Targa Resources Corp. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2011; comparisons are with the three and nine months ended September 30, 2010. Targa Resources Corp. (TRC) consolidates Targa Resources Partners LP (the Partnership), which owns and operates the midstream business. Most reported operating results and debt therefore relate to the Partnership; its assets and cash are subject to partnership and lending restrictions, and TRC does not have an obligation to repay Partnership debt. TRC’s own cash inflows depend primarily on distributions from the Partnership.
Financial and operating metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,713.6m | $1,220.0m | $5,060.5m | $3,948.3m |
| Gross margin (non-GAAP) | $228.1m | $186.3m | $696.0m | $554.4m |
| Operating margin (non-GAAP) | $151.6m | $120.1m | $481.9m | $364.0m |
| Income from operations | $70.8m | $43.3m | $242.8m | $146.5m |
| Consolidated net income (loss) | $36.5m | $(4.3)m | $140.6m | $39.0m |
| Net income attributable to TRC | $4.9m | $(17.5)m | $22.2m | $(7.2)m |
| TRC common-share EPS | $0.12 | $(3.77) | $0.54 | $(45.00) |
| Net cash from operating activities | Not presented by quarter | $164.6m | $126.0m |
Consolidated interest expense, net, was $26.8m in Q3 and $83.3m for nine months. Nine-month investing cash outflow was $390.1m, including $214.3m of property and equipment outlays, $164.2m for acquisitions and $11.9m invested in an unconsolidated affiliate. Financing provided $191.2m. Cash fell to $154.1m from $188.4m; $68.9m of September cash belonged to the Partnership and was not available to TRC.
At September 30, total consolidated long-term debt was $1,603.4m, versus $1,534.7m at year-end 2010. This includes $1,514.1m of Partnership debt and $89.3m of TRC non-Partnership debt. The Partnership had $476.7m available on its $1.1bn revolving facility and $88.3m of letters of credit outstanding. TRC had $85.2m of its own cash. Both TRC and the Partnership reported compliance with debt covenants.
Material changes versus prior comparable periods
- Revenue rose 40% in Q3 and 28% for the nine-month period. Management attributed the increases chiefly to higher realized NGL and condensate prices and higher sales volumes; product purchases also rose materially. Revenue growth should not be read as equivalent profit growth.
- Q3 operating margin increased $31.5m; nine-month operating margin increased $117.9m. The Field and Coastal Gathering and Processing, Logistics Assets, and Marketing and Distribution segments improved, while the “Other” hedge result moved to a loss of $10.8m for Q3 and $28.4m for nine months, versus gains of $7.1m and $7.0m, respectively, in 2010.
- Q3 consolidated net income improved from a loss to profit; nine-month net income rose to $140.6m. A substantial portion was attributable to noncontrolling interests: $118.4m for nine months, leaving $22.2m attributable to TRC.
- Cash from operations increased on a consolidated basis, but Partnership operating cash flow declined to $191.3m from $238.9m, reflecting, among other factors, working-capital movements and greater cash paid on derivative transactions, including termination of interest-rate swaps.
- Capital spending and acquisition activity increased. The Partnership acquired the Channelview terminal and, on September 30, the Tacoma and Baltimore terminals; the latter acquisitions had total consideration of $127.7m plus $7.5m estimated working capital.
Outlook, commentary, risks and unusual items
- Management said that, absent disruptive events, internally generated cash and available borrowing capacity should fund operations, non-acquisition capital expenditures, debt service and collateral requirements. The filing provides no formal earnings guidance.
- The Partnership estimated 2011 capital expenditures of approximately $520m gross, or $480m net of noncontrolling-interest share and reimbursements; approximately 15% of the net amount was expected to be maintenance spending. Projects include a $360m Cedar Bayou fractionator expansion targeted for completion in Q1 2013, a $250m propane export expansion targeted for Q3 2013, and a roughly $150m North Texas processing plant expected in mid-2013, subject to approvals. Timing, cost and returns remain subject to execution and market conditions.
- After quarter-end, the Partnership declared a quarterly distribution of $0.5825 per unit. TRC announced a $0.3075 quarterly common dividend, or $1.232 annualized, totaling $13.0m including accrued dividends on restricted shares.
- TRC reported $20.2m of distributable cash flow (non-GAAP) for Q3 and $46.1m for nine months. The Q3 figure included a $6.1m current tax benefit, primarily attributable to an overpayment of prior-year taxes; management described this as a one-time benefit. The measure is not a substitute for GAAP earnings or cash flow.
- The Partnership paid $24.2m, including accrued interest, to terminate all interest-rate swaps in September. The filing reports $19.6m of related losses deferred in other comprehensive income to be amortized into interest expense while variable-rate debt remains outstanding. Commodity hedges mitigate price exposure but can reduce revenue when market prices exceed hedge prices; deferred net hedge losses were expected to be reclassified over the next 12 months.
- Key risks include commodity-price and volume changes, producer drilling and supply trends, counterparty credit, collateral needs, access to capital, and weather or operating disruptions. Proposed EPA air-emissions rules and potential pipeline-safety requirements could increase costs, require investment, delay customer well completions or reduce demand. The Partnership is non-investment-grade rated; the filing notes that counterparties may demand significant collateral.
- The Partnership reported a $1.4m environmental liability. Versado’s NMED settlement projects were estimated to cost $33.4m in total, with a $21.0m Partnership share; $13.3m of that share had been spent by September 30, and TRC is obligated to reimburse the Partnership for specified maintenance capital expenditures. Management said ordinary-course legal and regulatory proceedings were not expected to have a material effect.
- TRC had a contingent obligation through 2011 to support Partnership distributions up to $8m per quarter if needed to reach $0.5175 per unit; it had made no payments and did not then expect to do so. The company’s ability to pay dividends depends on Partnership distributions and TRC’s own costs, taxes, reserves and capital contributions.
Most important facts for investors to verify
- Separate TRC’s parent-level cash, debt and earnings from the Partnership’s consolidated amounts; confirm which cash and assets are restricted and which liabilities TRC is legally responsible for.
- Assess whether reported margin and distributable-cash-flow growth is repeatable, excluding commodity-price effects, hedge settlements, the one-time tax benefit and working-capital changes.
- Track Partnership distribution coverage and the resulting cash available to fund TRC’s dividend, taxes, parent expenses and potential capital support.
- Verify the cost, schedule, funding and contracted economics of announced expansion projects and acquired terminals, as well as the Partnership’s remaining borrowing capacity and collateral requirements.
- Monitor environmental remediation and reimbursement obligations, and the final scope and cost implications of pending air-emissions and pipeline-safety regulations.