Business Context and Reporting Period
Company: Targa Resources Corp. (TRC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2011
Business Model: TRC is a holding company with no direct operating assets. Its primary revenue source consists of cash distributions from Targa Resources Partners LP (the "Partnership"), a midstream energy company engaged in natural gas gathering, processing, and NGL logistics. TRC owns a 2% general partner interest, all Incentive Distribution Rights (IDRs), and approximately 14.5% of the Partnership's common units.
Key Financial Metrics (2011)
| Metric | 2011 Value | Notes |
|---|---|---|
| Consolidated Revenues | $6,994.5 million | Includes Partnership revenues; up 28% from 2010. |
| Net Income (Consolidated) | $215.4 million | Up 240% from 2010. |
| Net Income Attributable to TRC | $30.7 million | Reflects noncontrolling interest allocation; up from a loss of $15.0 million in 2010. |
| Operating Margin (Non-GAAP) | $668.4 million | Up 28% from 2010. |
| Distributable Cash Flow (TRC) | $60.2 million | Non-GAAP measure used to evaluate dividend capacity. |
| Total Debt (Consolidated) | $1,567.0 million | Includes $498.0 million Partnership revolver and $979.7 million senior notes. |
| Cash and Equivalents | $145.8 million | Includes $55.6 million restricted Partnership cash. |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased by $1,518.4 million (28%) compared to 2010, driven primarily by higher realized prices for NGLs and condensate ($1,077.2 million) and increased sales volumes ($488.4 million).
- Profitability: Net income attributable to TRC turned positive ($30.7 million) from a net loss of $15.0 million in 2010. This improvement was aided by higher operating margins and the absence of significant debt repurchase losses seen in 2010.
- Acquisitions: The Partnership completed three third-party acquisitions in 2011 totaling approximately $156.5 million: the Channelview Terminal ($29 million), Sound Terminal, and Baltimore Terminal ($127.5 million plus working capital).
- Capital Expenditures: Total capital expenditures were $492.2 million, with $252.3 million allocated to expansion projects and $83.4 million to maintenance.
Guidance, Outlook, and Risks
Outlook and Growth Strategy: Management expects growth to be driven by organic expansion and third-party acquisitions. Major capital projects underway or planned through 2013 include:
- Cedar Bayou Fractionator (CBF) Expansion: Estimated $360 million to add 100,000 Bbl/d capacity.
- International Propane Export: $250 million expansion at Galena Park for 5,000+ Bbl/hr export capability.
- North Texas Longhorn Project: $150 million for a new 200 MMcf/d cryogenic processing plant.
Dividend Policy: TRC intends to pay quarterly dividends equal to cash received from the Partnership, less reserves for taxes, G&A expenses, and debt service. A quarterly dividend of $0.33625 per share was declared for Q4 2011 (annualized $1.345).
Key Risks:
- Commodity Price Volatility: Approximately 40% of gathering volumes are on percent-of-proceeds contracts, exposing cash flow to natural gas and NGL price fluctuations.
- Debt Obligations: The Partnership carries substantial indebtedness ($1.48 billion), with covenants restricting distributions if financial ratios are breached.
- Regulatory Environment: Increased scrutiny on hydraulic fracturing, pipeline safety (Pipeline Safety Act of 2011), and environmental regulations (GHG emissions) could increase compliance costs or delay projects.
- Counterparty Risk: Exposure to financial institutions regarding derivative hedging contracts.
Investor Verification Checklist
- Dividend Coverage: Verify the Partnership's Distributable Cash Flow coverage ratio against its quarterly distribution rate of $0.6025 per unit.
- Debt Covenants: Confirm compliance with the Partnership's leverage ratio (funded indebtedness to adjusted EBITDA < 5.50x) and interest coverage ratio (> 2.25x).
- Capital Project Execution: Monitor the timeline and cost adherence of the $360 million CBF expansion and $250 million propane export project.
- Commodity Hedging: Review the effectiveness of the Partnership's hedging program, which resulted in a net liability of $5.0 million at year-end due to rising NGL prices above hedge floors.
- Noncontrolling Interest: Understand that TRC's net income is significantly lower than consolidated net income due to the allocation of earnings to noncontrolling partners in the Partnership.