1 million plus $90.0 million in cash paid).
- Adjusted EBITDA reached $1,139.8 million (up 7%) and distributable cash flow reached $851.8 million (up 12%), versus common dividends of $3.64 per share.
- GAAP net loss to common shareholders of $(63.4) million, or $(0.31) per share, reflects a $378.0 million non-cash North Texas impairment and $117.4 million of preferred dividends; a $269.5 million deferred tax benefit from the Tax Act offset part of the impact.
- Logistics and Marketing operating margin fell 11% to $511.8 million on lower LPG export fees and domestic marketing margins.
- Growth capex was about $1.4 billion in 2017 with at least $1.63 billion planned for 2018, including Grand Prix, GCX, the Channelview Splitter and new Permian and Hickory Hills plants.
- Leverage and credit ratings remain a constraint: total debt was about $5.08 billion, with senior unsecured debt rated BB-/Ba3 (below investment grade).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Targa Resources Corp. kept $0.01.
- Revenue$8.81B100.0%
- Cost of revenue−$6.91B78.3%
- Gross profit$1.91B21.7%
- Operating costs−$2.03B23.0%
- Operating income−$122.4M1.4%
- Interest, other & tax$176.4M2.0%
- Net income$54.0M0.6%
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 16, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $8.81B$6.69B | +31.7% |
| Cost of Revenue | $6.91B$4.92B | +40.3% |
| Gross Profit | $1.91B$1.77B | +8.0% |
| Operating Income | -$122.40M$55.80M | −319.4% |
| Net Income | $54.00M-$187.30M | +128.8% |
| EPS (Basic) | $-0.31$-1.80 | +82.8% |
| EPS (Diluted) | $-0.31$-1.80 | +82.8% |
| Shares Outstanding (Basic) | 206.90M154.40M | +34.0% |
| Shares Outstanding (Diluted) | 206.90M154.40M | +34.0% |
05—Questions
Frequently Asked Questions
Is Targa's dividend covered by its cash flow?
Based on the company's own non-GAAP metrics, yes. Distributable cash flow of $851.8 million in 2017 exceeded the roughly $3.64 per share common dividend. Management guided to dividend coverage of about 0.95x to 1.0x during the year, and the dividend per share was held flat. Coverage is a non-GAAP measure, so investors should check it against the GAAP cash flow statement.
Why did Targa report a GAAP net loss to common shareholders despite positive net income?
Net income attributable to Targa was $54.0 million, but $91.7 million of preferred dividends on the Series A Preferred Stock and $25.7 million of non-cash deemed dividends from the beneficial conversion feature were subtracted, producing a $(63.4) million loss to common shareholders. The Series A Preferred will remain a drag on common earnings until it is redeemed or converted.
How large is the Permian Acquisition's remaining contingent payment?
Up to $935 million in potential earn-out payments may be owed to the sellers in 2018 and 2019, based on realized gross margin from contracts in place on March 1, 2017. The fair value recorded at year-end was $317.0 million ($6.8 million current, $310.2 million long-term), after a $99.3 million reduction because producer drilling in the region came in below expectations. This is a material cash obligation to monitor.
What are the main risks to Targa's growth plans?
The company depends on continued producer drilling in the Permian, Eagle Ford and other basins to replace natural production declines. Risks include commodity price weakness, rising interest costs (a 100 basis point rise in variable rates would add about $8.1 million of interest expense), limited ability to raise capital at attractive terms given non-investment-grade ratings, and execution risk on large projects such as Grand Prix and GCX. The company also cited a $378 million North Texas impairment as evidence that asset values can fall when basin activity declines.
06—Continue