Targa Resources Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in millions unless stated otherwise. Targa consolidates Targa Resources Partners LP (the Partnership); reported consolidated results include substantial noncontrolling interests, and Partnership debt is not an obligation of the parent.
Business context and financial performance
The Partnership gathers and processes natural gas and provides NGL, storage, transportation, terminaling and marketing services. Targa’s stated objective is to grow cash available for dividends, primarily through distributions from its Partnership interests.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,393.5 | $1,713.6 | $4,358.4 | $5,060.5 |
| Gross margin (non-GAAP) | $240.5 | $228.1 | $746.6 | $696.0 |
| Operating margin (non-GAAP) | $162.2 | $151.6 | $519.4 | $481.9 |
| Income from operations | $59.0 | $70.8 | $249.8 | $242.8 |
| Net income | $19.0 | $36.5 | $131.7 | $140.6 |
| Net income attributable to common shareholders | $8.7 | $4.9 | $26.9 | $22.2 |
| Diluted earnings per share | $0.21 | $0.12 | $0.64 | $0.54 |
Q3 consolidated operating margin was approximately 11.6% of revenue, versus 8.8% a year earlier; the nine-month comparison was approximately 11.9% versus 9.5%. These ratios are calculated from reported amounts. The filing cautions that gross and operating margin are non-GAAP measures.
Cash flow, debt and liquidity
- Cash flow, nine months: Operating cash flow was $290.2, compared with $164.6 in 2011; investing cash outflow was $403.8, versus $390.1; financing cash inflow was $88.5, versus $191.2. Cash declined $25.1 to $120.7.
- Capital spending: Property, plant and equipment outlays were $365.1; total capital expenditures including acquisitions were $400.2. Expansion spending was $326.1, maintenance spending $48.3, and acquisitions $25.8.
- Debt: Consolidated long-term debt was $1,751.0 at September 30, up from $1,567.0 at year-end 2011. This includes $89.3 of parent-level Holdco debt and Partnership debt. The Partnership had $280.0 drawn on its revolving facility and $47.4 in letters of credit; Targa reported covenant compliance at quarter-end.
- Quarter-end cash allocation: The Partnership held $88.9 and Targa non-Partnership entities held $31.8. After October credit-agreement changes, the filing reported estimated liquidity of $181.8 for Targa and $961.5 for the Partnership, including cash and available revolver capacity.
- Parent distributable cash flow (non-GAAP): $21.9 for Q3 and $53.6 for the nine months, compared with $20.2 and $46.1 in 2011. This is a measure Targa uses to assess capacity to fund dividends, not a substitute for GAAP cash flow.
Material changes and management commentary
- Revenue declined 19% in Q3 and 14% year to date, primarily because lower realized commodity prices reduced revenue; increased sales volumes, fee revenue and petroleum-products revenue partly offset the declines. Gross and operating margins nevertheless increased, reflecting higher volumes and fees and lower product purchase costs, partly offset by higher operating expenses.
- Q3 plant natural-gas inlet volumes fell 6% year over year, while gross NGL production rose 2%. For the nine months, inlet volumes fell 3% and NGL production increased 4%.
- Segment results were mixed: Logistics Assets operating margin increased 67% in Q3 and 62% year to date; Field Gathering and Processing fell 25% and 15%, respectively; Coastal Gathering and Processing fell 55% and 24%. Marketing and Distribution margin improved in Q3 but was lower year to date.
- Management attributed pressure in gathering and processing to weaker gas and NGL prices and, in coastal operations, lower supply and Hurricane Isaac impacts. Logistics growth reflected higher fractionation, treating, export and terminaling activity and prior acquisitions.
- The Partnership recorded a $15.4 loss after Hurricane Isaac-related decisions not to restart the Yscloskey joint-interest processing plant, plus $3.3 of cleanup and repair costs at Coastal Straddle plants. Its Gulf Coast Fractionators investment also incurred a quarterly loss amid a capacity expansion shutdown and startup issues.
Outlook, financing, risks and contingencies
- Management stated that, absent disruptive events, anticipated operating cash flow, revolver availability and access to debt or equity markets should fund operations, capital needs, debt obligations, collateral requirements and distributions for at least the next 12 months. The Partnership estimated 2012 capital expenditures of approximately $680, including about $600 for expansions and acquisitions.
- In October 2012, Targa replaced its $75 revolver with a $150 facility maturing in 2017, with potential commitment increases of up to $100, and used proceeds to repay the remaining $89.3 Holdco borrowing. The Partnership replaced its $1.1 billion revolver with a $1.2 billion facility maturing in 2017, with potential increases of up to $300.
- The Partnership called its 8⅛% notes due 2016 for redemption at a premium and subsequently issued $400 of 5⅛% notes due 2023. The refinancing proceeds were intended to redeem the higher-coupon notes, reduce revolver borrowings and support general purposes; the redemption entails an $8.6 premium and a $2.6 write-off of unamortized debt costs.
- The Partnership’s commodity hedges are intended to reduce cash-flow volatility, but limit potential proceeds on hedged volumes when prices rise. Derivative counterparties, customer credit, commodity and interest-rate movements, access to capital markets, collateral needs, weather, regulation and operational disruptions remain risks. The Partnership’s net derivative fair value was a $31.6 asset at quarter-end.
- Environmental liabilities were reported as not significant. Targa had reimbursed $16.7 of maintenance capital related to a New Mexico environmental settlement; projects were substantially complete. The company said ordinary-course legal and regulatory matters were not expected to materially affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether improved operating margin and distributable cash flow persist despite lower commodity prices, and how hedges affect realized results.
- Actual post-refinancing debt, borrowing availability, interest expense and compliance with credit-agreement covenants.
- Delivery and returns from the substantial expansion program, including the Partnership’s approximately $680 2012 capital-spending estimate.
- Operational and financial effects of Hurricane Isaac, the Yscloskey plant closure and Gulf Coast Fractionators’ expansion and startup issues.
- Whether Partnership distributions continue to support Targa’s dividends, given that parent cash inflows depend primarily on those distributions and Partnership assets are subject to partnership and lender restrictions.