Targa Resources Corp. quarterly report, Q3 FY2014

Targa Resources Corp. — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. Targa consolidates Targa Resources Partners LP (the Partnership), though most Partnership assets and cash flows are not freely available to the parent; results attributable to outside Partnership investors are reported as noncontrolling interests.

Financial performance

Q3 revenue rose 56%, operating margin 48%, and net income attributable to common shareholders 88% year over year. For the first nine months, revenue rose 56% and operating margin 56%. Growth reflected higher NGL and condensate volumes and prices, increased fee-based revenues, and expansion of logistics and export activities. NGL sales and export volumes increased substantially. Product purchases also rose, reflecting the larger commodity-marketing business.

Cash flow and investment: Nine-month operating cash flow was $519.1 million, versus $277.0 million in 2013. Capital spending cash outlays were $571.7 million, down from $727.1 million; investing cash use was $561.2 million. Financing provided $54.2 million, compared with $486.9 million in 2013. Cash and equivalents ended at $78.8 million. Parent-company distributable cash flow, a non-GAAP measure, was $31.0 million in Q3 and $87.0 million year to date, versus $35.5 million and $90.0 million, respectively, in 2013.

Debt and liquidity: Consolidated long-term debt was $3,137.2 million at September 30, up from $2,989.3 million at year-end 2013. The balance includes $3,045.2 million of Partnership debt and $92.0 million of parent debt; Targa states it is not obligated to make payments on Partnership debt. Partnership liquidity was $655.4 million, including $72.4 million cash, after borrowings and letters of credit. Parent non-Partnership liquidity was $64.4 million, including $6.4 million cash and $58.0 million revolver availability. Both entities were in compliance with debt covenants.

Material changes and notable items

• Logistics Assets operating margin increased 68% in Q3, supported by LPG exports and fractionation. Marketing and Distribution margin rose 90%; Field Gathering and Processing margin rose 39%. Coastal Gathering and Processing margin declined 9% in Q3, principally due to lower throughput and less favorable processing spreads.
• Two 200 MMcf/d processing plants began commercial operations in North Texas and the Permian Basin during 2014. The Partnership completed the second phase of its export expansion, including a de-ethanizer startup in September.
• The Partnership revised prior-period revenue and product purchases to report certain NGL buy-sell transactions net rather than gross. The filing says this nonmaterial correction did not affect net income, cash flow, financial position, or other profitability measures.
• October 2014 subsequent events: Targa agreed to acquire Atlas Energy, L.P. (ATLS), while the Partnership agreed to acquire Atlas Pipeline Partners, L.P. (APL), with the transactions contingent on one another and then expected to close in Q1 2015, subject to approvals and other conditions. The proposed APL transaction includes units and cash; the ATLS transaction includes Targa shares and cash.
• The Partnership issued $800 million of 4⅜% senior notes due 2019 in October, receiving about $791.5 million net proceeds. It also announced redemption of its 7⅞% notes due 2018 for $259.8 million plus accrued interest, expected to result in a $12.4 million 2014 loss.

Outlook, risks, and contingencies

Management expected 2014 Partnership growth capital expenditures of approximately $780 million gross and maintenance capital expenditures of approximately $80 million net to its interest. Approved projects included a roughly $385 million Mont Belvieu fractionation expansion, expected to finish in mid-2016, and a roughly $115 million condensate splitter, subject to permits. New processing capacity was also planned for the Permian and Williston basins. Targa stated it expected its cash distributions from the Partnership to support parent operations, debt and tax obligations, and projected dividends for at least the next 12 months; this depends on Partnership distributions and available liquidity.

Key risks include commodity-price and interest-rate volatility, counterparty and customer credit risk, weather, operating and volume changes, financing access, and execution of growth projects. The Atlas transactions faced regulatory, stockholder and unitholder approval conditions, integration and financing risks, and class-action lawsuits seeking to delay or block the mergers and alleging inadequate consideration and conflicts. Targa said it intended to defend the lawsuits and could not predict their outcome. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether Atlas merger approvals, litigation outcomes, financing arrangements, and closing conditions affect the announced terms, timing, or expected benefits.
• Whether the Partnership’s operating cash flow and distributions can sustain parent dividends, especially given parent distributable cash flow declined year over year despite stronger GAAP earnings.
• Actual costs, completion dates, utilization, and returns for the expansion projects, and whether projected capital spending and liquidity remain adequate.
• Debt maturities, refinancing needs, the post-offering liquidity position, and the effects of the planned senior-note redemption.
• Commodity exposure, hedge performance, and the concentration of derivative credit exposure among a small number of counterparties.