UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-34991
TARGA RESOURCES CORP.
(Exact name of registrant as specified in its charter)
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Delaware
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20-3701075
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1000 Louisiana St, Suite 4300, Houston, Texas
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77002
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(Address of principal executive offices)
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(Zip Code)
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(713) 584-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer R
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Accelerated filer £
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Non-accelerated filer £
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Smaller reporting company £
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R.
As of October 29, 2012, there were 42,492,913 shares of the registrant’s common stock, $0.001 par value, outstanding.
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PART I—FINANCIAL INFORMATION
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PART II—OTHER INFORMATION
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SIGNATURES
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Targa Resources Corp.’s (together with its subsidiaries, other than Targa Resources Partners LP (the “Partnership”), collectively “we,” “us,” “Targa,” “TRC,” or the “Company”) reports, filings and other public announcements may from time to time contain statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements.” You can typically identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, by the use of forward-looking words, such as “may,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” “forecast” and other similar words.
All statements that are not statements of historical facts, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.
These forward-looking statements reflect our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, many of which are outside our control. Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. Known risks and uncertainties include, but are not limited to, the risks set forth in “Part II-Other Information, Item 1A. Risk Factors.” of this Quarterly Report on Form 10-Q (“Quarterly Report”) as well as the following risks and uncertainties:
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the Partnership’s and our ability to access the debt and equity markets, which will depend on general market conditions and the credit ratings for our debt obligations;
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the amount of collateral required to be posted from time to time in the Partnership’s transactions;
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the Partnership’s success in risk management activities, including the use of derivative instruments to hedge commodity risks;
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the level of creditworthiness of counterparties to transactions;
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changes in laws and regulations, particularly with regard to taxes, safety and protection of the environment;
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the timing and extent of changes in natural gas, natural gas liquids (“NGL”) and other commodity prices, interest rates and demand for the Partnership’s services;
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weather and other natural phenomena;
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industry changes, including the impact of consolidations and changes in competition;
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the Partnership’s ability to obtain necessary licenses, permits and other approvals;
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the level and success of oil and natural gas drilling around the Partnership’s assets, its success in connecting natural gas supplies to its gathering and processing systems and NGL supplies to its logistics and marketing facilities and the Partnership’s success in connecting its facilities to transportation and markets;
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the Partnership’s and our ability to grow through acquisitions or internal growth projects and the successful integration and future performance of such assets;
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general economic, market and business conditions; and
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the risks described elsewhere in “Part II—Other Information, Item 1A. Risk Factors.” of this Quarterly Report, our Annual Report on Form 10-K for the year ended December 31, 2011 (“Annual Report”) and our reports and registration statements filed from time to time with the United States Securities and Exchange Commission (“SEC”).
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Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in this Quarterly Report will prove to be accurate. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described in “Part II - Other Information, Item 1A. Risk Factors.” in this Quarterly Report and in our Annual Report. Except as may be required by applicable law, we undertake no obligation to publicly update or advise of any change in any forward-looking statement, whether as a result of new information, future events or otherwise.
As generally used in the energy industry and in this Quarterly Report, the identified terms have the following meanings:
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Bbl
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Barrels (equal to 42 gallons)
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Btu
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British thermal units, a measure of heating value
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BBtu
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Billion British thermal units
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/d
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Per day
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/hr
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Per hour
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gal
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U.S. gallons
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GPM
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Liquid volume equivalent expressed as gallons per 1000 cu. ft. of natural gas
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LPG
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Liquefied petroleum gas
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MBbl
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Thousand barrels
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MMBbl
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Million barrels
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MMBtu
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Million British thermal units
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MMcf
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Million cubic feet
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NGL(s)
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Natural gas liquid(s)
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NYMEX
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New York Mercantile Exchange
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GAAP
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Accounting principles generally accepted in the United States of America
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NYSE
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New York Stock Exchange
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Price Index
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Definitions
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IF-NGPL MC
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Inside FERC Gas Market Report, Natural Gas Pipeline, Mid-Continent
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IF-PB
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Inside FERC Gas Market Report, Permian Basin
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IF-WAHA
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Inside FERC Gas Market Report, West Texas WAHA
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NY-WTI
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NYMEX, West Texas Intermediate Crude Oil
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OPIS-MB
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Oil Price Information Service, Mont Belvieu, Texas
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
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TARGA RESOURCES CORP.
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CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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2012
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2011
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(Unaudited)
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(In millions)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ | 120.7 | $ | 145.8 | ||||
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Trade receivables, net of allowances of $2.0 million and $2.4 million
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416.2 | 575.7 | ||||||
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Inventory
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84.4 | 92.2 | ||||||
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Deferred income taxes
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- | 0.1 | ||||||
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Assets from risk management activities
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33.7 | 41.0 | ||||||
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Other current assets
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11.4 | 11.7 | ||||||
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Total current assets
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666.4 | 866.5 | ||||||
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Property, plant and equipment
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4,196.4 | 3,821.1 | ||||||
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Accumulated depreciation
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(1,135.2 | ) | (1,001.6 | ) | ||||
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Property, plant and equipment, net
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3,061.2 | 2,819.5 | ||||||
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Long-term assets from risk management activities
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11.1 | 10.9 | ||||||
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Investment in unconsolidated affiliate
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51.0 | 36.8 | ||||||
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Other long-term assets
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91.8 | 97.3 | ||||||
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Total assets
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$ | 3,881.5 | $ | 3,831.0 | ||||
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LIABILITIES AND OWNERS' EQUITY
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Current liabilities:
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Accounts payable and accrued liabilities
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$ | 509.2 | $ | 700.0 | ||||
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Deferred income taxes
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11.1 | - | ||||||
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Liabilities from risk management activities
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6.0 | 41.1 | ||||||
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Total current liabilities
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526.3 | 741.1 | ||||||
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Long-term debt
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1,751.0 | 1,567.0 | ||||||
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Long-term liabilities from risk management activities
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7.2 | 15.8 | ||||||
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Deferred income taxes
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116.3 | 120.5 | ||||||
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Other long-term liabilities
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53.4 | 55.9 | ||||||
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Commitments and contingencies (see Note 12)
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Owners' equity:
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Targa Resources Corp. stockholders' equity:
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Common stock ($0.001 par value, 300,000,000 shares authorized, 42,491,913 and 42,398,148 shares issued and outstanding as of September 30, 2012 and December 31, 2011)
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- | - | ||||||
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Preferred stock ($0.001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2012 and December 31, 2011)
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- | - | ||||||
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Additional paid-in capital
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172.0 | 229.5 | ||||||
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Accumulated deficit
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(43.2 | ) | (70.1 | ) | ||||
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Accumulated other comprehensive income (loss)
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2.2 | (1.3 | ) | |||||
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Total Targa Resources Corp. stockholders' equity
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131.0 | 158.1 | ||||||
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Noncontrolling interests in subsidiaries
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1,296.3 | 1,172.6 | ||||||
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Total owners' equity
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1,427.3 | 1,330.7 | ||||||
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Total liabilities and owners' equity
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$ | 3,881.5 | $ | 3,831.0 | ||||
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See notes to consolidated financial statements.
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TARGA RESOURCES CORP.
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CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2012
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2011
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2012
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2011
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(Unaudited)
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(In millions, except per share amounts)
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Revenues
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$ | 1,393.5 | $ | 1,713.6 | $ | 4,358.4 | $ | 5,060.5 | ||||||||
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Costs and expenses:
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Product purchases
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1,153.0 | 1,485.5 | 3,611.8 | 4,364.5 | ||||||||||||
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Operating expenses
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78.3 | 76.5 | 227.2 | 214.1 | ||||||||||||
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Depreciation and amortization expenses
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48.6 | 45.7 | 144.3 | 134.3 | ||||||||||||
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General and administrative expenses
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35.7 | 35.4 | 106.5 | 105.1 | ||||||||||||
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Other operating (income) expense (See Note 13)
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18.9 | (0.3 | ) | 18.8 | (0.3 | ) | ||||||||||
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Income from operations
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59.0 | 70.8 | 249.8 | 242.8 | ||||||||||||
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Other income (expense):
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Interest expense, net
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(30.0 | ) | (26.8 | ) | (91.0 | ) | (83.3 | ) | ||||||||
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Equity earnings (loss)
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(2.2 | ) | 2.2 | (0.3 | ) | 5.2 | ||||||||||
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Loss on mark-to-market derivative instruments
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- | (1.8 | ) | - | (5.0 | ) | ||||||||||
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Other
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(1.8 | ) | (0.5 | ) | (2.1 | ) | (0.6 | ) | ||||||||
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Income before income taxes
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25.0 | 43.9 | 156.4 | 159.1 | ||||||||||||
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Income tax expense:
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Current
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(4.3 | ) | 2.5 | (20.3 | ) | (7.6 | ) | |||||||||
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Deferred
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(1.7 | ) | (9.9 | ) | (4.4 | ) | (10.9 | ) | ||||||||
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(6.0 | ) | (7.4 | ) | (24.7 | ) | (18.5 | ) | ||||||||
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Net income
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19.0 | 36.5 | 131.7 | 140.6 | ||||||||||||
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Less: Net income attributable to noncontrolling interests
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10.3 | 31.6 | 104.8 | 118.4 | ||||||||||||
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Net income available to common shareholders
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$ | 8.7 | $ | 4.9 | $ | 26.9 | $ | 22.2 | ||||||||
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Net income available per common share - basic
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$ | 0.21 | $ | 0.12 | $ | 0.66 | $ | 0.54 | ||||||||
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Net income available per common share - diluted
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$ | 0.21 | $ | 0.12 | $ | 0.64 | $ | 0.54 | ||||||||
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Weighted average shares outstanding - basic
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41.0 | 41.0 | 41.0 | 41.0 | ||||||||||||
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Weighted average shares outstanding - diluted
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41.9 | 41.5 | 41.8 | 41.4 | ||||||||||||
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See notes to consolidated financial statements.
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TARGA RESOURCES CORP.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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Three Months Ended September 30,
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2012
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2011
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Pre-Tax
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Related Income Tax
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After Tax
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Pre-Tax
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Related Income Tax
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After Tax
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(Unaudited)
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(In millions)
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Net income attributable to Targa Resources Corp.
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$ | 8.7 |
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$ | 4.9 | ||||||||||||||||
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Other comprehensive income (loss) attributable to Targa Resources Corp.
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Commodity hedging contracts:
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Change in fair value
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$ | (3.7 | ) | $ | 2.0 | (1.7 | ) | $ | 7.3 | $ | (2.9 | ) | 4.4 | |||||||||||
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Settlements reclassified to revenues
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(3.0 | ) | 1.6 | (1.4 | ) | 0.8 | (0.3 | ) | 0.5 | |||||||||||||||
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Interest rate swaps:
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Change in fair value
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- | - | (0.4 | ) | 0.2 | (0.2 | ) | |||||||||||||||||
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Settlements reclassified to interest expense, net
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0.3 | (1.0 | ) | (0.7 | ) | 0.2 | (0.1 | ) | 0.1 | |||||||||||||||
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Other comprehensive income (loss) attributable to Targa Resources Corp.
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$ | (6.4 | ) | $ | 2.6 | (3.8 | ) | $ | 7.9 | $ | (3.1 | ) | 4.8 | |||||||||||
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Comprehensive income attributable to Targa Resources Corp.
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$ | 4.9 | $ | 9.7 | ||||||||||||||||||||
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Net income attributable to noncontrolling interests
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$ | 10.3 | $ | 31.6 | ||||||||||||||||||||
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Other comprehensive income (loss) attributable to noncontrolling interests
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Commodity hedging contracts:
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Change in fair value
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$ | (18.9 | ) | $ | (0.2 | ) | (19.1 | ) | $ | 39.7 | $ | - | 39.7 | |||||||||||
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Settlements reclassified to revenues
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(12.4 | ) | (0.1 | ) | (12.5 | ) | 8.7 | - | 8.7 | |||||||||||||||
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Interest rate swaps:
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Change in fair value
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- | - | - | (1.9 | ) | - | (1.9 | ) | ||||||||||||||||
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Settlements reclassified to interest expense, net
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1.6 | - | 1.6 | 0.8 | - | 0.8 | ||||||||||||||||||
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Other comprehensive income (loss) attributable to noncontrolling interests
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$ | (29.7 | ) | $ | (0.3 | ) | (30.0 | ) | $ | 47.3 | $ | - | 47.3 | |||||||||||
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Comprehensive income (loss) attributable to noncontrolling interests
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(19.7 | ) | 78.9 | |||||||||||||||||||||
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Total comprehensive income (loss)
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$ | (14.8 | ) | $ | 88.6 | |||||||||||||||||||
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See notes to consolidated financial statements.
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TARGA RESOURCES CORP.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Continued)
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Nine Months Ended September 30,
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2012
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2011
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Pre-Tax
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Related Income Tax
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After Tax
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Pre-Tax
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Related Income Tax
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After Tax
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(Unaudited)
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(In millions)
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Net income attributable to Targa Resources Corp.
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$ | 26.9 |
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$ | 22.2 | ||||||||||||||||
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Other comprehensive income (loss) attributable to Targa Resources Corp.
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Commodity hedging contracts:
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Change in fair value
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$ | 11.5 | $ | (2.5 | ) | 9.0 | $ | (1.3 | ) | $ | 0.5 | (0.8 | ) | |||||||||||
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Settlements reclassified to revenues
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(6.6 | ) | 1.4 | (5.2 | ) | 0.4 | (0.2 | ) | 0.2 | |||||||||||||||
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Interest rate swaps:
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Change in fair value
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- | - | - | (0.4 | ) | 0.2 | (0.2 | ) | ||||||||||||||||
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Settlements reclassified to interest expense, net
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1.0 | (1.3 | ) | (0.3 | ) | 0.9 | (0.3 | ) | 0.6 | |||||||||||||||
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Other comprehensive income (loss) attributable to Targa Resources Corp.
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$ | 5.9 | $ | (2.4 | ) | 3.5 | $ | (0.4 | ) | $ | 0.2 | (0.2 | ) | |||||||||||
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Comprehensive income attributable to Targa Resources Corp.
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$ | 30.4 | $ | 22.0 | ||||||||||||||||||||
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Net income attributable to noncontrolling interests
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$ | 104.8 | $ | 118.4 | ||||||||||||||||||||
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Other comprehensive income (loss) attributable to noncontrolling interests
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Commodity hedging contracts:
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Change in fair value
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$ | 59.4 | $ | - | 59.4 | $ | (8.5 | ) | $ | - | (8.5 | ) | ||||||||||||
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Settlements reclassified to revenues
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(25.1 | ) | - | (25.1 | ) | 22.6 | - | 22.6 | ||||||||||||||||
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Interest rate swaps:
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Change in fair value
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- | - | - | (3.9 | ) | - | (3.9 | ) | ||||||||||||||||
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Settlements reclassified to interest expense, net
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5.1 | - | 5.1 | 4.8 | - | 4.8 | ||||||||||||||||||
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Other comprehensive income attributable to noncontrolling interests
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$ | 39.4 | $ | - | 39.4 | $ | 15.0 | $ | - | 15.0 | ||||||||||||||
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Comprehensive income attributable to noncontrolling interests
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144.2 | 133.4 | ||||||||||||||||||||||
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Total comprehensive income
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$ | 174.6 | $ | 155.4 | ||||||||||||||||||||
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See notes to consolidated financial statements.
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TARGA RESOURCES CORP.
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CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY
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Accumulated
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Additional
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Other
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Common Stock
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Paid in
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Accumulated
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Comprehensive
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Noncontrolling
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Shares
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Amount
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Capital
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Deficit
|
Income (Loss)
|
Interests
|
Total
|
|||||||||||||||||||||
|
|
(Unaudited)
|
|||||||||||||||||||||||||||
|
|
(In millions, except shares in thousands)
|
|||||||||||||||||||||||||||
|
Balance, December 31, 2011
|
42,398 | $ | - | $ | 229.5 | $ | (70.1 | ) | $ | (1.3 | ) | $ | 1,172.6 | $ | 1,330.7 | |||||||||||||
|
Compensation on equity grants
|
94 | - | 10.5 | - | - | 2.5 | 13.0 | |||||||||||||||||||||
|
Sale of Partnership limited partner interests
|
- | - | - | - | - | 115.2 | 115.2 | |||||||||||||||||||||
|
Impact of Partnership equity transactions
|
- | - | (20.3 | ) | - | - | 20.3 | - | ||||||||||||||||||||
|
Dividends
|
- | - | (46.5 | ) | - | - | (0.4 | ) | (46.9 | ) | ||||||||||||||||||
|
Distributions to owners
|
- | - | (1.2 | ) | - | - | (158.1 | ) | (159.3 | ) | ||||||||||||||||||
|
Other comprehensive income
|
- | - | - | - | 3.5 | 39.4 | 42.9 | |||||||||||||||||||||
|
Net income
|
- | - | - | 26.9 | - | 104.8 | 131.7 | |||||||||||||||||||||
|
Balance, September 30, 2012
|
42,492 | $ | - | $ | 172.0 | $ | (43.2 | ) | $ | 2.2 | $ | 1,296.3 | $ | 1,427.3 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2010
|
42,292 | $ | - | $ | 244.5 | $ | (100.8 | ) | $ | 0.6 | $ | 891.8 | $ | 1,036.1 | ||||||||||||||
|
Compensation on equity grants
|
109 | - | 10.7 | - | - | 0.7 | 11.4 | |||||||||||||||||||||
|
Sale of Partnership limited partner interests
|
- | - | - | - | - | 298.0 | 298.0 | |||||||||||||||||||||
|
Impact of Partnership equity transactions
|
- | - | 15.1 | - | - | (15.1 | ) | - | ||||||||||||||||||||
|
Dividends
|
- | - | (26.4 | ) | - | - | - | (26.4 | ) | |||||||||||||||||||
|
Distributions to owners
|
- | - | - | - | - | (142.0 | ) | (142.0 | ) | |||||||||||||||||||
|
Other comprehensive income (loss)
|
- | - | - | - | (0.2 | ) | 15.0 | 14.8 | ||||||||||||||||||||
|
Net income
|
- | - | - | 22.2 | - | 118.4 | 140.6 | |||||||||||||||||||||
|
Balance, September 30, 2011
|
42,401 | $ | - | $ | 243.9 | $ | (78.6 | ) | $ | 0.4 | $ | 1,166.8 | $ | 1,332.5 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
See notes to consolidated financial statements.
|
||||||||||||||||||||||||||||
|
TARGA RESOURCES CORP.
|
||||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
|
|
|
|
||||||
|
|
Nine Months Ended September 30,
|
|||||||
|
|
2012
|
2011
|
||||||
|
|
(Unaudited)
|
|||||||
|
Cash flows from operating activities
|
(In millions)
|
|||||||
|
Net income
|
$ | 131.7 | $ | 140.6 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Amortization in interest expense
|
14.7 | 7.2 | ||||||
|
Compensation on equity grants
|
13.0 | 11.4 | ||||||
|
Depreciation and amortization expense
|
144.3 | 134.3 | ||||||
|
Accretion of asset retirement obligations
|
3.0 | 2.7 | ||||||
|
Deferred income tax expense
|
4.4 | 10.9 | ||||||
|
Equity (earnings) losses, net of distributions
|
0.3 | (1.4 | ) | |||||
|
Risk management activities
|
1.7 | (18.8 | ) | |||||
|
Loss (gain) on sale or disposition of assets
|
15.5 | (0.4 | ) | |||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Receivables and other assets
|
162.9 | (75.3 | ) | |||||
|
Inventory
|
4.9 | (86.9 | ) | |||||
|
Accounts payable and other liabilities
|
(206.2 | ) | 40.3 | |||||
|
Net cash provided by operating activities
|
290.2 | 164.6 | ||||||
|
Cash flows from investing activities
|
||||||||
|
Outlays for property, plant and equipment
|
(365.1 | ) | (214.3 | ) | ||||
|
Business acquisitions
|
(25.8 | ) | (164.2 | ) | ||||
|
Investment in unconsolidated affiliate
|
(16.8 | ) | (11.9 | ) | ||||
|
Return of capital from unconsolidated affiliate
|
2.3 | - | ||||||
|
Other, net
|
1.6 | 0.3 | ||||||
|
Net cash used in investing activities
|
(403.8 | ) | (390.1 | ) | ||||
|
Cash flows from financing activities
|
||||||||
|
Partnership loan facilities:
|
||||||||
|
Proceeds from borrowings under credit facility
|
720.0 | 1,426.0 | ||||||
|
Repayments of credit facility
|
(938.0 | ) | (1,656.3 | ) | ||||
|
Proceeds from issuance of senior notes
|
400.0 | 325.0 | ||||||
|
Cash paid on note exchange
|
- | (27.7 | ) | |||||
|
Costs incurred in connection with financing arrangements
|
(4.5 | ) | (6.2 | ) | ||||
|
Distributions to owners
|
(159.3 | ) | (142.0 | ) | ||||
|
Proceeds from sale of common units of the Partnership
|
115.2 | 298.0 | ||||||
|
Dividends to common and common equivalent shareholders
|
(44.9 | ) | (25.6 | ) | ||||
|
Net cash provided by financing activities
|
88.5 | 191.2 | ||||||
|
Net change in cash and cash equivalents
|
(25.1 | ) | (34.3 | ) | ||||
|
Cash and cash equivalents, beginning of period
|
145.8 | 188.4 | ||||||
|
Cash and cash equivalents, end of period
|
$ | 120.7 | $ | 154.1 | ||||
|
|
||||||||
|
See notes to consolidated financial statements.
|
||||||||
TARGA RESOURCES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Except as noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are stated in millions of dollars.
Note 1 — Organization
Targa Resources Corp. (“TRC”) is a Delaware corporation formed in October 2005. Our common stock is listed on the NYSE under the symbol “TRGP.” In this Quarterly Report, unless the context requires otherwise, references to “we,” “us,” “our,” “the Company” or “Targa” are intended to mean our consolidated business and operations, including our wholly-owned subsidiary TRI Resources Inc. (“TRI”).
Note 2 — Basis of Presentation
We have prepared these unaudited consolidated financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. While we derived the year-end balance sheet data from audited financial statements, this interim report does not include all disclosures required by GAAP for annual periods. These unaudited consolidated financial statements and other information included in this Quarterly Report should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report.
The unaudited consolidated financial statements for the three and nine months ended September 30, 2012 and 2011 include all adjustments which we believe are necessary for a fair presentation of the results for interim periods. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current year presentation.
Our financial results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.
One of our indirect subsidiaries is the sole general partner of Targa Resources Partners LP (the “Partnership”). Because we control the general partner of the Partnership, under GAAP, we must reflect our ownership interests in the Partnership on a consolidated basis. Accordingly, the Partnership’s financial results are included in our consolidated financial statements even though the distribution or transfer of Partnership assets is limited by the terms of the Partnership’s partnership agreement, as well as restrictive covenants in the Partnership’s lending agreements. The limited partner interests in the Partnership not owned by us are reflected in our results of operations as net income attributable to noncontrolling interests and in our balance sheet equity section as noncontrolling interests in subsidiaries. Throughout these footnotes, we make a distinction where relevant between financial results of the Partnership versus those of a standalone parent and its non-partnership subsidiaries.
As of September 30, 2012, our interests in the Partnership consist of the following:
|
·
|
a 2% general partner interest, which we hold through our 100% ownership interest in the general partner of the Partnership;
|
|
·
|
all Incentive Distribution Rights (“IDRs”); and
|
|
·
|
12,945,659 common units of the Partnership, representing a 14.5% limited partnership interest.
|
The Partnership is engaged in the business of gathering, compressing, treating, processing and selling natural gas; storing, fractionating, treating, transporting and selling NGLs and NGL products; and storing and terminaling refined petroleum products and crude oil. See Note 13 for an analysis of our and the Partnership’s operations by segment.
Note 3 — Significant Accounting Policies
Accounting Policy Updates/Revisions
The accounting policies that we follow are set forth in Note 3 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no significant changes to these policies during the nine months ended September 30, 2012.
New Standards
Accounting Standards Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, was implemented in 2012. Note 11 – Fair Value Measurements includes additional disclosures regarding the fair value and fair value hierarchy classification of financial instruments reported at carrying value in our Consolidated Balance Sheets. Additionally, we have provided information regarding the unobservable inputs used in the fair value measurement of derivative contracts classified within Level 3 of the fair value hierarchy. The impact of Level 3 inputs on our financial statements is immaterial. Transfers among levels of the fair value hierarchy are deemed to occur at the end of the reporting period.
Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, was retroactively adopted during 2012. We now display in the Consolidated Statements of Comprehensive Income (Loss) the tax effect of each component of other comprehensive income.
Note 4 — Property, Plant and Equipment
|
|
September 30, 2012
|
December 31, 2011
|
|
|||||||||||||||||||||||||
|
|
|
|
Targa
|
|
|
Targa
|
Estimated
|
|||||||||||||||||||||
|
|
Targa
|
TRC
|
Resources
|
Targa
|
TRC
|
Resources
|
Useful
|
|||||||||||||||||||||
|
|
Resources
|
Non-
|
Corp.
|
Resources
|
Non-
|
Corp.
|
Lives
|
|||||||||||||||||||||
|
|
Partners LP
|
Partnership
|
Consolidated
|
Partners LP
|
Partnership
|
Consolidated
|
(In Years)
|
|||||||||||||||||||||
|
Natural gas gathering systems
|
$ | 1,801.9 | $ | - | $ | 1,801.9 | $ | 1,740.6 | $ | - | $ | 1,740.6 |
5 to 20
|
|||||||||||||||
|
Processing and fractionation facilities
|
1,111.3 | 6.5 | 1,117.8 | 1,062.7 | 6.6 | 1,069.3 |
5 to 25
|
|||||||||||||||||||||
|
Terminaling and storage facilities
|
402.4 | - | 402.4 | 380.7 | - | 380.7 |
5 to 25
|
|||||||||||||||||||||
|
Transportation assets
|
292.2 | - | 292.2 | 281.2 | - | 281.2 |
10 to 25
|
|||||||||||||||||||||
|
Other property, plant and equipment
|
57.9 | 26.8 | 84.7 | 54.9 | 24.0 | 78.9 |
3 to 25
|
|||||||||||||||||||||
|
Land
|
73.3 | - | 73.3 | 71.2 | - | 71.2 | - | |||||||||||||||||||||
|
Construction in progress
|
423.0 | 1.1 | 424.1 | 195.6 | 3.6 | 199.2 | - | |||||||||||||||||||||
|
|
$ | 4,162.0 | $ | 34.4 | $ | 4,196.4 | $ | 3,786.9 | $ | 34.2 | $ | 3,821.1 | ||||||||||||||||
Note 5 — Accounts Payable and Accrued Liabilities
The components of accounts payable and accrued liabilities consist of the following:
|
|
September 30, 2012
|
December 31, 2011
|
||||||
|
Commodities
|
$ | 336.2 | $ | 515.3 | ||||
|
Other goods and services
|
91.8 | 88.2 | ||||||
|
Interest
|
26.5 | 32.4 | ||||||
|
Compensation and benefits
|
37.3 | 46.1 | ||||||
|
Other
|
17.4 | 18.0 | ||||||
|
|
$ | 509.2 | $ | 700.0 | ||||
Note 6 — Debt Obligations
|
|
September 30,
|
December 31,
|
||||||
|
|
2012
|
2011
|
||||||
|
Long-term debt:
|
|
|
||||||
|
Non-Partnership obligations:
|
|
|
||||||
|
TRC Holdco loan facility, variable rate, due February 2015 (1)
|
$ | 89.3 | $ | 89.3 | ||||
|
TRI Senior secured revolving credit facility, variable rate, due July 2014 (1),(2)
|
- | - | ||||||
|
Obligations of the Partnership: (3)
|
||||||||
|
Senior secured revolving credit facility, variable rate, due July 2015 (1),(4)
|
280.0 | 498.0 | ||||||
|
Senior unsecured notes, 8¼% fixed rate, due July 2016 (1)
|
209.1 | 209.1 | ||||||
|
Senior unsecured notes, 11¼% fixed rate, due July 2017
|
72.7 | 72.7 | ||||||
|
Unamortized discount
|
(2.6 | ) | (2.9 | ) | ||||
|
Senior unsecured notes, 7⅞% fixed rate, due October 2018
|
250.0 | 250.0 | ||||||
|
Senior unsecured notes, 6⅞% fixed rate, due February 2021
|
483.6 | 483.6 | ||||||
|
Unamortized discount
|
(31.1 | ) | (32.8 | ) | ||||
|
Senior unsecured notes, 6⅜% fixed rate, due August 2022
|
400.0 | - | ||||||
|
Total long-term debt
|
$ | 1,751.0 | $ | 1,567.0 | ||||
|
Irrevocable standby letters of credit:
|
||||||||
|
Letters of credit outstanding under TRC Senior secured credit facility (2)
|
$ | - | $ | - | ||||
|
Letters of credit outstanding under the Partnership senior secured revolving credit facility (4)
|
47.4 | 92.5 | ||||||
|
|
$ | 47.4 | $ | 92.5 | ||||
___________
|
(1)
|
See Subsequent Events section of this note.
|
|
(2)
|
As of September 30, 2012, the entire amount of TRC’s $75.0 million credit facility was available.
|
|
(3)
|
While we consolidate the debt of the Partnership in our financial statements, we do not have the obligation to make interest payments or debt payments with respect to the debt of the Partnership.
|
|
(4)
|
As of September 30, 2012, availability under the Partnership’s $1.1 billion senior secured revolving credit facility was $772.6 million.
|
The following table shows the range of interest rates and weighted average interest rate incurred on our and the Partnership’s variable-rate debt obligations during the nine months ended September 30, 2012:
| Range of Interest Rates Incurred | Weighted Average Interest Rate Incurred | ||
|
TRC Holdco Loan Facility
|
3.2% - 3.3%
|
|
3.2%
|
|
Partnership Senior Secured Revolving Credit Facility
|
2.4% - 4.5%
|
|
2.6%
|
As of September 30, 2012, both we and the Partnership were in compliance with the covenants contained in our various debt agreements.
Partnership 6⅜% Senior Notes
On January 30, 2012, the Partnership privately placed $400.0 million in aggregate principal amount of 6⅜% Senior Notes due 2022 (the “6⅜% Notes”). The 6⅜% Notes resulted in approximately $395.5 million of net proceeds, which were used to reduce borrowings under the Partnership’s senior secured revolving credit facility and for general partnership purposes.
The 6⅜% Notes are unsecured senior obligations that rank pari passu in right of payment with existing and future senior indebtedness, including indebtedness under the Partnership’s credit facility. They are senior in right of payment to any of the Partnership’s future subordinated indebtedness and are unconditionally guaranteed by certain of the Partnership’s subsidiaries. The 6⅜% Notes are effectively subordinated to all secured indebtedness under the Partnership’s credit agreement, which is secured by substantially all of the Partnership’s assets, to the extent of the value of the collateral securing that indebtedness.
Interest on the 6⅜% Notes accrues at the rate of 6⅜% per annum and is payable semi-annually in arrears on February 1 and August 1, commencing on August 1, 2012.
The Partnership may redeem 35% of the aggregate principal amount of the 6⅜% Notes at any time prior to February 1, 2015, with the net cash proceeds of one or more equity offerings. The Partnership must pay a redemption price of 106.375% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date provided that:
|
1)
|
at least 65% of the aggregate principal amount of the 6⅜% Notes (excluding the 6⅜% Notes held by the Partnership) remains outstanding immediately after the occurrence of such redemption; and
|
|
2)
|
the redemption occurs within 180 days of the date of the closing of such equity offering.
|
The Partnership may also redeem all or part of the 6⅜% Notes on or after February 1, 2017 at the prices set forth below plus accrued and unpaid interest and liquidated damages, if any, on the notes redeemed, if redeemed during the twelve month period beginning on February 1 of each year indicated below.
|
Year
|
Redemption Price
|
|
2017
|
103.188%
|
|
2018
|
102.125%
|
|
2019
|
101.063%
|
|
2020 and thereafter
|
100.000%
|
Subsequent Events
TRC Senior Secured Credit Agreement
On October 3, 2012, we entered into a Credit Agreement that replaced our existing variable rate Senior Secured Credit Facility due July 2014 (the “Previous Credit Facility”) with a new variable rate Senior Secured Credit Facility due October 3, 2017 (the “TRC Revolver”). The TRC Revolver increases available commitments to $150.0 million from $75.0 million and allows us to request up to an additional $100.0 million in commitment increases. Outstanding letters of credit and related outstanding reimbursement obligations may not exceed $50.0 million in the aggregate.
We incurred a charge of $0.2 million related to a partial write-off of debt issue costs associated with the Previous Senior Secured Credit Facility as a result of a change in syndicate members under the new TRC Revolver. The remaining deferred debt issue costs, along with the issue costs associated with the October 2012 amendment, will be amortized on a straight-line basis over the life of the TRC Revolver.
The TRC Revolver bears interest, at our option, at either (a) a base rate equal to the highest of Deutsche Bank’s prime rate, the federal funds rate plus 0.5% and the one-month LIBOR rate plus 1.0%, plus an applicable margin ranging from 1.75% to 2.5%, or (b) LIBOR plus an applicable margin ranging from 2.75% to 3.5%.
We are required to pay a commitment fee equal to an applicable rate ranging from 0.375% to 0.5% times the actual daily average unused portion of the TRC Revolver. Additionally, issued and undrawn letters of credit bear interest at an applicable rate from 2.75% to 3.5%.
Borrowings are guaranteed by TRI and its restricted subsidiaries. The TRC Revolver requires us to maintain a ratio of consolidated funded indebtedness to consolidated adjusted EBITDA of no more than 4.00 to 1.00. The TRC Revolver restricts our ability to make dividends to shareholders if, on a pro forma basis after giving effect to such dividend, (a) any default or event of default has occurred and is continuing or (b) our ratio of consolidated funded indebtedness to consolidated adjusted EBITDA exceeds 4.00 to 1.00. In addition, the TRC Revolver includes various covenants that may limit, among other things, our ability to incur indebtedness, grant liens, make investments, repay or amend the terms of certain other indebtedness, merge or consolidate, sell assets, and engage in transactions with affiliates.
TRC Holdco Loan Facility
On October 3, 2012, using proceeds from our TRC Revolver, we paid $88.8 million to acquire the remaining $89.3 million of outstanding borrowings under the TRC Holdco Loan Facility, resulting in a pretax gain of $0.5 million. In addition, we wrote-off $0.3 million of associated unamortized deferred debt issue costs.
The Partnership’s Revolving Credit Agreement
On October 3, 2012, the Partnership entered into a Second Amended and Restated Credit Agreement that amends and replaces the Partnership’s existing variable rate Senior Secured Credit Facility due July 2015 (the “Previous Revolver”) to provide a variable rate Senior Secured Credit Facility due October 3, 2017 (the “TRP Revolver”). The TRP Revolver increases available commitments to $1.2 billion from $1.1 billion and allows the Partnership to request up to an additional $300.0 million in commitment increases.
The Partnership incurred a $1.7 million loss related to a partial write-off of debt issue costs associated with the Previous Revolver as a result of a change in syndicate members under the new TRP Revolver. The remaining deferred debt issue costs of $9.3 million, along with the issue costs associated with the October 2012 amendment, will be amortized on a straight-line basis over the life of the TRP Revolver.
The TRP Revolver bears interest, at the Partnership’s option, at either (a) a base rate equal to the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.5% or (iii) the one-month LIBOR rate plus 1.0%, plus an applicable margin ranging from 0.75% to 1.75%, or (b) LIBOR plus an applicable margin ranging from 1.75% to 2.75%.
The Partnership is required to pay a commitment fee equal to an applicable rate ranging from 0.3% to 0.5% times the actual daily average unused portion of the TRP Revolver. Additionally, issued and undrawn letters of credit bear interest at an applicable rate from 1.75% to 2.75%.
The TRP Revolver is collateralized by a majority of the Partnership’s assets. Borrowings are guaranteed by the Partnership’s restricted subsidiaries.
The TRP Revolver restricts the Partnership’s ability to make distributions of available cash to unitholders if a default or an event of default (as defined in the TRP Revolver) exists or would result from such distribution. The TRP Revolver requires the Partnership to maintain a ratio of consolidated funded indebtedness to consolidated adjusted EBITDA of no more than 5.50 to 1.00. The TRP Revolver also requires the Partnership to maintain a ratio of consolidated EBITDA to consolidated interest expense of no less than 2.25 to 1.00. In addition, the TRP Revolver contains various covenants that may limit, among other things, the Partnership’s ability to incur indebtedness, grant liens, make investments, repay or amend the terms of certain other indebtedness, merge or consolidate, sell assets, and engage in transactions with affiliates (in each case, subject to the Partnership’s right to incur indebtedness or grant liens in connection with, and convey accounts receivable as part of, a permitted receivables financing).
Partnership 8¼% Senior Notes
On October 19, 2012, the Partnership issued a call notice for full redemption of its 8¼% Senior Unsecured Notes due July 2016, (the “8¼% Notes”), at a redemption price of 104.125% plus accrued interest through the redemption date of November 19, 2012. As of September 30, 2012, the outstanding balance on the 8¼% Notes was $209.1 million. The redemption will result in a premium paid on the redemption of $8.6 million and a write-off of $2.6 million of unamortized debt issue costs.
Partnership 5¼% Senior Notes
On October 25, 2012, the Partnership privately placed $400.0 million in aggregate principal amount of 5¼% Senior Unsecured Notes due May 2023 (the “5¼% Notes”) at 99.5% of par value. The 5¼% Notes resulted in approximately $398.0 million of gross proceeds ($393.5 million of net proceeds), which were used to redeem the Partnership’s 8¼% Notes, reduce borrowings under the TRP Revolver and for general partnership purposes.
Note 7 — Partnership Units and Related Matters
Public Offerings of Common Units
On January 23, 2012, the Partnership completed a public offering of 4,000,000 common units at a price of $38.30 per common unit ($37.11 per common unit, net of underwriting discounts). Net proceeds to the Partnership from this offering were approximately $149.9 million. Pursuant to the exercise of the underwriters’ overallotment option, the Partnership issued an additional 405,000 common units, providing net proceeds of approximately $15.0 million. As part of this offering, a wholly-owned subsidiary of ours purchased 1,300,000 common units with an aggregate value of $49.8 million (based on the offering price of $38.30). The units our subsidiary purchased were not subject to any underwriter discounts or commissions. In addition, we contributed $3.4 million for 89,898 general partner units to maintain our 2% general partner interest in the Partnership. The Partnership used the net proceeds from this offering for general partnership purposes, including the repayment of indebtedness.
On August 24, 2012, the Partnership entered into an Equity Distribution Agreement (“EDA”) with Citigroup Global Markets Inc. (“Citibank”) which permits the Partnership to sell, at its option, up to an aggregate of $100 million of its common units through Citibank, as sales agent. Settlement for sales of common units will occur on the third business day following the date on which any sales were made in return for payment of the net proceeds to the Partnership. During the quarter ended September 30, 2012, there were no sales of common units pursuant to this program.
Distributions
The following table details the distributions declared and/or paid during the first nine months of 2012:
|
|
|
|
Distributions |
|
Distributions to Targa Resources Corp.
|
Distributions per limited partner unit
|
|||||||||||||||
|
Three Months Ended
|
|
Date Paid or to be Paid
|
Limited Partners | General Partner |
|
|
|
||||||||||||||
|
|
Common | Incentive | 2% | Total |
|
|
|||||||||||||||
|
(In millions, except per unit amounts)
|
|||||||||||||||||||||
| September 30, 2012 | November 14, 2012 |
$
|
59.1 | $ | 16.1 |
$
|
1.5 | $ | 76.7 |
$
|
26.2 |
$
|
0.6625 | ||||||||
| June 30, 2012 | August 14, 2012 |
|
57.3 |
|
14.4 |
|
1.5 | 73.2 |
|
24.2 |
|
0.6425 | |||||||||
|
March 31, 2012
|
|
May 15, 2012
|
|
55.5
|
|
12.7
|
|
1.4
|
|
69.6
|
|
22.2
|
|
0.6225
|
|||||||
|
December 31, 2011
|
|
February 14, 2012
|
|
53.7
|
|
11.0
|
|
1.3
|
|
66.0
|
|
20.1
|
|
0.6025
|
|||||||
Note 8 — Common Stock and Related Matters
The following table details the dividends declared and/or paid during the first nine months of 2012:
|
Three Months Ended
|
Date Paid or to be Paid
|
Total Dividend Declared
|
Amount of
Dividend Paid
|
Accrued
Dividends (1)
|
Dividend Declared
per Share of
Common Stock
|
|||||||||||||
|
(In millions, except per share amounts)
|
||||||||||||||||||
| September 30, 2012 | November 15, 2012 | $ | 18.0 | $ | 17.3 | $ | 0.7 | $ | 0.42250 | |||||||||
|
June 30, 2012
|
August 15, 2012
|
16.7 | 16.1 | 0.6 | 0.39375 | |||||||||||||
|
March 31, 2012
|
May 16, 2012
|
15.5 | 15.0 | 0.5 | 0.36500 | |||||||||||||
|
December 31, 2011
|
February 15, 2012
|
14.3 | 13.8 | 0.5 | 0.33625 | |||||||||||||
________
|
(1)
|
Represents accrued dividends on the restricted shares that are payable upon vesting.
|
Note 9 — Earnings per Common Share
The following table sets forth a reconciliation of net income and weighted average shares outstanding used in computing basic and diluted net income per common share:
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||||||||||||||
|
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Net income
|
$ | 19.0 | $ | 36.5 | $ | 131.7 | $ | 140.6 | ||||||||
|
Less: Net income attributable to noncontrolling interests
|
10.3 | 31.6 | 104.8 | 118.4 | ||||||||||||
|
Net income attributable to common shareholders
|
$ | 8.7 | $ | 4.9 | $ | 26.9 | $ | 22.2 | ||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding - basic
|
41.0 | 41.0 | 41.0 | 41.0 | ||||||||||||
|
|
||||||||||||||||
|
Net income available per common share - basic
|
$ | 0.21 | $ | 0.12 | $ | 0.66 | $ | 0.54 | ||||||||
|
|
||||||||||||||||
|
Weighted average shares outstanding
|
41.0 | 41.0 | 41.0 | 41.0 | ||||||||||||
|
Dilutive effect of unvested stock awards
|
0.9 | 0.5 | 0.8 | 0.4 | ||||||||||||
|
Weighted average shares outstanding - diluted
|
41.9 | 41.5 | 41.8 | 41.4 | ||||||||||||
|
|
||||||||||||||||
|
Net income available per common share - diluted
|
$ | 0.21 | $ | 0.12 | $ | 0.64 | $ | 0.54 | ||||||||
Note 10 — Derivative Instruments and Hedging Activities
Partnership Commodity Hedges
The primary purpose of the Partnership’s commodity risk management activities is to hedge the exposure to commodity price risk and reduce fluctuations in the Partnership’s operating cash flow despite fluctuations in commodity prices. In an effort to reduce the variability of cash flows, the Partnership has hedged the commodity price associated with a portion of its expected (i) natural gas equity volumes in Field Gathering and Processing Operations through 2015 and (ii) NGL and condensate equity volumes predominately in Field Gathering and Processing Operations as well as in the LOU portion of the Coastal Gathering and Processing Operations through 2014 that result from its percent of proceeds processing arrangement by entering into derivative instruments including swaps and purchased puts (floors) and calls (caps). The Partnership has designated these derivative contracts as cash flow hedges.
The hedges generally match the NGL product composition and the NGL and natural gas delivery points to those of the Partnership’s physical equity volumes. The NGL hedges may be transacted as specific NGL hedges or as baskets of ethane, propane, normal butane, isobutane and natural gasoline based upon the Partnership’s expected equity NGL composition. We believe this approach avoids uncorrelated risks resulting from employing hedges on crude oil or other petroleum products as “proxy” hedges of NGL prices. The Partnership’s natural gas and NGL hedges are settled using published index prices for delivery at various locations which closely approximate the Partnership’s actual natural gas and NGL delivery points.
The Partnership hedges a portion of its condensate sales using crude oil hedges that are based on the NYMEX futures contracts for West Texas Intermediate light, sweet crude, which approximates the prices received for condensate. This necessarily exposes the Partnership to a market differential risk if the NYMEX futures do not move in exact parity with the sales price of its underlying West Texas condensate equity volumes.
At September 30, 2012, the notional volumes of the Partnership’s commodity hedges for equity volumes were:
|
Commodity
|
|
Instrument
|
|
Unit
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Natural Gas
|
|
Swaps
|
|
MMBtu/d
|
|
31,790
|
|
26,089
|
|
18,000
|
|
4,500
|
|
NGL
|
|
Swaps
|
|
Bbl/d
|
|
9,361
|
|
5,650
|
|
1,000
|
|
-
|
|
NGL
|
|
Puts (propane)
|
|
Bbl/d
|
|
294
|
|
-
|
|
-
|
|
-
|
|
NGL
|
|
Calls (ethane) (1)
|
|
Bbl/d
|
|
2,000
|
|
-
|
|
-
|
|
-
|
|
Condensate
|
|
Swaps
|
|
Bbl/d
|
|
1,660
|
|
1,795
|
|
700
|
|
-
|
________
|
(1)
|
Utilized in connection with 2,000 Bbl/d of 2012 ethane swaps providing a floor on ethane with upside.
|
The Partnership also enters into derivative instruments to help manage other short-term commodity-related business risks. The Partnership has not designated these derivatives as hedges and records changes in fair value and cash settlements to revenues.
The following schedules reflect the fair values of the Partnership’s derivative instruments:
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
||||||||||||
|
|
|
|
|
Fair Value as of
|
|
|
Fair Value as of
|
||||||||||
|
|
|
|
Balance Sheet
|
September 30,
|
|
December 31,
|
|
Balance Sheet
|
September 30,
|
|
December 31,
|
||||||
|
|
|
|
Location
|
2012
|
|
2011
|
|
Location
|
2012
|
|
2011
|
||||||
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Commodity contracts
|
Current assets
|
$
|
33.4
|
|
$
|
40.3
|
|
Current liabilities
|
$
|
5.9
|
|
$
|
40.6
|
|||
|
|
|
|
Long-term assets |
11.0
|
|
|
10.9
|
|
Long-term liabilities |
|
7.2
|
|
|
15.8
|
|||
|
Total derivatives designated as hedging instruments
|
$
|
44.4
|
|
$
|
51.2
|
|
|
$
|
13.1
|
|
$
|
56.4
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Commodity contracts
|
Current assets
|
$
|
0.3
|
|
$
|
0.7
|
|
Current liabilities |
$
|
0.1
|
|
$
|
0.5
|
|||
|
|
|
|
Long-term assets
|
|
0.1
|
|
|
-
|
|
Long-term liabilities
|
|
-
|
|
|
-
|
||
|
Total derivatives not designated as hedging instruments
|
$
|
0.4
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
$
|
0.5
|
|||||
|
Total derivatives
|
|
|
$
|
44.8
|
|
$
|
51.9
|
|
|
$
|
13.2
|
|
$
|
56.9
|
|||
The fair value of the Partnership’s derivative instruments, depending on the type of instrument, was determined by the use of present value methods or standard option valuation models with assumptions about commodity prices based on those observed in underlying markets.
The estimated fair value of the Partnership’s derivative instruments was a net asset of $31.6 million as of September 30, 2012, net of an adjustment for credit risk. The credit risk adjustment is based on the default probabilities by year as indicated by market quotes for the counterparties’ credit default swap rates. These default probabilities have been applied to the unadjusted fair values of the derivative instruments to arrive at the credit risk adjustment, which was immaterial for all periods presented.
The Partnership’s payment obligations in connection with substantially all of these hedging transactions and any additional credit exposure due to a rise in natural gas, NGL and crude oil prices relative to the fixed prices set forth in the hedges are secured by a first priority lien in the collateral securing its senior secured indebtedness that ranks equal in right of payment with liens granted in favor of its senior secured lenders.
The following tables reflect amounts recorded in other comprehensive income (“OCI”) and amounts reclassified from OCI to revenue and expense for the periods indicated:
|
Derivatives in
|
Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
|
|||||||||||||||
|
Cash Flow Hedging
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
|
Relationships
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Interest rate contracts
|
$ | - | $ | (2.3 | ) | $ | - | $ | (4.3 | ) | ||||||
|
Commodity contracts
|
(22.6 | ) | 47.0 | 70.9 | (9.8 | ) | ||||||||||
|
|
$ | (22.6 | ) | $ | 44.7 | $ | 70.9 | $ | (14.1 | ) | ||||||
|
|
Gain (Loss) Reclassified from OCI into Income (Effective Portion)
|
|||||||||||||||
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
|
Location of Gain (Loss)
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Interest expense, net
|
$ | (1.9 | ) | $ | (1.0 | ) | $ | (6.1 | ) | $ | (5.7 | ) | ||||
|
Revenues
|
15.4 | (9.5 | ) | 31.7 | (23.0 | ) | ||||||||||
|
|
$ | 13.5 | $ | (10.5 | ) | $ | 25.6 | $ | (28.7 | ) | ||||||
Hedge ineffectiveness was immaterial for all periods presented.
Our consolidated earnings are also affected by the use of the mark-to-market method of accounting for derivative instruments that do not qualify for hedge accounting or that have not been designated as hedges. The changes in fair value of these instruments are recorded on the balance sheet and through earnings (i.e., using the “mark-to-market” method) rather than being deferred until the anticipated transaction settles. The use of mark-to-market accounting for financial instruments can cause non-cash earnings volatility due to changes in the underlying commodity price indices. The Partnership recorded the following mark-to-market gains (losses) for the periods indicated:
|
Gain (Loss) Recognized in Income on Derivatives
|
|||||||||||||||||
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||||
| Derivatives not Designated as Hedging Instruments | Location of Gain Recognized in Income on Derivatives |
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Commodity contracts
|
Revenue
|
$ | (0.1 | ) | $ | 0.4 | $ | 0.9 | $ | 1.4 | |||||||
|
Interest rate swaps
|
Other income (expense)
|
- | (1.8 | ) | - | (5.0 | ) | ||||||||||
The following table shows the deferred gains (losses) included in accumulated OCI that will be reclassified into earnings through the end of 2015:
|
|
September 30, 2012
|
December 31, 2011
|
||||||
|
Commodity hedges, before tax
|
$ | 5.3 | $ | 0.4 | ||||
|
Commodity hedges, after tax
|
4.1 | 0.2 | ||||||
|
Interest rate swaps, before tax
|
(1.7 | ) | (2.5 | ) | ||||
|
Interest rate swaps, after tax
|
(1.9 | ) | (1.4 | ) | ||||
As of September 30, 2012, deferred net gains of $26.2 million on commodity hedges and deferred net losses of $6.5 million on terminated interest rate swaps recorded in OCI are expected to be reclassified to revenue and interest expense during the next twelve months.
See Note 11 for additional disclosures related to derivative instruments and hedging activities.
Note 11 — Fair Value Measurements
Under generally accepted accounting principles, our consolidated balance sheet reflects a mixture of measurement methods for financial assets and liabilities (“financial instruments”). Derivative financial instruments are reported at fair value in our consolidated balance sheet. Other financial instruments are reported at historical cost or amortized cost in our consolidated balance sheet, with fair value measurements for these instruments provided as supplemental information.
Following is additional qualitative and quantitative disclosures regarding fair value measurements of financial instruments.
Fair Value of Derivative Financial Instruments
The Partnership’s derivative instruments consist of financially settled commodity swap and option contracts and fixed price commodity contracts with certain counterparties. The Partnership determines the fair value of its derivative contracts using a discounted cash flow model for swaps and a standard option pricing model for options, based on inputs that are readily available in public markets. The Partnership has consistently applied these valuation techniques in all periods presented and we believe the Partnership has obtained the most accurate information available for the types of derivative contracts the Partnership holds.
The fair values of the Partnership’s derivative instruments, which aggregate to a net asset position of $31.6 million as of September 30, 2012, are sensitive to changes in forward pricing on natural gas, NGLs and crude oil. This asset position reflects the present value, adjusted for counterparty credit risk, of the amount the Partnership expects to receive in the future on its derivative contracts. If forward pricing on natural gas, NGLs and crude oil were to increase by 10%, the result would be a fair value reflecting a net asset of $1.9 million, ignoring an adjustment for counterparty credit risk. If forward pricing on natural gas, NGLs and crude oil were to decrease by 10%, the result would be a fair value reflecting a net asset of $61.3 million, ignoring an adjustment for counterparty credit risk.
Fair Value of Other Financial Instruments
Due to their cash or near-cash nature, the carrying value of other financial instruments included in working capital (i.e., cash and cash equivalents, accounts receivable, accounts payable) approximates their fair value. As such, long-term debt is primarily the other financial instrument for which our carrying value could vary significantly from fair value. We determined the supplemental fair value disclosures for our long-term debt as follows:
|
·
|
Holdco facility is based on repurchases we made in October 2012 and December 2010;
|
|
·
|
senior secured revolving credit facility is based on carrying value which approximates fair value as its interest rate is based on prevailing market rates;
|
|
·
|
senior unsecured notes are based on quoted market prices derived from trades of the debt.
|
Fair Value Hierarchy
We categorize the inputs to the fair value measurements using a three-tier fair value hierarchy that prioritizes the significant inputs used in measuring fair value:
|
·
|
Level 1 – observable inputs such as quoted prices in active markets;
|
|
·
|
Level 2 – inputs other than quoted prices in active markets that we can directly or indirectly observe to the extent that the markets are liquid for the relevant settlement periods; and
|
|
·
|
Level 3 – unobservable inputs in which little or no market data exists, therefore we must develop our own assumptions.
|
The following table shows a breakdown by fair value hierarchy category for (1) financial instruments measurements included in our consolidated balance sheet at fair value and (2) supplemental fair value disclosures for other financial instruments:
|
|
September 30, 2012
|
|||||||||||||||||||
|
|
Carrying Value
|
Fair Value
|
||||||||||||||||||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||
|
Financial Instruments Recorded on Our Consolidated Balance Sheet at Fair Value:
|
|
|
|
|
|
|||||||||||||||
|
Assets from commodity derivative contracts
|
$ | 44.8 | $ | 44.8 | $ | - | $ | 44.7 | $ | 0.1 | ||||||||||
|
Liabilities from commodity derivative contracts
|
13.2 | 13.2 | - | 12.4 | 0.8 | |||||||||||||||
|
Financial Instruments Recorded on Our Consolidated Balance Sheet at Carrying Value:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
||||||||||||||||||||