Targa Resources Corp. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Targa is primarily a holding company whose results consolidate Targa Resources Partners LP (the Partnership); most consolidated operating results and debt relate to the Partnership. Partnership assets and cash are subject to distribution restrictions, and Partnership debt is not an obligation of Targa Resources Corp. as parent.
Financial results and liquidity
- Revenue: $1.646 billion, up 2% from $1.619 billion in Q1 2011. Product purchases fell 1% to $1.384 billion.
- Profit: Operating income was $107.7 million versus $73.5 million; net income was $69.2 million versus $40.8 million. After $59.6 million attributable to noncontrolling interests, net income available to common shareholders was $9.6 million, or $0.23 per diluted share, compared with $6.8 million, or $0.16 per diluted share.
- Margins: Reported non-GAAP operating margin increased 25% to $190.0 million from $151.5 million. The filing reports gross margin of $261.6 million, up 20%. These are non-GAAP measures, not substitutes for GAAP earnings.
- Cash flow and investment: Operating cash flow was $138.8 million versus $70.1 million. Capital expenditures were $103.0 million versus $57.0 million; investing cash outflow was $108.1 million. Financing cash outflow was $55.3 million. Cash declined $24.6 million to $121.2 million.
- Debt and liquidity: Consolidated long-term debt was $1.470 billion, down from $1.567 billion at year-end. The Partnership had $86.3 million cash and $1.022 billion available under its $1.1 billion revolver, with $77.6 million of letters of credit outstanding. Consolidated cash includes $86.3 million belonging to the Partnership and unavailable to the parent; parent cash was $34.9 million.
- Cash distributions: Parent distributable cash flow, a non-GAAP measure, was $14.4 million versus $13.2 million. The declared Q1 Partnership distribution was $0.6225 per unit; Targa declared a $0.365 per-share dividend, payable May 16, 2012.
Material changes versus Q1 2011
- Operating margin improved across Field Gathering and Processing, Coastal Gathering and Processing, and Logistics Assets. Logistics Assets operating margin nearly doubled to $43.0 million, supported by increased fractionation and treating volumes, the Cedar Bayou expansion, and 2011 terminal acquisitions.
- Marketing and Distribution operating margin fell 20% to $26.1 million. Management cited weaker prices and reduced wholesale propane activity associated with warmer weather; increased LPG exports partly offset the decline.
- Higher volumes and fee-based revenues helped offset lower realized natural gas and NGL prices. Overall plant inlet volumes rose 3% and gross NGL production rose 11%.
- In January, the Partnership raised approximately $150 million net from a common-unit offering, plus approximately $15 million from the overallotment, and issued $400 million of 6⅞% senior notes due 2022. Proceeds were used for general purposes and to reduce revolver borrowings.
Outlook, risks and unusual items
- The Partnership estimated 2012 capital expenditures of approximately $680 million gross, or $650 million net of noncontrolling interests and reimbursements; approximately 12% of net spending was expected to be maintenance capital. It anticipated funding spending through operating cash flow, revolver borrowings, and debt or equity issuance.
- Management said expected Partnership cash generation, available revolver capacity and financing access should be sufficient for operations, capital expenditures, debt obligations, collateral requirements and minimum distributions for at least 12 months, absent disruptive events. Targa also expected its Partnership distributions to support parent operations, debt and dividends over that period. These are expectations, not guarantees; no specific earnings guidance was provided.
- Key exposures include commodity-price volatility, weather, changing supply and throughput, counterparty and customer credit, collateral needs, interest rates, capital-market access, and regulatory changes. Commodity hedges reduce some price exposure but can limit gains when prices rise; derivative fair values are sensitive to forward prices. A 10% increase in forward commodity prices would have shifted the Partnership’s derivative position to a $34.1 million net liability (before credit-risk adjustment), while a 10% decrease would have produced a $48.1 million net asset.
- On April 17, 2012, the EPA approved new air-emissions rules. Targa was assessing the impact; compliance could require equipment upgrades and materially increase capital and operating costs.
- Environmental liabilities were described as not significant, and management said ordinary-course legal and regulatory matters were not expected to have a material adverse effect. The Partnership was in compliance with debt covenants at quarter-end. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile consolidated earnings and cash to amounts actually attributable or accessible to parent shareholders, given substantial noncontrolling interests and restrictions on Partnership assets.
- Review the Partnership’s separate filing for operating cash flow, distributable-cash-flow coverage, debt covenants, and the assumptions behind its 2012 capital-spending estimate.
- Assess the sensitivity of results and liquidity to natural gas, NGL and crude prices, hedge settlements, collateral requirements, and counterparty performance.
- Monitor the cost and timing of compliance with the new EPA air-emissions rules and any resulting changes to capital plans.
- Confirm dividend and distribution payments and whether future Partnership distributions can sustainably support parent dividends and debt service.