Targa Resources Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statements are unaudited. Targa consolidates Targa Resources Partners LP (the Partnership), although Partnership assets and cash flows are subject to partnership and lending-agreement restrictions. Targa’s principal standalone cash inflows are distributions from the Partnership.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $2,061.9 million | $1,441.6 million | $4,414.8 million | $2,839.4 million |
| Operating margin (non-GAAP) | $277.4 million | $169.1 million | $552.7 million | $343.3 million |
| Income from operations | $150.3 million | $60.9 million | $308.8 million | $134.8 million |
| Net income | $103.2 million | $22.5 million | $210.2 million | $56.2 million |
| Net income available to common shareholders | $26.4 million | $15.0 million | $46.0 million | $28.3 million |
| Diluted earnings per share | $0.63 | $0.36 | $1.09 | $0.67 |
- Revenue grew 43% in Q2 and 55% in the first half year over year. Management attributed the increases to higher commodity volumes and prices, plus growth in fee-based and other revenue. Product purchases also rose substantially, to $1,677.9 million in Q2 and $3,651.2 million in the first half.
- Operating margin, a company-defined non-GAAP measure, increased 64% in Q2 and 61% in the first half. Q2 operating margin was about 13.5% of revenue, compared with about 11.7% a year earlier. Earnings growth at the consolidated level largely reflects Partnership results; $76.8 million of Q2 net income and $164.2 million for the first half were attributable to noncontrolling interests.
- Six-month cash from operations was $424.5 million, versus $181.6 million in 2013. Investing used $413.7 million, principally for capital spending; financing used $1.6 million. Ending cash was $75.9 million. Capital-project cash outlays were $419.6 million.
- At June 30, total assets were $6,328.4 million, long-term debt $3,048.2 million, and owners’ equity $2,243.0 million. Cash was $75.9 million and current liabilities were $818.9 million. These consolidated debt figures include Partnership obligations; Targa states it is not obligated to pay Partnership debt.
- Reported liquidity was $71.6 million for Targa standalone (including $8.6 million cash and $63.0 million revolver availability) and $677.7 million for the Partnership. Both entities were in compliance with debt covenants. Partnership revolver availability was $610.4 million after outstanding borrowings and letters of credit.
- Targa distributable cash flow, a non-GAAP measure, was $28.7 million in Q2 and $55.9 million for the first half. Targa declared common dividends of $29.2 million for Q2 and $56.6 million for the first half; review the company’s definition and reconciliation when assessing dividend coverage.
Material changes and operating developments
- Growth was strongest in Logistics Assets and Marketing and Distribution, supported by increased LPG exports, fractionation volumes and fees. Q2 export volumes were 159.0 thousand barrels per day, versus 41.2 thousand a year earlier.
- Field Gathering and Processing benefited from higher throughput, commodity prices and expanded systems. Crude oil gathered rose 119% in Q2 to 83.8 thousand barrels per day. Longhorn and High Plains processing plants began commercial operations in May and June, respectively.
- Operating expenses, depreciation and amortization, and interest expense increased. The filing cites larger operations and assets placed in service, higher compensation, lower capitalized interest and increased borrowings as factors.
- Commodity hedge results were unfavorable compared with 2013; the “Other” segment’s operating margin was a loss of $4.0 million in Q2 and $10.1 million in the first half. The Partnership’s estimated derivative fair value was a net liability of $11.4 million at quarter-end.
Outlook, risks and unusual items
- Management expected Targa’s Partnership distributions and available resources to fund its operations, debt and tax obligations, and projected quarterly shareholder dividends, for at least the next 12 months. This outlook depends on expected Partnership distributions and is not a guarantee.
- The Partnership estimated 2014 gross growth capital expenditures of approximately $780 million and maintenance capital expenditures, net to its interest, of approximately $90 million. It expected to fund capital spending through operating cash flow, debt facilities and securities offerings.
- Phase II of the international export expansion was expected to be fully operational in Q3 2014. The Partnership approved a 100,000-barrel-per-day Mont Belvieu fractionation expansion, estimated at approximately $385 million, with completion expected in mid-2016. A roughly $115 million condensate splitter project was also approved, subject to permits, with completion expected about 18 months after permits are obtained.
- In July 2014, S&P raised the Partnership’s corporate and senior unsecured debt ratings from BB to BB+. The Partnership remained non-investment grade. It also had approximately $385.4 million remaining under its May 2014 equity distribution agreement as of July 21.
- Key risks include commodity-price and demand volatility, counterparty and hedge performance, access to debt and equity markets, collateral requirements, weather, regulation and permits, and the ability to sustain throughput and complete growth projects. Hedging reduces some cash-flow exposure but may be unfavorable when market prices rise.
- The Badlands acquisition’s contingent-payment period expired in June 2014 without the required volume thresholds being met; no payment was due. Management said ordinary-course legal and regulatory matters were not expected to have a material effect.
- The filing reports no material off-balance-sheet arrangements and no material change in market-risk exposures. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Separate Targa standalone liquidity and debt-service capacity from consolidated figures that include Partnership assets, debt and noncontrolling interests.
- Assess dividend coverage using Targa distributable cash flow, declared dividends, taxes and the timing and sustainability of Partnership distributions.
- Examine the drivers and durability of margin growth, particularly LPG exports, fractionation fees, commodity prices, and the effects of product purchases and hedges.
- Track actual versus planned capital spending, project permits, construction costs, commissioning and returns on the export, fractionation and condensate projects.
- Review Partnership debt availability, equity issuance, credit ratings, covenant compliance, hedge liabilities and counterparty exposures as market conditions change.