Targa Resources Corp. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Targa consolidates Targa Resources Partners LP (the Partnership), including amounts attributable to outside owners. Partnership debt and assets are not equivalent to parent-only obligations or resources.
Business context and key financial metrics
Targa is principally a holding company whose cash inflows depend on distributions from the Partnership. The Partnership operates natural gas gathering and processing, NGL logistics and marketing, and crude oil gathering and terminaling businesses.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2013 / 2012 | $1,441.6 / $1,319.1 | $2,839.4 / $2,964.9 |
| Gross margin, 2013 / 2012 | $265.2 / $244.5 | $525.5 / $506.1 |
| Operating margin, 2013 / 2012 | $169.1 / $167.2 | $343.3 / $357.2 |
| Income from operations, 2013 / 2012 | $60.9 / $83.2 | $134.8 / $190.8 |
| Net income, 2013 / 2012 | $22.5 / $43.5 | $56.2 / $112.6 |
| Net income attributable to Targa common shareholders, 2013 / 2012 | $15.0 / $8.6 | $28.3 / $18.2 |
| Diluted earnings per share, 2013 / 2012 | $0.36 / $0.21 | $0.67 / $0.44 |
For the six months, operating cash flow was $162.7, investing cash outflow was $455.0, and financing cash inflow was $298.9, compared with $204.0, $251.1 and $18.8, respectively, in 2012. Cash and equivalents were $82.9 at June 30, versus $76.3 at year-end 2012. Cash outlays for capital projects were $444.5, including $399.2 of expansion spending and $43.4 of maintenance additions.
Consolidated long-term debt was $2,728.0 at June 30, up from $2,475.3 at December 31, 2012; it includes Partnership debt. Current assets were $697.9 and current liabilities $608.6. The Partnership had $47.9 of letters of credit outstanding. Both Targa and the Partnership reported compliance with debt covenants.
Material changes versus the prior comparable period
- Second-quarter revenue rose 9%, while first-half revenue declined 4%. First-half NGL price weakness reduced revenue, partly offset by higher natural gas and condensate prices, volumes and fee-based revenue.
- Second-quarter operating margin edged up 1%; first-half operating margin fell 4%. Higher costs, depreciation and amortization, and interest contributed to lower operating income and consolidated net income.
- Despite lower consolidated net income, income available to Targa common shareholders increased in both comparisons. The filing attributes the change largely to lower earnings allocated to noncontrolling interests and increased incentive distributions.
- Expansion spending increased substantially year over year. Net property, plant and equipment rose to $3,883.4 from $3,538.0 at year-end.
- Partnership segment performance was mixed: Field Gathering and Processing operating margin rose 25% in Q2, and Logistics Assets rose 14%; Coastal Gathering and Processing fell 40%. First-half operating margin declined in Field Gathering and Processing and Coastal Gathering and Processing, while Logistics Assets and Marketing and Distribution improved.
Outlook, commentary, risks and unusual items
- Management estimated the Partnership’s 2013 growth capital expenditures at approximately $1.0 billion gross and maintenance capital expenditures, net to its interest, at approximately $85 million. Spending may vary with investment opportunities.
- Management stated that expected operating cash flow, revolver and securitization capacity, and potential equity or debt offerings should fund Partnership needs for at least 12 months, absent disruptive events. Targa likewise expected its distributions from the Partnership to support its own operations, debt and dividends over that period.
- The Partnership’s second-quarter distribution was declared at $0.715 per common unit, or $2.86 annualized. Targa declared a quarterly dividend of $0.53250 per share. Targa’s dividend capacity depends on Partnership distributions and parent-level costs and reserves.
- The Badlands assets, acquired at year-end 2012, were in start-up and integration; management anticipated volume growth and system build-out during 2013 and 2014. A contingent payment of up to $50 million depends on crude-oil gathering thresholds through June 2014. Its estimated fair value fell from $15.3 to $9.1, producing a $6.2 reduction in the liability.
- The Partnership issued $625 million of 4¼% senior notes in May, using proceeds in part to reduce revolver borrowings. It redeemed $100 million face value of 6⅜% notes in June, recording a $7.4 loss. In July, after quarter-end, it redeemed the outstanding 11¼% notes; a further $7.4 loss was recorded in Q3.
- Operational factors included a planned Cedar Bayou fractionator maintenance turnaround, completed in July, and Coastal segment supply, pipeline and facility issues. The filing noted that a temporary y-grade inventory build was expected to be fractionated in Q3 and Q4.
- Key exposures include volatile commodity prices, interest rates on variable-rate borrowings, counterparty and customer credit, access to capital markets, operating interruptions, and regulatory and environmental requirements. The filing reported ordinary-course legal matters that management did not expect to materially affect results.
Most important facts for investors to verify
- Whether Badlands throughput and crude-oil gathering volumes meet the contingent-payment thresholds, and whether planned expansion delivers the anticipated growth.
- Progress and returns on the approximately $1.0 billion 2013 growth-capital program, alongside maintenance needs and resulting cash generation.
- Underlying fee-based and segment margins, especially recovery in Coastal Gathering and Processing and performance after the Cedar Bayou turnaround.
- Debt, refinancing and liquidity at both the parent and Partnership levels; consolidated debt includes Partnership obligations, while Partnership assets and cash are subject to partnership and lending restrictions.
- Distribution coverage and Targa’s ability to sustain dividends given the parent’s reliance on Partnership distributions.
- Commodity hedge effectiveness, price exposure and counterparty concentration; the filing’s sensitivity analysis shows derivative fair values can change materially with commodity prices.