Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011, for Targa Resources Corp. (TRC). TRC is a holding company that controls Targa Resources Partners LP (the Partnership), a leading provider of midstream natural gas and natural gas liquid (NGL) services in the United States. TRC consolidates the Partnership's financial results due to its control of the General Partner. The company operates through four primary segments: Field Gathering and Processing, Coastal Gathering and Processing, Logistics Assets, and Marketing and Distribution.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenues | $1,618.1 million | $1,483.6 million |
| Net Income (Consolidated) | $40.8 million | $35.9 million |
| Net Income Attributable to TRC | $6.8 million | $21.9 million |
| Operating Margin (Non-GAAP) | $151.5 million | $123.6 million |
| Adjusted EBITDA (Partnership) | $107.4 million | $97.5 million |
| Cash Flow from Operations | $70.1 million | $76.0 million |
| Long-Term Debt | $1,268.4 million | $1,534.7 million |
| Cash and Cash Equivalents | $147.7 million | $305.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 9% ($134.5 million) driven by higher NGL and natural gas sales volumes and favorable realized commodity prices, partially offset by lower condensate sales volumes.
- Operating Margin: Operating margin increased 23% ($27.9 million) due to a 17% increase in gross margin, despite a 6% rise in operating expenses.
- Net Income Attributable to TRC: Net income attributable to TRC common shareholders decreased significantly to $6.8 million from $21.9 million in Q1 2010. This decline is primarily due to the absence of a $28.9 million gain on early debt extinguishment and a $17.4 million loss on debt repurchases recorded in Q1 2010, as well as higher net income attributable to noncontrolling interests ($34.0 million vs. $14.0 million).
- Debt Reduction: Long-term debt decreased by $266.3 million. The Partnership issued $325 million in 6.25% Senior Notes and raised $298.1 million from a public offering of common units, using proceeds to reduce borrowings under its senior secured credit facility.
- Acquisitions: The company acquired a refined petroleum products and crude oil storage and terminaling facility in Channelview, Texas, for $29.0 million.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted strong performance in the Logistics and Marketing segments, particularly in terminaling and storage revenues. The company continues to focus on growth through acquisitions and internal expansion projects. Distributable cash flow for TRC was $13.2 million for the quarter.
Dividends: On April 11, 2011, TRC declared a quarterly dividend of $0.2725 per share ($1.09 annualized), totaling $11.5 million, payable May 17, 2011. The Partnership declared a distribution of $0.5575 per common unit.
Risks and Contingencies:
- Commodity Price Risk: The company is exposed to fluctuations in natural gas and NGL prices. While hedging programs are in place to mitigate cash flow volatility, rising prices can result in lower revenues on hedged volumes.
- Counterparty Credit Risk: Significant exposure exists with major financial institutions (Barclays, Credit Suisse) and BP regarding commodity derivative instruments.
- Environmental Liabilities: The company has a $1.6 million environmental liability reserve. A settlement with the NMED regarding air emissions violations requires approximately $33.4 million in total project costs, of which the Partnership's share is projected at $21.0 million.
- Legal Proceedings: The Texas Supreme Court denied review of a lawsuit filed by WTG Gas Processing, L.P., effectively ending the litigation in favor of Targa.
Investor Verification Checklist
- Noncontrolling Interest Impact: Verify the impact of the increasing net income attributable to noncontrolling interests ($34.0 million) on the net income available to TRC common shareholders.
- Debt Structure: Confirm the terms of the new $325 million 6.25% Senior Notes and the reduction in the senior secured revolving credit facility.
- Hedging Effectiveness: Review the fair value of derivative instruments, noting the $111.6 million in total derivative liabilities and the potential for mark-to-market volatility.
- Capital Expenditures: Assess the $79.1 million in capital expenditures for the quarter, with $66.0 million allocated to expansion projects.
- Environmental Costs: Monitor the progress and funding of the $21.0 million environmental remediation obligation related to the Versado acquisition.