Targa Resources Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Comparisons are with Q1 2013 unless noted. Targa consolidates Targa Resources Partners LP (the Partnership), although most consolidated operations are Partnership operations and much of its earnings belong to noncontrolling investors.
Business context and results
Targa is a midstream energy company whose cash inflows primarily come from its general partner interest, incentive distribution rights (IDRs), and common units in the Partnership. The Partnership gathers and processes natural gas and crude oil, and transports, fractionates, stores, markets, and exports NGLs and other products.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $2,352.9 million | $1,397.8 million |
| Gross margin (non-GAAP) | $379.6 million | $260.3 million |
| Operating margin (non-GAAP) | $275.3 million | $174.2 million |
| Income from operations | $158.4 million | $73.9 million |
| Net income | $106.9 million | $33.8 million |
| Net income attributable to Targa common shareholders | $19.6 million; $0.47 per diluted share | $13.4 million; $0.32 per diluted share |
| Operating cash flow | $318.7 million | $192.9 million |
| Capital expenditures, cash outlays | $197.7 million | $221.8 million |
Revenue rose 68%, gross margin 46%, operating margin 58%, and net income attributable to common shareholders 46%. Revenue growth reflected higher commodity prices ($459.8 million), higher commodity volumes ($401.2 million), and higher fee-based and other revenue ($94.1 million). NGL sales and commodity marketing are a large share of revenue, so revenue growth alone does not indicate equivalent profit growth.
The Partnership’s Adjusted EBITDA was $231.6 million versus $132.2 million, and its distributable cash flow was $189.0 million versus $85.5 million. Targa’s own distributable cash flow, a non-GAAP measure, was $27.0 million versus $25.1 million. These measures are not substitutes for GAAP earnings or cash flow.
Balance sheet, liquidity, and financing
- At March 31, 2014, consolidated cash was $94.9 million; total assets were $6.06 billion; and current assets exceeded current liabilities by $51.5 million.
- Consolidated long-term debt was $2.89 billion, down from $2.99 billion at year-end. This includes Partnership debt; Targa stated it is not obligated to pay the Partnership’s debt service. The Partnership and Targa were in compliance with debt covenants.
- Targa reported standalone liquidity of $91.5 million, including $13.5 million cash and $78.0 million available on its revolving facility. Partnership liquidity was $829.2 million, including cash and remaining revolver and securitization-facility availability.
- Q1 operating cash flow increased to $318.7 million. Investing used $193.7 million and financing used $96.8 million; cash ended the quarter $28.2 million higher. Cash flow benefited from working-capital movements, including lower inventory and collections.
- The Partnership issued units under its equity distribution agreement, receiving $115.3 million net proceeds in Q1 (some proceeds were received in April). The report states total 2014 proceeds through the period discussed were $163.0 million, used to reduce revolver borrowings and for general purposes.
Material operating changes
- Logistics Assets operating margin increased 72% to $96.6 million, mainly on higher LPG exports, fractionation volumes, and reservation fees. Export volumes averaged 115.6 MBbl/d versus 45.8 MBbl/d, reflecting the first phase of the export expansion placed in service in September 2013; CBF Train 4 also commenced commercial operations in 2013.
- Marketing and Distribution operating margin increased 90% to $64.6 million, primarily due to export activity and improved NGL marketing and wholesale margins.
- Field Gathering and Processing operating margin rose 75% to $94.1 million, supported by prices, throughput growth, system expansions, and increased Badlands activity. Crude oil gathered rose 137% to 74.7 MBbl/d.
- Coastal Gathering and Processing operating margin rose 11% to $26.1 million; lower inlet volumes were partly offset by higher NGL prices and temporary off-system supply.
- Hedging reduced reported operating margin by $6.1 million in Q1 2014, compared with a $6.6 million benefit in Q1 2013. The Partnership reported a $9.6 million net derivative liability at quarter-end.
Outlook, risks, and contingencies
- The Partnership estimated 2014 growth capital expenditures of approximately $700 million gross and maintenance capital expenditures of approximately $90 million net to its interest. Q1 gross capital additions were $175.4 million, including $161.7 million for expansion.
- Management expected Targa’s Partnership distributions, together with available resources, to fund its operations, debt obligations, taxes, and dividends for at least the next 12 months. The Partnership also expected operating cash flow, borrowing availability, and equity or debt offerings to cover operations, capital needs, debt, collateral requirements, and minimum distributions over that period. These are expectations, not guarantees.
- The Partnership declared a quarterly distribution of $0.7625 per common unit, payable May 15, 2014. Targa declared a $0.64750 per-share dividend, payable May 16, 2014.
- Key risks identified include commodity-price volatility, hedge performance and counterparty credit, access to debt and equity markets, collateral demands, weather, regulation, permits, competition, and the ability to connect supply and complete growth projects. The Partnership’s hedges covered portions of expected natural gas volumes through 2016 and NGL and condensate volumes through 2014.
- Management said ordinary-course legal and regulatory matters were not expected to materially affect financial position, results, or cash flows. No material off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material Q1 change in internal control over financial reporting.
- The Q1 2013 cash-flow comparison was revised to reclassify $18.9 million of capital expenditures from operating to investing activities; the comparative operating cash flow shown is $192.9 million.
Important facts for investors to verify
- Review Partnership-level filings and debt terms separately from Targa’s consolidated statements: Partnership assets and cash are subject to partnership-agreement and lending restrictions, and most Partnership earnings are attributable to noncontrolling interests.
- Assess whether export, fractionation, and gathering expansions sustain their higher margins and whether planned capital spending generates expected returns.
- Examine the sustainability of Targa’s dividend against actual cash distributions received from the Partnership, parent-level expenses, taxes, and debt service.
- Monitor commodity prices, hedge settlements, derivative collateral needs, and counterparty performance, including the derivative net liability disclosed at quarter-end.
- Compare cash-flow trends with working-capital movements and the disclosed reclassification of 2013 capital expenditures.