Targa Resources Corp. 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2013; filed November 4, 2013. Targa Resources Corp. (TRC) is primarily a holding company whose operating results largely reflect its controlled subsidiary Targa Resources Partners LP (the Partnership), a midstream natural gas, NGL, crude oil and refined-products business. TRC consolidates the Partnership, including debt it says TRC itself is not obligated to repay. TRC held the Partnership’s 2% general partner interest, all incentive distribution rights and an 11.9% limited-partner interest.
Financial and operating highlights
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,556.8 million | $1,393.5 million | $4,396.2 million | $4,358.4 million |
| Income from operations | $88.5 million | $59.0 million | $223.1 million | $249.8 million |
| Net income | $49.4 million | $19.0 million | $105.6 million | $131.7 million |
| Net income available to common shareholders | $16.3 million | $8.7 million | $44.6 million | $26.9 million |
| Basic / diluted EPS | $0.39 / $0.39 | $0.21 / $0.21 | $1.07 / $1.06 | $0.66 / $0.64 |
| Operating cash flow | Not separately presented | Not separately presented | $258.1 million | $290.2 million |
| Cash capital outlays | Not separately presented | Not separately presented | $708.2 million | $365.1 million |
For Q3, gross margin was $297.0 million versus $240.5 million and operating margin, a company-defined non-GAAP measure, was $199.4 million versus $162.2 million. For the first nine months, gross margin was $822.4 million versus $746.6 million and operating margin was $542.6 million versus $519.4 million.
At September 30, cash was $83.7 million; total assets were $5.725 billion; current assets were $809.0 million and current liabilities were $687.1 million. Consolidated long-term debt was $2.868 billion, up from $2.475 billion at December 31, 2012. These consolidated figures include Partnership obligations; TRC states it has no obligation to make payments on Partnership debt. TRC’s own revolving facility had $70 million drawn and $80 million available at September 30. As of October 28, TRC reported $80 million total liquidity; the Partnership reported $859.6 million.
Changes versus the prior comparable period
- Q3 revenue rose 12% and net income attributable to common shareholders rose 87%; nine-month revenue was nearly flat, consolidated net income fell 20%, while income available to common shareholders increased 66%.
- Q3 operating margin rose 23%, supported by higher volumes, natural gas prices, fractionation fees and exports. Nine-month operating margin grew 4%; lower NGL prices and a CBF turnaround constrained results.
- Operating cash flow declined to $258.1 million from $290.2 million, while cash used in investing increased to $737.6 million from $403.8 million, principally reflecting higher expansion spending.
- Depreciation and amortization increased to $198.7 million from $144.3 million for the nine-month period, reflecting Badlands and recently commissioned or expanded assets.
Outlook, management commentary, risks and unusual items
- Management expected the Partnership’s operating cash flow, revolver and securitization capacity, and potential debt and equity offerings to fund operations, capital spending, debt service, collateral needs and distributions for at least 12 months, absent disruptive events. TRC likewise expected Partnership distributions to support its operations, debt and dividends over that period.
- The Partnership estimated 2013 gross growth capital expenditures of about $900 million and maintenance capital expenditures, net to its interest, of about $80 million. Nine-month gross additions to property and equipment were $727.1 million.
- Badlands began operations under Partnership control in January 2013 and remained in a start-up and build-out phase. Management anticipated volume growth and system expansion through 2013 and 2014. The related potential $50 million contingent payment was revalued to zero; the reversal contributed $9.1 million to Q3 other income and $15.3 million year to date, as management assessed that volume thresholds would not be met.
- The Partnership commissioned CBF fractionator Train 4 in August, adding 100,000 barrels per day of capacity, and commissioned Phase I of its international export project in September, with stated capacity of about 2 million barrels per month. Q3 LPG export volumes averaged 55.2 thousand barrels per day, up 78% year over year.
- The Partnership issued $625 million of 4.25% notes, redeemed $100 million of 6.875% notes and redeemed its remaining 11.25% notes. The redemptions generated $14.7 million of losses for the nine months, including $7.4 million in Q3.
- Commodity prices, drilling and throughput, weather, operating disruptions, counterparty performance, access to capital, interest rates, regulation and collateral requirements are key risks. The Partnership hedged a portion of expected natural gas volumes through 2016 and NGL and condensate volumes through 2014; hedges can limit upside when prices rise.
- A fire at the Saunders plant led to repairs and operational issues; Q3 other operating expense included $3.7 million of Versado repair costs net of insurance. The Partnership also disclosed a New Mexico environmental notice with a proposed $130,600 penalty; discussions to resolve it were ongoing. Management said other ordinary-course legal matters were not expected to have a material effect.
- TRC declared a quarterly dividend of $0.57 per share for Q3, payable November 15, 2013. The Partnership declared a quarterly distribution of $0.7325 per common unit, payable November 14, 2013. Management’s outlook is conditional; no full-year earnings guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Separate TRC obligations and liquidity from the Partnership’s consolidated debt, cash and available credit; confirm which resources are accessible to TRC.
- Track whether the Partnership’s high expansion spending converts into expected throughput, fee revenue and cash distributions, including progress at Badlands and export facilities.
- Assess the sustainability of TRC dividends and Partnership distributions against distributable cash flow, capital needs and debt service; distributable cash flow is a non-GAAP measure.
- Monitor NGL and natural gas prices, hedge positions, counterparty exposure and the sensitivity of derivative values to commodity-price movements.
- Follow Saunders plant repairs and the NMED matter, and assess whether other operational constraints or contingencies affect results.