01—Abstract
Summary
Summary of the 10-K filed March 1, 2019. Cited figures are marked; the original filing is the authoritative source.
Targa Resources Corp. (NYSE: TRGP) closed 2018 with total revenues of $10.48 billiona, up 19% from $8.81 billion in 2017, and operating margin of $1.52 billion, up 19% year over year.
Growth was driven by higher Permian volumes, the Permian Acquisition's full-year contribution, and higher NGL and condensate prices, with Gathering and Processing operating margin rising 24% to $968 millionb and Logistics and Marketing rising 16% to $593 million. Net income attributable to Targa was only $1.6 million, and net loss to common shareholders was $119.3 million after $91.7 million of Series A preferred dividends and $29.2 million of deemed dividends. The gap between operating results and bottom-line earnings is driven largely by a $210 million goodwill impairment tied to the Atlas mergers, plus interest expense and preferred dividends, so investors should focus on cash-flow metrics such as Adjusted EBITDA of $1.37 billion (up 20%) and distributable cash flow of $942 million (up 11%).
The company is in a heavy growth-capital cycle, with 2018 capital expenditures of $3.33 billionc and at least $2.3 billion of announced 2019 organic growth projects, including Grand Prix NGL pipeline, Train 6, the GCX pipeline, and several Permian plants. Growth is being funded through a mix of debt (including $1.0 billion of 5⅞% notes in 2018 and $1.5 billion of new notes in January 2019 to refinance the 2019 maturities), equity issuance, joint ventures with Stonepeak and Blackstone, and asset sales. Notably, in February 2019 Targa agreed to sell a 45% interest in Targa Badlands to GSO and Blackstone for $1.6 billion, which would meaningfully reduce leverage if it closes as expected in the second quarter of 2019.
Key risks include commodity price exposure (about 69% of gathered gas volumes are under percent-of-proceeds contracts, partly hedged), leverage (total debt of $6.7 billiond with $1.4 billion of variable-rate debt), dividend coverage that management says is about 1.0x, and customer and counterparty concentration (Petredec accounted for about 15% of revenue). The company's senior unsecured debt is rated BB by S&P and Ba3 by Moody's, and the common dividend was held flat at $3.64 per share annualized.
02—Key points
Key Highlights
- Revenue rose 19% to $10.48 billion and operating margin rose 19% to $1.52 billion, led by Gathering and Processing (+24%) and Logistics and Marketing (+16%).
- Adjusted EBITDA reached $1.37 billion (up 20%) and distributable cash flow was $942 million (up 11%), providing dividend coverage of about 1.0x.
- Net income attributable to Targa was only $1.6 million, and net loss to common shareholders was $119.3 million, due to a $210 million goodwill impairment, $121 million of preferred dividends and deemed dividends, and interest expense.
- Capital expenditures were $3.33 billion in 2018, with at least $2.3 billion of organic growth projects planned for 2019, including Grand Prix, GCX, Train 6, and Permian processing plants.
- Targa agreed in February 2019 to sell a 45% interest in Targa Badlands to GSO and Blackstone for $1.6 billion, expected to close in Q2 2019, with proceeds earmarked for debt reduction and growth capital.
- Total debt of $6.7 billion includes $1.4 billion of variable-rate borrowings; a 100 basis point rate increase would raise interest expense by about $14.2 million.
- The company's senior unsecured debt is rated BB by S&P (raised in October 2018) and Ba3 by Moody's, and the quarterly common dividend held steady at $0.91 per share.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Targa Resources Corp. kept $0.00.
- Revenue$10.48B100.0%
- Cost of revenue−$8.24B78.6%
- Gross profit$2.25B21.4%
- Operating costs−$2.01B19.2%
- Operating income$237.5M2.3%
- Interest, other & tax−$235.9M2.3%
- Net income$1.6M0.0%
Where FY2018 revenue went
$10.48B- Cost of revenue: $8.24B, 79% of revenue
- Operating costs: $2.01B, 19% of revenue
- Net income: $1.6M, 0.0% of revenue
- Interest, other & tax: $235.9M, 2.3% of revenue
Kept 0.0% as net incomeNet income $1.6M · 0.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed March 1, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $10.48B$8.81B | +18.9% |
| Cost of Revenue | $8.24B$6.91B | +19.3% |
| Gross Profit | $2.25B$1.91B | +17.7% |
| Operating Income | $237.50M-$122.40M | +294.0% |
| Net Income | $1.60M$54.00M | −97.0% |
| EPS (Basic) | $-0.53$-0.31 | −71.0% |
| EPS (Diluted) | $-0.53$-0.31 | −71.0% |
| Shares Outstanding (Basic) | 224.20M206.90M | +8.4% |
| Shares Outstanding (Diluted) | 224.20M206.90M | +8.4% |
05—Questions
Frequently Asked Questions
Why did Targa report a net loss to common shareholders despite growing operating margin by 19%?
Operating margin is a segment-level measure that excludes depreciation, G&A, and impairments. In 2018, Targa recorded a $210 million goodwill impairment, $816 million of depreciation and amortization, $186 million of net interest expense, and $121 million of preferred dividends and deemed dividends on the Series A Preferred Stock. Net income attributable to Targa of $1.6 million was then reduced by these preferred payments to produce a $119.3 million loss to common shareholders, or $(0.53) per share.
Is the common dividend covered by cash flow?
Management reports distributable cash flow of $942.4 million for 2018 against common dividends of roughly $813 million declared, and says it achieved its public guidance of about 1.0x dividend coverage. Coverage is thin relative to the company's large growth-capital program, which is largely funded with debt, equity, joint ventures, and asset sales rather than retained cash flow. The dividend was held flat at $3.64 per share annualized.
What is the impact of the Badlands sale and January 2019 notes offering on the balance sheet?
The January 2019 issuance of $1.5 billion of 6½% and 6⅞% senior notes was used to redeem the $749 million 4⅛% notes due 2019 in full, extending maturities to 2027 and 2029. The planned $1.6 billion Badlands sale, expected to close in Q2 2019, would be used mainly to pay down debt and fund growth capital. Targa keeps operatorship and majority governance of Badlands, and Blackstone's capital contributions carry a liquidation preference.
How exposed is Targa to commodity price declines?
About 69% of 2018 gathered natural gas volume was under percent-of-proceeds contracts, which expose Targa to NGL and natural gas prices. The company hedges a portion of expected equity volumes through 2023, and its Downstream business is largely fee-based with take-or-pay components. A 10% decline in forward natural gas, NGL, and crude prices would raise the net fair value of derivatives to about $189 million, which offsets some, but not all, of the unhedged exposure.
06—Continue