Targa Resources Corp. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with Q1 2012. Targa consolidates Targa Resources Partners LP (the Partnership), but Partnership assets and cash are subject to partnership and debt-agreement restrictions. Targa’s parent-level cash generation depends primarily on distributions from the Partnership.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1,397.8 million | $1,645.8 million | Down 15% |
| Gross margin | $260.3 million | $261.6 million | Nearly flat |
| Operating margin | $174.2 million | $190.0 million | Down 8% |
| Income from operations | $73.9 million | $107.7 million | Down 31% |
| Net income | $33.8 million | $69.2 million | Down 51% |
| Net income available to common shareholders | $13.4 million; $0.32 diluted EPS | $9.6 million; $0.23 diluted EPS | Up 40% in common income |
| Operating cash flow | $174.0 million | $138.8 million | Up $35.2 million |
| Capital expenditures, cash outlays | $202.9 million | $103.0 million | Nearly doubled |
At March 31, cash was $112.7 million, total assets $5.15 billion, and long-term debt $2.52 billion, versus $2.48 billion at year-end 2012. Current assets of $631.2 million were slightly below current liabilities of $633.1 million. Reported debt includes Partnership obligations; Targa stated it is not obligated to make payments on Partnership debt. At quarter-end, $78.0 million was available under Targa’s $150 million revolver and $581.8 million under the Partnership’s $1.2 billion revolver. The Partnership had $53.2 million of letters of credit outstanding. Both entities were in compliance with debt covenants.
Consolidated operating cash flow less cash capital outlays was negative $33.5 million. The Partnership’s adjusted EBITDA was $132.2 million, down from $145.4 million; its distributable cash flow was $85.5 million, down from $105.7 million. Targa’s distributable cash flow, a non-GAAP parent-level measure, was $25.1 million, up from $14.4 million.
Material changes and operating performance
- Revenue fell mainly because lower realized NGL and condensate prices reduced revenue by $317.0 million; higher natural-gas prices and increased fee-based and other revenue partly offset the decline. Product purchases also fell, leaving gross margin nearly unchanged.
- Operating expenses rose 20% to $86.1 million, primarily due to system expansions and higher maintenance. Depreciation and amortization rose 35% to $64.0 million, reflecting Badlands assets, expansions and assets placed in service.
- Logistics Assets operating margin increased 31% to $56.3 million, and Marketing and Distribution rose 30% to $34.0 million, supported by export, storage, treating and propane activity. Field Gathering and Processing margin fell 26% to $53.8 million; Coastal Gathering and Processing fell 49% to $23.5 million, mainly due to weaker NGL and condensate pricing, lower throughput and less favorable frac spreads.
- The Partnership began operating the Badlands assets in January. Q1 Badlands results were not material; management anticipated volume growth and system build-out during 2013–2014. A contingent payment of up to $50 million depends on crude-oil gathering volume thresholds through June 2014; the recorded fair-value liability was $15.6 million at March 31.
Liquidity, outlook and risks
- Management expected the Partnership’s operating cash flow, borrowing capacity and equity/debt access to fund operations, capital needs, debt obligations, collateral and minimum distributions for at least 12 months, absent disruptive events. It gave the same general 12-month sufficiency assessment for Targa’s parent-level needs and dividends.
- The Partnership estimated 2013 growth capital spending of approximately $1.0 billion gross and maintenance capital spending of approximately $75 million net to its interest. Q1 expansion and maintenance capital expenditures were $185.2 million and $21.7 million, respectively.
- At April 25, 2013, reported liquidity was $83.5 million for Targa and $649.3 million for the Partnership. These are post-quarter-end figures; Partnership liquidity included $25.0 million cash, $525.0 million of revolver borrowings, $147.7 million of securitization borrowings and $50.7 million of revolver letters of credit.
- The Partnership declared a Q1 distribution of $0.6975 per unit, payable May 15, 2013. Targa declared a $0.495 per-share dividend, payable May 16, 2013. Management said Targa intends to distribute Partnership receipts to shareholders after expenses, taxes, contributions and reserves; future dividend levels are not assured.
- Key risks include commodity-price volatility, throughput and drilling activity, weather, project execution, access to capital, counterparty/customer credit, collateral requirements, regulation and permits. Hedging reduces some price exposure but can limit gains when prices rise; a 10% increase in forward commodity prices would have shifted the reported derivative fair value to a net liability of $18.7 million, before credit-risk adjustment.
- Legal and regulatory proceedings were described as ordinary-course matters that management believed would not materially affect financial position, results or cash flows. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower NGL and condensate prices, offshore supply declines and third-party pipeline or plant disruptions persist, and how these affect segment margins and throughput.
- Badlands volume ramp-up, integration progress and the likelihood of triggering the contingent payment.
- Execution, returns and funding for the approximately $1.0 billion 2013 growth-capital program, including continued reliance on revolver capacity and securities issuance.
- Cash available at the parent level after Partnership restrictions, debt service, taxes and reserves, and whether distributions can support Targa’s dividend.
- Commodity hedge coverage, derivative fair-value sensitivity, counterparty concentrations and the potential effect of higher interest rates on variable-rate borrowings.