Targa Resources Corp. - Quarter Report: 2015 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 001-34991

TARGA RESOURCES CORP.

(Exact name of registrant as specified in its charter)

 

Delaware		20-3701075
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1000 Louisiana St, Suite 4300, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

(713) 584-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑.

As of October 30, 2015, there were 56,018,652 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.		4
	Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	4
	Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014	5
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014	6
	Consolidated Statements of Changes in Owners' Equity for the nine months ended September 30, 2015 and 2014	8
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	9
	Notes to Consolidated Financial Statements	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.		37
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		70
Item 4. Controls and Procedures.		75
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.		76
Item 1A. Risk Factors.		76
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		77
Item 3. Defaults Upon Senior Securities.		77
Item 4. Mine Safety Disclosures.		77
Item 5. Other Information.		77
Item 6. Exhibits.		78
SIGNATURES
Signatures		80

 

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

Targa Resources Corp.’s (together with its subsidiaries, other than Targa Resources Partners LP (“the Partnership”), “we,” “us,” “Targa,” “TRC,” or the “Company”) reports, filings and other public announcements may from time to time contain statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements.” You can typically identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, by the use of forward-looking statements, such as “may,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” “forecast” and other similar words.

All statements that are not statements of historical facts, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.

These forward-looking statements reflect our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, many of which are outside our control. Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. Known risks and uncertainties include, but are not limited to, the following risks and uncertainties:

·

the Partnership’s and our ability to access the debt and equity markets, which will depend on general market conditions and the credit ratings for our debt obligations;

·

the amount of collateral required to be posted from time to time in the Partnership’s transactions;

·

the Partnership’s success in risk management activities, including the use of derivative instruments to hedge commodity risks;

·

the level of creditworthiness of counterparties to various transactions with the Partnership;

·

changes in laws and regulations, particularly with regard to taxes, safety and protection of the environment;

·

the timing and extent of changes in natural gas, natural gas liquids (“NGL”), crude oil and other commodity prices, interest rates and demand for the Partnership’s services;

·

weather and other natural phenomena;

·

industry changes, including the impact of consolidations and changes in competition;

·

the Partnership’s ability to obtain necessary licenses, permits and other approvals;

·

the level and success of crude oil and natural gas drilling around the Partnership’s assets, its success in connecting natural gas supplies to its gathering and processing systems, oil supplies to its gathering systems and NGL supplies to its logistics and marketing facilities and the Partnership’s success in connecting its facilities to transportation and markets;

·

the Partnership’s and our ability to grow through acquisitions or internal growth projects and the successful integration and future performance of such assets; including with respect to the Atlas mergers (as defined below) which were completed on February 27, 2015 between Targa Resources Corp. and Atlas Energy, L.P., a Delaware limited partnership (“ATLS”) and between Atlas Pipeline Partners, L.P., a Delaware limited partnership (“APL”) and the Partnership;

·

general economic, market and business conditions; and

·

the risks described elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2014 (“Annual Report”) and our reports and registration statements filed from time to time with the United States Securities and Exchange Commission (“SEC”).

 

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in this Quarterly Report will prove to be accurate. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described in “Part II – Other Information, Item 1A. Risk Factors.” in this Quarterly Report and in our Annual Report. Except as may be required by applicable law, we undertake no obligation to publicly update or advise of any change in any forward-looking statement, whether as a result of new information, future events or otherwise.

As generally used in the energy industry and in this Quarterly Report, the identified terms have the following meanings:

Bbl	Barrels (equal to 42 U.S. gallons)
Bcf	Billion cubic feet
Btu	British thermal units, a measure of heating value
BBtu	Billion British thermal units
/d	Per day
/hr	Per hour
gal	U.S. gallons
GPM	Liquid volume equivalent expressed as gallons per 1000 cu. ft. of natural gas
LPG	Liquefied petroleum gas
MBbl	Thousand barrels
MMBbl	Million barrels
MMBtu	Million British thermal units
MMcf	Million cubic feet
NGL(s)	Natural gas liquid(s)
NYMEX	New York Mercantile Exchange
GAAP	Accounting principles generally accepted in the United States of America
LIBOR	London Interbank Offered Rate
NYSE	New York Stock Exchange
Price Index Definitions
IF-NGPL MC	Inside FERC Gas Market Report, Natural Gas Pipeline, Mid-Continent
IF-PB	Inside FERC Gas Market Report, Permian Basin
IF-WAHA	Inside FERC Gas Market Report, West Texas WAHA
NY-WTI	NYMEX, West Texas Intermediate Crude Oil
OPIS-MB	Oil Price Information Service, Mont Belvieu, Texas
NG-NYMEX	NYMEX, Natural Gas

 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

 

TARGA RESOURCES CORP.

CONSOLIDATED BALANCE SHEETS

 

										September 30, 2015				December 31, 2014
										(Unaudited) (In millions)
ASSETS
Current assets:
Cash and cash equivalents										$	102.9			$	81.0
Trade receivables, net of allowances of $0.0 million											621.0				567.3
Inventories											151.1				168.9
Deferred income taxes											-				0.1
Assets from risk management activities											92.3				44.4
Other current assets											33.8				20.9
Total current assets											1,001.1				882.6
Property, plant and equipment											11,798.4				6,521.1
Accumulated depreciation											(2,048.2	)			(1,696.5	)
Property, plant and equipment, net											9,750.2				4,824.6
Goodwill											551.4				-
Intangible assets, net											1,695.7				591.9
Long-term assets from risk management activities											45.4				15.8
Investments in unconsolidated affiliates											264.2				50.2
Other long-term assets											110.2				88.4
Total assets										$	13,418.2			$	6,453.5
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities										$	688.9			$	638.5
Deferred income taxes											33.5				0.6
Liabilities from risk management activities											4.3				5.2
Accounts receivable securitization facility											135.5				182.8
Total current liabilities											862.2				827.1
Long-term debt											5,938.8				2,885.4
Long-term liabilities from risk management activities											4.0				-
Deferred income taxes, net											156.8				138.2
Other long-term liabilities											76.5				63.3
Contingencies (see Note 16)
Owners' equity:
Targa Resources Corp. stockholders' equity:
Common stock ($0.001 par value, 300,000,000 shares authorized)											0.1				-
		Issued				Outstanding
September 30, 2015			56,444,353				56,018,925
December 31, 2014			42,532,353				42,143,463
Preferred stock ($0.001 par value, 100,000,000 shares authorized, no shares issued and outstanding)											-				-
Additional paid-in capital											1,492.4				164.9
Retained earnings											12.6				25.5
Accumulated other comprehensive income (loss)											5.2				4.8
Treasury stock, at cost (425,428 shares as of September 30, 2015 and 388,890 as of December 31, 2014)											(28.5	)			(25.4	)
Total Targa Resources Corp. stockholders' equity											1,481.8				169.8
Noncontrolling interests in subsidiaries											4,898.1				2,369.7
Total owners' equity											6,379.9				2,539.5
Total liabilities and owners' equity										$	13,418.2			$	6,453.5

See notes to consolidated financial statements.

TARGA RESOURCES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(Unaudited) (In millions, except per share amounts)
Revenues
Sales of commodities		$	1,321.3			$	2009.2			$	4,119.6			$	5,853.3
Fees from midstream services			310.8				279.1				891.6				730.4
Total revenues:			1,632.1				2,288.3				5,011.2				6,583.7
Costs and expenses:
Product purchases			1,172.4				1,880.5				3,677.7				5,412.2
Operating expenses			133.6				112.8				381.9				323.7
Depreciation and amortization expenses			165.8				87.6				448.3				253.1
General and administrative expenses			44.9				43.0				136.5				122.4
Other operating (income) expense			0.1				(4.3	)			0.6				(5.3	)
Income from operations			115.3				168.7				366.2				477.6
Other income (expense):
Interest expense, net			(70.4	)			(36.9	)			(195.6	)			(106.5	)
Equity earnings (loss)			(1.6	)			4.7				(1.1	)			13.8
Loss from financing activities			(0.5	)			-				(13.4	)			-
Other			2.0				(0.6	)			(21.4	)			(0.6	)
Income before income taxes			44.8				135.9				134.7				384.3
Income tax (expense) benefit:
Current			(0.6	)			(17.3	)			(12.2	)			(57.8	)
Deferred			(23.4	)			1.8				(41.9	)			4.2
			(24.0	)			(15.5	)			(54.1	)			(53.6	)
Net income			20.8				120.4				80.6				330.7
Less: Net income attributable to noncontrolling interests			8.1				89.7				49.2				253.9
Net income available to common shareholders		$	12.7			$	30.7			$	31.4			$	76.8
Net income available per common share - basic		$	0.23			$	0.73			$	0.60			$	1.83
Net income available per common share - diluted		$	0.23			$	0.73			$	0.60			$	1.82
Weighted average shares outstanding - basic			56.0				42.0				52.6				42.0
Weighted average shares outstanding - diluted			56.1				42.1				52.7				42.1

See notes to consolidated financial statements.

 

TARGA RESOURCES CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

		Three Months Ended September 30,
		2015												2014
		Pre-Tax				Related Income Tax				After Tax				Pre- Tax				Related Income Tax				After Tax
		(Unaudited)
		(In millions)
Targa Resources Corp.
Net income attributable to Targa Resources Corp.										$	12.7											$	30.7
Other comprehensive income (loss) attributable to Targa Resources Corp.
Commodity hedging contracts:
Change in fair value		$	4.6			$	(1.7	)			2.9			$	1.9			$	(0.7	)			1.2
Settlements reclassified to revenues			(1.8	)			0.7				(1.1	)			0.1				-				0.1
Interest rate swaps:
Settlements reclassified to interest expense, net			-				-				-				-				-				-
Other comprehensive income (loss) attributable to Targa Resources Corp.		$	2.8				(1.0	)			1.8				2.0				(0.7	)			1.3
Comprehensive income attributable to Targa Resources Corp.										$	14.5											$	32.0
Noncontrolling interests
Net income attributable to noncontrolling interests											8.1												89.7
Other comprehensive income (loss) attributable to noncontrolling interests
Commodity hedging contracts:
Change in fair value			38.3			$	-				38.3				12.3				-				12.3
Settlements reclassified to revenues			(14.9	)			-				(14.9	)			0.7				-				0.7
Interest rate swaps:
Settlements reclassified to interest expense, net			-				-				-				-				-				-
Other comprehensive income (loss) attributable to noncontrolling interests			23.4			$	-				23.4				13.0			$	-				13.0
Comprehensive income attributable to noncontrolling interests											31.5												102.7
Total
Net income											20.8												120.4
Other comprehensive income (loss)
Commodity hedging contracts:
Change in fair value		$	42.9			$	(1.7	)			41.2			$	14.2			$	(0.7	)			13.5
Settlements reclassified to revenues			(16.7	)			0.7				(16.0	)			0.8				-				0.8
Interest rate swap:
Settlements reclassified to interest expense, net			-				-				-				-				-				-
Other comprehensive income (loss)		$	26.2			$	(1.0	)			25.2			$	15.0			$	(0.7	)			14.3
Total comprehensive income										$	46.0											$	134.7

 

See notes to consolidated financial statements.

 

TARGA RESOURCES CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

		Nine Months Ended September 30,
		2015												2014
		Pre-Tax				Related Income Tax				After Tax				Pre- Tax				Related Income Tax				After Tax
		(Unaudited) (In millions)
Net income attributable to Targa Resources Corp.										$	31.4											$	76.8
Other comprehensive income (loss) attributable to Targa Resources Corp.
Commodity hedging contracts:
Change in fair value		$	5.2			$	(2.0	)			3.2			$	(0.6	)		$	0.2				(0.4	)
Settlements reclassified to revenues			(4.5	)			1.7				(2.8	)			1.5				(0.5	)			1.0
Interest rate swaps:
Settlements reclassified to interest expense, net			-				-				-				0.3				(0.1	)			0.2
Other comprehensive income (loss) attributable to Targa Resources Corp.		$	0.7			$	(0.3	)			0.4			$	1.2			$	(0.4	)			0.8
Comprehensive income attributable to Targa Resources Corp.											31.8												77.6
Net income attributable to noncontrolling interests											49.2												253.9
Other comprehensive loss attributable to noncontrolling interests
Commodity hedging contracts:
Change in fair value			54.2			$	-				54.2				(3.9	)		$	-				(3.9	)
Settlements reclassified to revenues			(36.6	)			-				(36.6	)			10.1				-				10.1
Interest rate swaps:
Settlements reclassified to interest expense, net			-				-				-				2.1				-				2.1
Other comprehensive income (loss) attributable to noncontrolling interests			17.6				-				17.6				8.3								8.3
Comprehensive income attributable to noncontrolling interests											66.8												262.2
Total
Net income											80.6												330.7
Other comprehensive income (loss)
Commodity hedging contracts:
Change in fair value		$	59.4			$	(2.0	)			57.4			$	(4.5	)		$	0.2				(4.3	)
Settlements reclassified to revenues			(41.1	)			1.7				(39.4	)			11.6				(0.5	)			11.1
Interest rate swap:
Settlements reclassified to interest expense, net			-				-				-				2.4				(0.1	)			2.3
Other comprehensive income (loss)		$	18.3			$	(0.3	)			18.0			$	9.5			$	(0.4	)			9.1
Total comprehensive income										$	98.6											$	339.8

See notes to consolidated financial statements.

TARGA RESOURCES CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY

 

		Common Stock								Additional Paid in				Retained Earnings (Accumulated				Accumulated Other Comprehensive				Treasury Shares								Noncontrolling
		Shares				Amount				Capital				Deficit)				Income (Loss)				Shares				Amount				Interests				Total
		(Unaudited) (In millions, except shares in thousands)
Balance, December 31, 2014			42,143			$	-			$	164.9			$	25.5			$	4.8				389			$	(25.4	)		$	2,369.7			$	2,539.5
Compensation on equity grants			-				-				6.2				-				-				-				-				12.8				19.0
Distribution equivalent rights			-				-				(0.6	)			-				-				-				-				(1.9	)			(2.5	)
Shares issued under compensation program			48				-				-				-				-				-				-				-				-
Common stock and Partnership units tendered for tax withholding obligations			(36	)			-				-				-				-				36				(3.1	)			(5.2	)			(8.3	)
Sale of Partnership limited partner interests			-				-				-				-				-				-				-				315.4				315.4
Proceeds from equity issuances			3,738				-				335.5				-				-				-				-				-				335.5
Impact of Partnership equity transactions			-				-				56.5				-				-				-				-				(56.5	)			-
Dividends			-				-				-				(44.3	)			-				-				-				-				(44.3	)
Dividends in excess of retained earnings			-				-				(83.7	)			-				-				-				-				-				(83.7	)
Distributions to noncontrolling interests			-				-				-				-				-				-				-				(368.5	)			(368.5	)
Contributions from noncontrolling interests							-				-				-				-				-				-				16.4				16.4
Noncontrolling interest in acquired subsidiaries			-				-				-				-				-				-				-				113.4				113.4
Common stock issued in ATLS merger			10,126				0.1				1,013.6				-				-				-				-				-				1,013.7
Issuance of Partnership units in APL merger			-				-				-				-				-				-				-				2,435.7				2,435.7
Other comprehensive income (loss)			-				-				-				-				0.4				-				-				17.6				18.0
Net income			-				-				-				31.4				-				-				-				49.2				80.6
Balance, September 30, 2015			56,019			$	0.1			$	1,492.4			$	12.6			$	5.2				425			$	(28.5	)		$	4,898.1			$	6,379.9
Balance, December 31, 2013			42,162			$	-			$	151.6			$	20.5			$	(0.5	)			367			$	(22.8	)		$	1,942.5			$	2,091.3
Compensation on equity grants			-				-				3.8				-				-				-				-				7.0				10.8
Distribution equivalent rights			-				-				-				-				-				-				-				(2.0	)			(2.0	)
Shares issued under compensation program			3				-				-				-				-				-				-				-				-
Repurchase of common stock			-				-				-				-				-				-				-				-				-
Common stock and Partnership units tendered for tax withholding obligations			(22	)			-				-				-				-				22				(2.6	)			(4.8	)			(7.4	)
Sale of Partnership limited partner interests			-				-				-				-				-				-				-				257.2				257.2
Impact of Partnership equity transactions			-				-				14.1				-				-				-				-				(14.1	)			-
Dividends			-				-								(66.5	)			-				-				-				-				(66.5	)
Dividends in excess of retained earnings			-				-				(15.7	)			-				-				-				-				-				(15.7	)
Distributions			-				-				-				-				-				-				-				(257.7	)			(257.7	)
Other comprehensive income (loss)			-				-				-				-				0.8				-				-				8.3				9.1
Net income			-				-				-				76.8				-				-				-				253.9				330.7
Balance, September 30, 2014			42,143			$	-			$	153.8			$	30.8			$	0.3				389			$	(25.4	)		$	2,190.3			$	2,349.8

See notes to consolidated financial statements.

 

TARGA RESOURCES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended September 30,
		2015				2014
		(Unaudited) (In millions)
Cash flows from operating activities
Net income		$	80.6			$	330.7
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization in interest expense			11.2				9.2
Compensation on equity grants			19.0				10.8
Depreciation and amortization expense			448.3				253.1
Accretion of asset retirement obligations			4.0				3.3
Deferred income tax expense (benefit)			41.9				(4.2	)
Equity (earnings) loss of unconsolidated affiliates			1.1				(13.8	)
Distributions received from unconsolidated affiliates			10.1				13.8
Risk management activities			53.2				0.9
Gain on sale or disposition of assets			(0.2	)			(5.6	)
Loss from financing activities			13.4				-
Changes in operating assets and liabilities, net of business acquisitions:
Receivables and other assets			121.6				(41.3	)
Inventory			31.2				(117.8	)
Accounts payable and other liabilities			(139.9	)			80.0
Net cash provided by operating activities			695.5				519.1
Cash flows from investing activities
Outlays for property, plant and equipment			(625.3	)			(571.7	)
Outlays for business acquisitions, net of cash acquired			(1,574.4	)			-
Investment in unconsolidated affiliates			(6.6	)			-
Return of capital from unconsolidated affiliates			1.1				4.2
Other, net			(3.0	)			6.3
Net cash used in investing activities			(2,208.2	)			(561.2	)
Cash flows from financing activities
Partnership debt obligations:
Proceeds from borrowings under credit facilities			1,646.0				1,295.0
Repayments of credit facilities			(1,211.0	)			(1,115.0	)
Proceeds from accounts receivable securitization facility			275.5				88.9
Repayments of accounts receivable securitization facility			(322.8	)			(131.0	)
Proceeds from issuance of senior notes			1,700.0				-
Redemption of APL senior notes			(1,168.8	)			-
Non-Partnership debt obligations:
Proceeds from borrowings under credit facility			481.0				67.0
Repayments of credit facility			(138.0	)			(59.0	)
Proceeds from issuance of senior term loan			422.5				-
Repayments on senior term loan			(270.0	)			-
Costs incurred in connection with financing arrangements			(43.0	)			(2.7	)
Proceeds from sale of common units of the Partnership			318.6				259.9
Repurchase of common units under Partnership compensation plans			(5.2	)			(4.8	)
Contributions from noncontrolling interests			16.4				-
Distributions to noncontrolling interests			(368.5	)			(257.7	)
Proceeds from TRC equity offerings			335.5				-
Repurchase of common stock under TRC compensation plans			(3.1	)			(2.6	)
Dividends to common shareholders			(128.0	)			(82.2	)
Payments of distribution equivalent rights			(2.5	)			(1.6	)
Net cash provided by financing activities			1,534.6				54.2
Net change in cash and cash equivalents			21.9				12.1
Cash and cash equivalents, beginning of period			81.0				66.7
Cash and cash equivalents, end of period		$	102.9			$	78.8

 

See notes to consolidated financial statements.

 

TARGA RESOURCES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Except as noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are stated in millions of dollars.

Note 1 — Organization

Targa Resources Corp. (“TRC”) is a publicly traded Delaware corporation formed in October 2005. Our common stock is listed on the New York Stock Exchange under the symbol “TRGP.” In this Quarterly Report, unless the context requires otherwise, references to “we,” “us,” “our,” “the Company” or “Targa” are intended to mean our consolidated business and operations.

Note 2 — Basis of Presentation

We have prepared these unaudited consolidated financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. While we derived the year-end balance sheet data from audited financial statements, this interim report does not include all disclosures required by GAAP for annual periods. These unaudited consolidated financial statements and other information included in this Quarterly Report should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report.

The unaudited consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 include all adjustments that we believe are necessary for a fair presentation of the results for interim periods. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods may have been reclassified to conform to the current year presentation.

Our financial results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the full year.

One of our indirect subsidiaries is the sole general partner of Targa Resources Partners LP (“the Partnership” or “TRP”). Because we control the general partner of the Partnership, under GAAP, we must reflect our ownership interests in the Partnership on a consolidated basis. Accordingly, the Partnership’s financial results are included in our consolidated financial statements even though the distribution or transfer of Partnership assets is limited by the terms of the Partnership’s partnership agreement, as well as restrictive covenants in the Partnership’s lending agreements. The limited partner interests in the Partnership not owned by us are reflected in our consolidated results of operations as net income attributable to noncontrolling interests and in our consolidated balance sheet equity section as noncontrolling interests in subsidiaries. Throughout these footnotes, we make a distinction where relevant between financial results of the Partnership versus those of a standalone parent and its non-partnership subsidiaries.

As of September 30, 2015, our interests in the Partnership consist of the following:

·

a 2% general partner interest, which we hold through our 100% ownership interest in the general partner of the Partnership;

·

all Incentive Distribution Rights (“IDRs”);

·

16,309,594 common units of the Partnership, representing an 8.8% limited partnership interest; and

·

a Special GP Interest representing retained tax benefits related to the contribution to the Partnership from us of the APL general partner interest acquired in the ATLS merger (see Note 4 – Business Acquisitions).

The Partnership is engaged in the business of gathering, compressing, treating, processing and selling natural gas; storing, fractionating, treating, transporting and selling NGLs and NGL products; gathering, storing and terminaling crude oil; and storing, terminaling and selling refined petroleum products. See Note 18 – Segment Information for an analysis of our and the Partnership’s operations by business segment.

 

The Partnership does not have any employees. We provide operational, general and administrative and other services to the Partnership, associated with the Partnership’s existing assets and assets acquired from third parties. We perform centralized corporate functions for the Partnership, such as legal, accounting, treasury, insurance, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes, engineering and marketing.

The Partnership Agreement governs our relationship with the Partnership regarding the reimbursement of costs incurred on behalf of the Partnership. We charge the Partnership for all the direct costs of the employees assigned to its operations, as well as all general and administrative support costs other than (1) costs attributable to our status as a separate reporting company and (2) our costs of providing management and support services to certain unaffiliated spun-off entities. The Partnership generally reimburses us monthly for cost allocations to the extent that we have made a cash outlay.

 

Note 3 — Significant Accounting Policies

Accounting Policy Updates

The accounting policies that we follow are set forth in Note 3 of the Notes to Consolidated Financial Statements in our Annual Report. We have updated our policies during the nine months ended September 30, 2015 to include our accounting policy for goodwill related to the Atlas mergers.

Goodwill

Goodwill results when the cost of an acquisition exceeds the fair value of the net identifiable assets of the acquired business. Goodwill is not amortized, but is assessed annually to determine whether its carrying value has been impaired.

Impairment testing for goodwill is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component.

Goodwill is subject to a test for impairment at least annually, as well as whenever events or changes in circumstances indicate it is more likely than not the fair value of an affected reporting unit is less than its carrying amount. We may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount (including assigned goodwill) as the basis for determining whether it is necessary to perform the two-step goodwill impairment test. If a two-step process goodwill impairment test is required, the first step involves comparing the fair value of the reporting unit to which goodwill has been allocated with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the second step of the process involves comparing the implied fair value to the carrying value of the goodwill for that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, the excess of the carrying value over the implied fair value is recognized as a reduction of goodwill on our Consolidated Balance Sheets and a goodwill impairment loss on our Consolidated Statements of Operations.

Recent Accounting Pronouncements

 

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments are intended to simplify the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities and modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities. The amendments are effective for us in 2016, with early adoption permitted. We are currently evaluating the effect of the amendments for each of our less-than-wholly owned subsidiaries.

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability (other than revolving credit facilities) be presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This update deals solely with financial statement display matters; recognition and measurement of debt issuance costs are unaffected. Unamortized debt issuance costs of $44.7 million and $29.9 million for term loans and notes were included in Other long-term assets on the Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The amendment clarifies ASU 2015-03 and provides that an entity may defer and present debt issuance costs for a line-of-credit or other revolving credit facility arrangement as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the arrangement. Unamortized debt issuance costs of $15.6 million and $8.6 million for revolving credit facilities were included in Other long-term assets on the Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014. We will continue to include debt issuance costs for our line-of-credit and revolving credit facility arrangements in Other long-term assets upon adoption of ASU 2015-03. We plan to adopt these standards as of December 31, 2015.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 303): Simplifying the Measurement of Inventory. Topic 303 currently requires inventory to be measured at the lower of cost or market, where market could be replacement cost, net realizable value or net realizable value less a normal profit margin. The amendments in this update require that all inventory, excluding inventory that is measured using the last-in, first-out method or the retail inventory method, be measured at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment has been adopted, with no impact on our consolidated financial statements or results of operations.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment defers the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) by one year. As a result of the amendment, Topic 606 is effective for the annual period beginning December 15, 2017, and for annual and interim periods thereafter, with early adoption permitted. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We expect to adopt this guidance on January 1, 2018 and are continuing to evaluate the impact of Topic 606 on our revenue recognition practices.

Note 4 — Business Acquisitions

2015 Acquisition

Atlas Mergers

On February 27, 2015, (i) Targa completed the transactions contemplated by the Agreement and Plan of Merger, dated as of October 13, 2014 (the “ATLS Merger Agreement”), by and among Targa, Targa GP Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of Targa (“GP Merger Sub”), ATLS and Atlas Energy GP, LLC, a Delaware limited liability company and the general partner of ATLS (“ATLS GP”), and (ii) Targa and the Partnership completed the transactions contemplated by the Agreement and Plan of Merger (the “APL Merger Agreement” and, together with the ATLS Merger Agreement, the “Atlas Merger Agreements”) by and among Targa, the Partnership, the Partnership’s general partner, Trident MLP Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of the Partnership (“MLP Merger Sub”), ATLS, APL and Atlas Pipeline Partners GP, LLC, a Delaware limited liability company and the general partner of APL (“APL GP”). Pursuant to the terms and conditions set forth in the ATLS Merger Agreement, GP Merger Sub merged (the “ATLS merger”) with and into ATLS, with ATLS continuing as the surviving entity and as a subsidiary of Targa. Pursuant to the terms and conditions set forth in the APL Merger Agreement, MLP Merger Sub merged (the “APL merger” and, together with the ATLS merger, the “Atlas mergers”) with and into APL, with APL continuing as the surviving entity and as a subsidiary of the Partnership. While the Atlas mergers were two separate legal transactions, for GAAP reporting purposes, they are viewed as a single integrated transaction.

 

In connection with the Atlas mergers, APL changed its name to “Targa Pipeline Partners LP,” which we refer to as TPL, and ATLS changed its name to “Targa Energy LP.”

In addition, prior to the completion of the Atlas mergers, ATLS, pursuant to a separation and distribution agreement entered into by and among ATLS, ATLS GP and Atlas Energy Group, LLC, a Delaware limited liability company (“AEG”), on February 27, 2015, (i) transferred its assets and liabilities other than those related to its “Atlas Pipeline Partners” segment, to AEG and (ii) effected a pro rata distribution to the ATLS unitholders of AEG common units representing a 100% interest in AEG (collectively, the “Spin-Off” and, together with the Atlas mergers, the “Atlas Transactions”).

On February 27, 2015, the Partnership Agreement was amended to provide for the issuance of a special general partner interest in the Partnership (the “Special GP Interest”) representing the contribution to the Partnership of the APL GP interest acquired in the ATLS merger totaling $1.6 billion. The Special GP Interest is not entitled to current distributions or allocations of net income or loss, and has no voting rights or other rights except for the limited right to receive deductions attributable to the contribution of APL GP and the right to distributions in liquidation.

The Partnership acquired all of the outstanding units of APL for a total purchase price of approximately $5.3 billion (including $1.8 billion of acquired debt and all other assumed liabilities). Of the $1.8 billion of debt acquired and other liabilities assumed, approximately $1.2 billion of the acquired debt was tendered and settled upon the closing of the Atlas mergers via the Partnership’s January 2015 cash tender offers. These tender offers were in connection with, and conditioned upon, the consummation of the merger with APL. The merger with APL, however, was not conditioned on the consummation of the tender offers. On that same date, we acquired ATLS for a total purchase price of approximately $1.6 billion (including all assumed liabilities).

 

Pursuant to the APL Merger Agreement, Targa agreed to cause the general partner of the Partnership to amend the Partnership’s Partnership Agreement, which we refer to as the IDR Giveback Amendment, in order to reduce aggregate distributions to us, as the holder of the Partnership’s IDRs, by (a) $9,375,000 per quarter during the first four quarters following the APL merger, (b) $6,250,000 per quarter for the next four quarters, (c) $2,500,000 per quarter for the next four quarters and (d) $1,250,000 per quarter for the next four quarters, with the amount of such reductions to be distributed pro rata to the holders of the Partnership’s outstanding common units.

 

ATLS owned, directly and indirectly, 5,754,253 APL common units immediately prior to closing. Our acquisition of ATLS resulted in our acquiring these common units (converted to 3,363,935 Partnership common units) valued at approximately $147.4 million (based on the $43.82 closing market price of a Partnership common unit on the NYSE on February 27, 2015) and the right to receive the units’ one-time cash payment of approximately $7.3 million, which reduced the consolidated purchase price by approximately $154.7 million.

All outstanding ATLS equity awards, whether vested or unvested, were adjusted in connection with the Spin-Off on the terms and conditions set forth in an Employee Matters Agreement entered into by ATLS, ATLS GP and AEG on February 27, 2015. Following the Spin-Off-related adjustment and at the effective time of the ATLS merger, each outstanding ATLS option and ATLS phantom unit award, whether vested or unvested, held by a person who became an employee of AEG became fully vested (to the extent not vested) and was cancelled and converted into the right to receive the ATLS Merger Consideration in respect of each ATLS common unit underlying the ATLS option or phantom unit award (in the case of options, net of the applicable exercise price). Each outstanding vested ATLS option held by an employee of APL who became an employee of the Company in connection with the Atlas Transactions (a “Midstream Employee”) was cancelled and converted into the right to receive the ATLS Merger Consideration in respect of each ATLS common unit underlying the vested ATLS option, net of the applicable exercise price. Each outstanding unvested ATLS option and each outstanding ATLS phantom unit award held by a Midstream Employee was cancelled and converted into the right to receive (1) the ATLS Cash Consideration in respect of each ATLS common unit underlying such ATLS option or phantom unit award and (2) a TRC restricted stock unit award with respect to a number of shares of TRC Common Stock equal to the product of the ATLS Stock Consideration multiplied by the number of ATLS common units underlying such ATLS option or phantom unit award (in the case of options, net of the applicable exercise price).

In connection with the APL merger, each outstanding APL phantom unit award held by an employee of AEG became fully vested and was cancelled and converted into the right to receive the APL Merger Consideration in respect of each APL common unit underlying the APL phantom unit award. Each outstanding APL phantom unit award held by a Midstream Employee was cancelled and converted into the right to receive (1) the APL Cash Consideration in respect of each APL common unit underlying such APL phantom unit award and (2) a Partnership phantom unit award with respect to a number of the Partnership’s common units equal to the product of the APL Unit Consideration multiplied by the number of APL common units underlying such APL phantom unit award.

The acquired business contributed revenues of $1,065.7 million and a net loss of $1.0 million to the Company for the period from February 27, 2015 to September 30, 2015, and is reported in our Field Gathering and Processing segment. In 2015, we incurred $27.3 million of acquisition-related costs. These expenses are included in other expense in our Consolidated Statements of Operations for the nine months ended September 30, 2015.

 

Pro Forma Impact of Atlas Mergers on Consolidated Statements of Operations

 

The following summarized unaudited pro forma consolidated statement of operations information for the nine months ended September 30, 2015 and September 30, 2014 assumes that the Partnership’s acquisition of APL and our acquisition of ATLS had occurred as of January 1, 2014. We prepared the following summarized unaudited pro forma financial results for comparative purposes only. The summarized unaudited pro forma financial results may not be indicative of the results that would have occurred if we had completed these acquisitions as of January 1, 2014, or that the results that will be attained in the future.

 

	Pro Forma Results for the Nine Months Ended
	September 30, 2015				September 30, 2014
Revenues		$	5,299.9			$	8,659.5
Net income			63.2				340.5

The pro forma consolidated results of operations amounts have been calculated after applying our accounting policies, and making adjustments to:

·

Reflect the change in amortization expense resulting from the difference between the historical balances of APL’s intangible assets, net, and our preliminary estimate of the fair value of intangible assets acquired.

 

·

Reflect the change in depreciation expense resulting from the difference between the historical balances of APL’s property, plant and equipment, net, and our preliminary estimate of the fair value of property, plant and equipment acquired.

 

·

Reflect the change in interest expense resulting from our financing activities directly related to the Atlas mergers as compared with APL’s historical interest expense.

 

·

Reflect the changes in stock-based compensation expense related to the fair value of the unvested portion of replacement Partnership Long Term Incentive Plan (“LTIP”) awards which were issued in connection with the acquisition to APL phantom unitholders who continue to provide service as Targa employees following the completion of the APL merger.

 

·

Remove the results of operations attributable to APL businesses sold during the periods: (1) the May 2014 sale of APL’s 20% interest in West Texas LPG Pipeline Limited Partnership and (2) the February 2015 transfer to Atlas Resource Partners, L.P of 100% of APL’s interest in gas gathering assets located in the Appalachian Basin of Tennessee.

 

·

Exclude $27.3 million of acquisition-related costs incurred in 2015 from pro forma net income for the nine months ended September 30, 2015. Pro forma net income for the nine months ended September 30, 2014 was adjusted to include these charges.

 

·

Conform to our accounting policy, we also adjusted APL’s revenues to report plant sales of Y-grade at contractual net values rather than grossed up for transportation and fractionation deduction factors.

 

The following table summarizes the consideration transferred to acquire ATLS and APL:

Fair Value of Consideration Transferred:
Cash paid, net of cash acquired (1):
TRC		$	745.7
TRP			828.7
Common shares of TRC			1,008.5
Replacement restricted stock units awarded (2)			5.2
Common units of TRP			2,421.1
Replacement phantom units awarded (2)			15.0
Total		$	5,024.2

 

---

(1)

Net of cash acquired of $40.8 million.

(2)

The fair value of consideration transferred in the form of replacement restricted stock unit awards and replacement phantom unit awards represent the allocation of the fair value of the awards to the pre-combination service period. The fair value of the awards associated with the post-combination service period will be recognized over the remaining service period of the award.

 

As of February 27, 2015, our preliminary fair value determination related to the Atlas mergers was as follows. The excess of the purchase price over the estimated fair value of net assets acquired was approximately $551.4 million, which was recorded as goodwill. This determination is based on our preliminary valuation and is subject to revisions pending the completion of the valuation and other adjustments.

Preliminary fair value determination:		February 27, 2015
Trade and other current receivables, net		$	181.1
Other current assets			24.5
Assets from risk management activities			102.1
Property, plant and equipment			4,703.1
Investments in unconsolidated affiliates			219.7
Intangible assets			1,199.0
Other long-term assets			5.6
Current liabilities			(258.0	)
Long-term debt			(1,573.3	)
Deferred income tax liabilities, net			(8.6	)
Other long-term liabilities			(9.0	)
Total identifiable net assets			4,586.2
Noncontrolling interest in subsidiaries			(113.4	)
Goodwill			551.4
Total fair value consideration transferred		$	5,024.2

Our valuation of the acquired assets and liabilities is ongoing and may result in future measurement-period adjustments to these preliminary fair values. The fair values of property, plant and equipment, investments in unconsolidated affiliates, intangible assets representing customer contracts and customer relationships, deferred income taxes related to APL Arkoma, Inc., a taxable subsidiary acquired, and noncontrolling interest, which is calculated as a proportionate share of the fair value of the acquired joint ventures’ net assets, are preliminary pending completion of final valuations. As a result, goodwill is also preliminary, as it has been recorded as the excess of the purchase price over the estimated fair value of net assets acquired.

During the three months ended June 30, 2015, we recorded measurement period adjustments to our preliminary acquisition date fair values due to the refinement of our valuation models, assumptions and inputs. As a result, the statement of operations for the three months ended March 31, 2015 was retrospectively adjusted for the impact of measurement-period adjustments to property, plant and equipment, intangible assets, and investment in unconsolidated affiliates. These adjustments resulted in a decrease in depreciation and amortization expense of $1.0 million, and an increase in equity earnings of $0.3 million from the amounts previously reported in our Form 10-Q for the quarter ended March 31, 2015.

During the three months ended September 30, 2015, we recorded additional measurement-period adjustments to our preliminary acquisition date fair values due to the refinement of our valuation models, assumptions and inputs. In accordance with the recent ASU 2015-16, we have recognized these measurement-period adjustments in the current reporting period, with the effect on the consolidated statements of operations resulting from the change to the provisional amounts calculated as if the acquisition had been completed at February 27, 2015. During the three months ended September 30, 2015, the acquisition date fair value of property, plant and equipment increased by $9.9 million, investments in unconsolidated affiliates increased by $5.5 million, intangible assets decreased by $5.0 million, current liabilities increased by $2.4 million, other assets decreased by $1.0 million, and other current assets decreased by $0.6 million, which resulted in a decrease in goodwill of $6.4 million. These adjustments resulted in increased revenues of $0.6 million, a reduction of operating expenses of $1.9 million, depreciation and amortization expense of $0.1 million and equity losses of $0.1 million recorded in the three months ended September 30, 2015, which under the prior accounting standard would have been reflected in previous reporting periods.

 

The preliminary valuation of the acquired assets and liabilities was prepared using fair value methods and assumptions including projections of future production volumes and cash flows, benchmark analysis of comparable public companies, expectations regarding customer contracts and relationships, and other management estimates. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs, as defined in Note 15 – Fair Value Measurements. These inputs require significant judgments and estimates at the time of valuation.

The preliminary determination of goodwill of $551.4 million is attributable to the workforce of the acquired business and the expected synergies with us. The goodwill is expected to be amortizable for tax purposes. The attribution of the goodwill to reporting units for the purpose of required future impairment assessments will be completed in conjunction with our finalization of the fair value determination.

The fair value of assets acquired includes trade receivables of $178.1 million. The gross amount due under contracts is $178.1 million, all of which is expected to be collectible. The fair value of assets acquired includes receivables of $3.0 million reported in current receivables and $4.5 million reported in other long-term assets related to a contractual settlement with a counterparty. See Note 10-Debt Obligations for additional disclosures regarding related financing activities associated with the Atlas mergers.

 

Contingent Consideration

 

A liability arising from the contingent consideration for APL’s previous acquisition of a gas gathering system and related assets has been recognized at fair value. APL agreed to pay up to an additional $6.0 million if certain volumes are achieved on the acquired gathering system within a specified time period. The fair value of the remaining contingent payment is recorded within other long term liabilities on our Consolidated Balance Sheets. The range of the undiscounted amount that we could pay related to the remaining contingent payment is between $0.0 and $6.0 million. We finalized our acquisition analysis and modeling of this contingent liability during the three months ended June 30, 2015, which resulted in an acquisition date fair value of $4.2 million. Any future change in the fair value of this liability will be included in earnings.

Replacement Restricted Stock Units (“RSUs”)

In connection with the ATLS merger, we awarded RSUs in accordance with and as required by the Atlas Merger Agreements to those APL employees that who became Targa employees after the acquisition. The vesting dates and terms remained unchanged from the existing ATLS awards, and will vest over the remaining terms of the awards, which are either 25% per year over the original four year term or 25% after the third year of the original term and 75% after the fourth year of the original term.

Each RSU will entitle the grantee to one common share on the vesting date and is an equity-settled award. The RSUs include dividend equivalents. When we declare and pay cash dividends, the holders of RSUs will be entitled within 60 days to receive cash payment of dividend equivalents in an amount equal to the cash dividends the holders would have received if they were the holders of record on the record date of the number of our common shares related to the RSUs.

The fair value of the RSUs was based on the closing price of our common shares at the close of trading on February 27, 2015. The fair value was allocated between the pre-acquisition and post-acquisition periods to determine the amount to be treated as purchase consideration and future compensation expense, respectively. Compensation cost will be recognized in general and administrative expense over the remaining service period of each award.

Replacement Phantom Units

In connection with the APL merger, the Partnership awarded replacement phantom units in accordance with and as required by the Atlas Merger Agreements to those APL employees who became Targa employees after the acquisition. The vesting dates and terms remained unchanged from the existing APL awards, and will vest over the remaining terms of the awards, which are either 25% per year over the original four year term or 33% per year over the original three year term.

 

Each replacement phantom unit will entitle the grantee to one common unit on the vesting date and is an equity-settled award. The replacement phantom units include distribution equivalent rights (“DERs”). When the Partnership declares and pays cash distributions, the holders of replacement phantom units will be entitled within 60 days to receive cash payment of DERs in an amount equal to the cash distributions the holders would have received if they were the holders of record on the record date of the number of the Partnership’s common units related to the replacement phantom units.

The fair value of the replacement phantom units was based on the closing price of the Partnership’s units at the close of trading on February 27, 2015. The fair value was allocated between the pre-acquisition and post-acquisition periods to determine the amount to be treated as purchase consideration and compensation expense, respectively. Compensation cost will be recognized in general and administrative expense over the remaining service period of each award.

Note 5 — Inventories

		September 30, 2015			December 31, 2014
Partnership:
Commodities		$	138.4			$	157.4
Materials and supplies			12.7				11.5
		$	151.1			$	168.9

Note 6 — Property, Plant and Equipment and Intangible Assets

 

		September 30, 2015				December 31, 2014			Estimated Useful Lives (In Years)
Gathering systems		$	6,187.7			$	2,588.6		5 to 20
Processing and fractionation facilities			2,996.3				1,890.7		5 to 25
Terminaling and storage facilities			1,098.2				1,038.9		5 to 25
Transportation assets			439.5				359.0		10 to 25
Other property, plant and equipment			213.7				149.3		3 to 25
Land			108.6				95.6		-
Construction in progress			754.4				399.0		-
Property, plant and equipment			11,798.4				6,521.1
Accumulated depreciation			(2,048.2	)			(1,696.5	)
Property, plant and equipment, net		$	9,750.2			$	4,824.6
Intangible assets		$	1,880.6			$	681.8		20
Accumulated amortization			(184.9	)			(89.9	)
Intangible assets, net		$	1,695.7			$	591.9

Intangible assets consist of customer contracts and customer relationships acquired in our Atlas mergers and our Badlands business acquisition. The fair values of these acquired intangible assets were determined at the date of acquisition based on the present values of estimated future cash flows. Key valuation assumptions include probability of contracts under negotiation, renewals of existing contracts, economic incentives to retain customers, past and future volumes, current and future capacity of the gathering system, pricing volatility and the discount rate.

The fair values of intangible assets acquired in the Atlas mergers have been recorded at a preliminary value of $1,199.0 million pending completion of final valuations. For the purpose of our preparing the accompanying consolidated financial statements, (which includes seven months of amortization of these intangible assets), we have amortized these intangible assets over a 20 year life using a straight-line method.

Amortization expense attributable to our intangible assets related to the Badlands acquisition is recorded using a method that closely reflects the cash flow pattern underlying their intangible asset valuation. The estimated annual amortization expense for intangible assets, including the preliminary Atlas valuation and straight-line treatment, is approximately $129.9 million, $148.1 million, $141.3 million, $127.6 million and $116.6 million for each of the years 2015 through 2019.

 

Note 7 — Asset Retirement Obligations

The Partnership’s asset retirement obligations (“ARO”) primarily relate to certain gas gathering pipelines and processing facilities, and are included in our Consolidated Balance Sheets as a component of other long-term liabilities. The changes in the Partnership’s ARO are as follows:

		Nine Months Ended September 30, 2015
Beginning of period		$	57.1
Preliminary fair value of ARO acquired with APL merger			4.0
Change in cash flow estimate			3.8
Accretion expense			4.0
End of period		$	68.9

Note 8 — Investments in Unconsolidated Affiliates

The Partnership’s unconsolidated investments consist of a 38.8% non-operated ownership interest in Gulf Coast Fractionators LP (“GCF”) and three non-operated joint ventures in South Texas; 75% interest in T2 LaSalle; 50% interest in T2 Eagle Ford; and 50% interest in T2 EF Co-Gen (together the “T2 Joint Ventures”). The T2 Joint Ventures were formed to provide services for the benefit of the joint interest owners. The T2 Joint Ventures have capacity lease agreements with the joint interest owners, which cover the costs of operations of the T2 Joint Ventures. The terms of these joint venture agreements do not afford the Partnership the degree of control required for consolidating them in our consolidated financial statements, but they do afford the Partnership significant influence required to employ the equity method of accounting.

The following table shows the activity related to the Partnership’s investment in unconsolidated affiliates:

 

		Nine Months Ended September 30, 2015
		GCF				T2 Joint Ventures				Total
Beginning of period		$	50.2			$	-			$	50.2
Preliminary fair value of T2 Joint Ventures acquired			-				219.7				219.7
Equity earnings (loss)			10.1				(11.2	)			(1.1	)
Cash distributions (1)			(10.7	)			(0.5	)			(11.2	)
Cash calls for expansion projects			-				6.6				6.6
End of period		$	49.6			$	214.6			$	264.2

---

(1)

Includes $1.1 million distributions received from GCF and T2 Joint Ventures in excess of the Partnership’s share of cumulative earnings for the nine months ended September 30, 2015. Such excess distributions are considered a return of capital and disclosed in cash flows from investing activities in the Consolidated Statements of Cash Flows.

The Partnership’s recorded value of the T2 Joint Ventures is based on preliminary fair values at the date of acquisition which results in an excess fair value of $45.1 million over the book value of the Partnership’s capital accounts. This basis difference is attributable to depreciable tangible assets and is being amortized over the preliminary estimated useful lives of the underlying assets of 20 years on a straight-line basis and is included as a component of equity earnings. See Note 4 - Business Acquisitions for further information regarding the preliminary fair value determinations related to the Atlas mergers.

Note 9 — Accounts Payable and Accrued Liabilities

		September 30, 2015												December 31, 2014
		Targa Resources Partners LP				TRC Non- Partnership				Targa Resources Corp. Consolidated (1)				Targa Resources Partners LP				TRC Non- Partnership				Targa Resources Corp. Consolidated (1)
Commodities		$	416.5			$	-			$	416.5			$	416.7			$	-			$	416.7
Other goods and services			100.5				1.2				101.7				108.9				2.2				111.1
Interest			68.0				0.7				68.7				37.3				-				37.3
Compensation and benefits			1.0				29.7				30.7				1.3				44.8				46.1
Income and other taxes			42.6				0.2				42.8				13.6				(1.9	)			11.7
Other			21.9				6.6				28.5				14.9				0.7				15.6
		$	650.5			$	38.4			$	688.9			$	592.7			$	45.8			$	638.5