Business Context and Reporting Period
Company: Targa Resources Corp. (TRC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Business Overview: TRC is a holding company that controls Targa Resources Partners LP (the Partnership), a leading provider of midstream natural gas and natural gas liquids (NGL) services. The Partnership engages in gathering, processing, fractionating, transporting, and marketing natural gas, NGLs, and refined petroleum products. TRC consolidates the Partnership's results but distinguishes between Partnership and Non-Partnership activities.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2011 |
Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2011 |
Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Revenues | $1,727.7 | $1,240.1 | $3,345.8 | $2,723.7 |
| Net Income (Consolidated) | $63.3 | $7.4 | $104.1 | $43.3 |
| Net Income Attributable to TRC | $10.5 | $(11.6) | $17.3 | $10.3 |
| Operating Margin (Non-GAAP) | $178.9 | $120.3 | $330.4 | $243.9 |
| Adjusted EBITDA (Partnership) | $129.8 | $93.9 | $237.2 | $191.4 |
| Cash Flow from Operations | N/A | N/A | $221.5 | $149.4 |
| Long-Term Debt | $1,265.8 | N/A | $1,265.8 | $1,534.7 |
| Cash and Cash Equivalents | $154.7 | N/A | $154.7 | $249.4 |
Note: Operating Margin and Adjusted EBITDA are non-GAAP measures. Net Income Attributable to TRC excludes noncontrolling interests.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 39% ($487.6 million) for the quarter and 23% ($622.1 million) for the six months compared to the prior year periods. This was driven by higher realized commodity prices and increased NGL and natural gas sales volumes.
- Profitability: Consolidated net income surged 755% for the quarter and 140% for the six months. Net income attributable to TRC improved from a loss of $11.6 million to a profit of $10.5 million for the quarter.
- Debt Reduction: Long-term debt decreased by $268.9 million from year-end 2010 to June 30, 2011. The Partnership utilized proceeds from equity and debt offerings to reduce borrowings under its senior secured credit facility.
- Capital Expenditures: Capital expenditures increased significantly, with $167.8 million incurred in the first six months of 2011 compared to $47.0 million in the same period in 2010, driven by expansion projects and the acquisition of the Channelview Terminal.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Distributions: On July 11, 2011, the Partnership declared a quarterly distribution of $0.57 per common unit. TRC declared a quarterly dividend of $0.29 per share.
- Capital Projects: The Partnership estimates total capital expenditures for 2011 to be approximately $370 million. Major projects include a $360 million expansion of the Cedar Bayou Fractionator and a $40 million expansion of the North Texas System.
- Acquisitions: The Partnership acquired a refined petroleum products and crude oil storage facility in Channelview, Texas, for $29.0 million in March 2011.
Risks and Contingencies:
- Regulatory Risk: Proposed EPA rules regarding air emissions (New Source Performance Standards) could require significant capital expenditures and operating costs, potentially reducing demand for services.
- Commodity Price Risk: Revenues are sensitive to natural gas and NGL price fluctuations. The Partnership uses derivative instruments to hedge, but hedge ineffectiveness or market volatility can impact earnings.
- Counterparty Risk: Significant credit exposure exists with financial institutions (e.g., Barclays, Credit Suisse) regarding derivative instruments.
- Environmental Liabilities: The Partnership has a $1.4 million environmental liability reserve, primarily for groundwater assessment and remediation related to a settlement with the New Mexico Environment Department.
Investor Verification Checklist
- Non-GAAP Reconciliations: Verify the reconciliation of Operating Margin and Adjusted EBITDA to GAAP Net Income to understand the impact of hedging and non-cash items.
- Debt Covenants: Confirm compliance with debt covenants, particularly given the reduction in revolver borrowings and the exchange of senior notes.
- Hedge Positions: Review the fair value of derivative instruments (Level 2 and Level 3) and the impact of de-designated interest rate swaps on earnings volatility.
- Capital Expenditure Funding: Assess the sufficiency of cash flows and credit facility availability to fund the estimated $370 million in 2011 capital expenditures.
- Regulatory Impact: Monitor the finalization of EPA air emission rules and their potential cost implications on the Partnership's operations and customers.