Note 2 — Basis of Presentation

These accompanying financial statements and related notes present our consolidated financial position as of December 31, 2016 and 2015, and the results of operations, comprehensive income, cash flows, and changes in owners’ equity for the years ended December 31, 2016, 2015 and 2014.

We have prepared these consolidated financial statements in accordance with GAAP. 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.

One of our indirect subsidiaries is the sole general partner of Targa Resources Partners LP (“the Partnership” or “TRP”). Prior to February 17, 2016, our interests in the Partnership consisted 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 representing limited partner interests in the Partnership (“common units”), 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 (as defined in Note 4 – Business Acquisitions).

On February 17, 2016, we completed the transactions contemplated by the Agreement and Plan of Merger (the “TRC/TRP Merger Agreement”), and such transaction, the “TRC/TRP Merger”, dated November 2, 2015, by and among us, the general partner of TRP, TRC and Spartan Merger Sub LLC, a subsidiary of us (“Merger Sub”) and we acquired indirectly all of the outstanding TRP common units that we and our subsidiaries did not already own. Upon the terms and conditions set forth in the TRC/TRP Merger Agreement, Merger Sub merged with and into TRP, with TRP continuing as the surviving entity and as a subsidiary of TRC.

At the effective time of the TRC/TRP Merger, each outstanding TRP common unit not owned by us or our subsidiaries was converted into the right to receive 0.62 shares of our common stock. We issued 104,525,775 shares of our common stock to third-party unitholders of the common units of the Partnership in exchange for all of the 168,590,009 outstanding common units of the Partnership that we previously did not own. No fractional shares were issued in the TRC/TRP Merger, and TRP common unitholders instead received cash in lieu of fractional shares. There were no changes to our other interests in the Partnership.

TRP’s 5,000,000 9.0% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the “Preferred Units”) remain outstanding after the TRC/TRP Merger. The Preferred Units are listed on the NYSE under “NGLS PRA” and are publicly traded. The Preferred Units are reported as noncontrolling interests in our financial statements.

As we continued to control the Partnership after the TRC/TRP Merger, the resulting change in our ownership interest was accounted for as an equity transaction, which is reflected in our Consolidated Balance Sheet as a reduction of noncontrolling interests and a corresponding increase in common stock and additional paid in capital. The TRC/TRP Merger was a taxable exchange that resulted in a book/tax difference in the basis of the underlying assets acquired (our investment in TRP). The tax impact is presented as a reduction of additional paid-in capital consistent with the accounting for tax effects of transactions with noncontrolling interests. See Note 23 – Income Taxes. The following table summarizes the financial effects of the TRC/TRP Merger:

	Common shares		Additional paid-in capital			Retained earnings		Accumulated other comprehensive income (loss)			TRC's stockholders' equity			Noncontrolling interests (1)			Total owners' equity
Shares issued for the Merger	$	0.1	$	1,803.0		$	—	$	—		$	1,803.1		$	(4,119.7	)	$	(2,316.6	)
Impact of NCI acquisition on TRC owners' equity		—		2,226.7			—		89.9			2,316.6			—			2,316.6
Deferred tax adjustments		—		(831.0	)		—		(34.1	)		(865.1	)		—			(865.1	)
Transaction costs, net of tax		—		(15.0	)		—		—			(15.0	)		—			(15.0	)
Acquisition of TRP noncontrolling common interests	$	0.1	$	3,183.7		$	—	$	55.8		$	3,239.6		$	(4,119.7	)	$	(880.1	)

(1)

Reflects the February 17, 2016 book value of the publicly held interests in TRP.

The equity interests in TRP (which are consolidated in our financial statements) that were owned by the public prior to February 17, 2016 are reflected within “Noncontrolling interests” in our Consolidated Balance Sheets for periods prior to the merger date. The earnings recorded by TRP that were attributed to its common units held by the public prior to February 17, 2016 are reflected within “Net income attributable to noncontrolling interests” in our Consolidated Statements of Operations for periods prior to the merger date.

On October 19, 2016, TRP executed the Third Amended and Restated Partnership Agreement of Limited Partnership of Targa Resources Partners LP (the “Third A&R Partnership Agreement”), effective as of December 1, 2016. The Third A&R Partnership Agreement (i) eliminated the incentive distribution rights (“IDRs”) held by the General Partner, and related distribution and allocation provisions, (ii) eliminated the Special GP Interest held by the General Partner, (iii) provided the ability to declare monthly distributions in addition to quarterly distributions, (iv) modified certain provisions relating to distributions from available cash, (v) eliminated the Class B Unit provisions and (vi) made changes to reflect the passage of time and removed provisions that were no longer applicable. In connection with the Third A&R Partnership Agreement, on December 1, 2016, TRP issued to the General Partner (i) 20,380,286 Common Units and 424,590 General Partner Units in exchange for the elimination of the IDRs and (ii) 11,267,485 Common Units and 234,739 General Partner Units in exchange for the elimination of the Special GP Interest.

Change in Reportable Segments

Concurrent with the TRC/TRP Merger in February 2016, management reevaluated our reportable segments. See “Segment Information” included in Note 26 for a presentation of financial results by reportable segment, which have been recast to reflect our change in reporting segments for all periods presented.

Purchase of Versado Membership Interest

On October 31, 2016, we executed a Membership Interest Sale and Purchase Agreement with Chevron U.S.A. Inc. to acquire the remaining 37% membership interest in our consolidated subsidiary Versado Gas Processors, L.L.C. (“Versado”). As we continue to control Versado, the change in our ownership interest was accounted for as an equity transaction representing the acquisition of a noncontrolling interest and no gain or loss was recognized in our Consolidated Statements of Operations as a result. See Note 20 – Contingencies.

Revisions of Previously Reported Activity in our Consolidated Statements of Comprehensive Income (Loss)

During the first quarter of 2016 we concluded that activity related to our commodity hedge contracts was not reported properly in our Consolidated Statements of Comprehensive Income (Loss) during 2015. The errors resulted in misstatements of the statement caption “Change in fair value” and equal offsetting misstatements of the caption “Settlements reclassified to revenues.” Related income tax effects were also misstated. The reported beginning and ending balance sheet values of Accumulated Other Comprehensive Income were unaffected.

We concluded that these misstatements were not material to any of the periods affected, as reported “Total Other Comprehensive Income” is unchanged. However, we have revised previous Consolidated Statements of Comprehensive Income (Loss) reported during 2015 to properly reflect changes in fair value and settlements reclassified to revenues. There is no impact on previously reported net income, total comprehensive income, cash flows, financial position or other profitability measures.

The following table displays the impact of these revisions to activity reported in our Consolidated Statements of Comprehensive Income (Loss) during the year ended December 31, 2015:

		Year Ended
		December 31, 2015
		As Reported												As Corrected
		Pre-Tax				Related Income Tax				After Tax				Pre-Tax				Related Income Tax				After Tax
Targa Resources Corp.
Commodity hedging contracts:
Change in fair value	$		7.4		$		(2.8	)	$		4.6		$		11.0		$		(4.2	)	$		6.8
Settlements reclassified to revenues			(5.9	)			2.2				(3.7	)			(9.5	)			3.6				(5.9	)
Other comprehensive income (loss) attributable to Targa Resources Corp.			1.5				(0.6	)			0.9				1.5				(0.6	)			0.9

Noncontrolling interests
Commodity hedging contracts:
Change in fair value			73.8				-				73.8				101.7				-				101.7
Settlements reclassified to revenues			(48.9	)			-				(48.9	)			(76.8	)			-				(76.8	)
Other comprehensive income (loss) attributable to noncontrolling interests			24.9				-				24.9				24.9				-				24.9

Total
Commodity hedging contracts:
Change in fair value			81.2				(2.8	)			78.4				112.7				(4.2	)			108.5
Settlements reclassified to revenues			(54.8	)			2.2				(52.6	)			(86.3	)			3.6				(82.7	)
Other comprehensive income (loss)	$		26.4		$		(0.6	)	$		25.8		$		26.4		$		(0.6	)	$		25.8