Targa Resources Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Targa is the general partner of Targa Resources Partners LP and consolidates the Partnership; reported consolidated results therefore include substantial noncontrolling interests. Targa itself has no separate direct operating activities, and its parent-level cash flow depends primarily on Partnership distributions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,319.1 million | $1,728.3 million | $2,964.9 million | $3,347.0 million |
| Operating margin (non-GAAP) | $167.2 million | $178.9 million | $357.2 million | $330.4 million |
| Income from operations | $83.2 million | $98.5 million | $190.8 million | $172.0 million |
| Net income | $43.5 million | $63.3 million | $112.6 million | $104.1 million |
| Net income available to common shareholders | $8.6 million | $10.5 million | $18.2 million | $17.3 million |
| Diluted EPS | $0.21 | $0.25 | $0.44 | $0.42 |
- Margins: Q2 operating margin was about 12.7% of revenue, versus 10.4% a year earlier; GAAP operating income margin was about 6.3%, versus 5.7%. Six-month operating margin was about 12.0%, versus 9.9%.
- Cash flow, six months: Operating activities provided $204.0 million, compared with $221.5 million in 2011. Investing used $251.1 million, including $238.7 million of property and equipment outlays. Financing provided $18.8 million; cash declined $28.3 million to $117.5 million.
- Debt and liquidity at June 30: Long-term debt was $1,610.3 million, including $89.3 million of parent-level debt and $1,521.0 million of Partnership debt. Partnership revolver availability was $889.8 million after borrowings and letters of credit; Partnership total liquidity was $979.3 million. Parent-level liquidity was $103.0 million, comprising $28.0 million cash and $75.0 million available under TRI’s facility. The filing states that the parent is not obligated to pay Partnership debt.
- Non-GAAP cash measures: Targa distributable cash flow was $17.3 million in Q2 and $31.5 million for six months, versus $12.7 million and $25.8 million, respectively. Partnership distributable cash flow was $84.5 million in Q2 and $190.2 million for six months, versus $90.0 million and $164.1 million.
Changes versus prior comparable periods
- Revenue fell 24% in Q2 and 11% for the six-month period. Management attributed the declines chiefly to lower realized commodity prices, partly offset by higher sales volumes and fee-based revenue; lower product purchase costs largely offset the revenue decline.
- Q2 consolidated operating margin declined 7%, while six-month operating margin rose 8%. Q2 net income fell 31%; six-month net income increased 8%. Parent common-shareholder income declined in Q2 but increased slightly year to date.
- Results varied by segment. Six-month Logistics Assets operating margin rose to $88.7 million from $55.7 million, supported by fractionation expansion, treating fees, exports and prior-year terminal acquisitions. Field and Coastal Gathering and Processing margins declined, while Marketing and Distribution margin also fell.
- Partnership capital expenditures increased to $238.4 million for the half-year from $166.5 million. Partnership liquidity rose to $979.3 million from $565.1 million, in part following January equity and note offerings and repayment of revolver borrowings.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management said it expects Partnership operating cash flow, revolver availability and access to equity and debt offerings to fund operations, capital needs, debt service, collateral requirements and minimum distributions for at least 12 months, absent disruptive events. It expressed a similar expectation for Targa’s parent-level obligations and dividends, based on expected Partnership distributions.
- The Partnership estimated 2012 capital expenditures of approximately $680 million gross and $650 million net of noncontrolling-interest share and reimbursements; approximately 12% of net spending was expected to be maintenance capital. The filing anticipates significant investment in expansions and growth projects.
- The Partnership declared a Q2 distribution of $0.6425 per common unit, payable August 14, 2012. Targa declared a dividend of $0.39375 per share, payable August 15, 2012. Management stated that future parent dividends depend on Partnership distributions and deductions for expenses, taxes, capital contributions and reserves.
- Commodity prices remain a major risk. Hedges reduced price exposure, and the Partnership reported a $70.7 million net derivative asset at June 30, versus a $5.0 million net liability at year-end. Hedge positions can limit upside when prices rise, and counterparty nonperformance could impair expected receipts. Barclays, Wells Fargo and Natixis accounted for 24%, 20% and 15% of derivative counterparty exposure, respectively.
- Other risks include interest-rate changes, market access, customer and counterparty credit, operating volumes and outages, and regulatory changes. New EPA air-emissions rules may require equipment modifications and increase capital and operating costs; the Partnership was assessing the impact. Partnership environmental liabilities were described as not significant, and ordinary-course legal matters were not expected to have a material effect.
- Q2 Partnership equity earnings included a loss from Gulf Coast Fractionators during a planned shutdown and turnaround associated with a 43 MBbl/d capacity expansion. Q2 2011 included a $3.2 million mark-to-market loss on interest-rate swaps that were later terminated.
Investor verification points
- Review the Partnership’s separate filing and distribution coverage: consolidated parent earnings include Partnership results that largely belong to noncontrolling interests, and Partnership assets are subject to distribution restrictions.
- Verify progress, spending and funding for the 2012 capital program, and whether planned expansion returns and expected operating cash flow support the stated liquidity outlook.
- Monitor commodity prices, hedge volumes and maturities, derivative valuations, and concentration and credit quality of counterparties.
- Assess exposure to the EPA emissions rules, required compliance investment and any resulting operating constraints.
- Confirm debt covenant compliance and continued access to revolver and capital markets. The filing reports covenant compliance at June 30 and identifies the Partnership’s credit rating as non-investment grade.