Targa Resources Corp. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; selected fourth-quarter figures are included below. Amounts are U.S. dollars. Targa Resources Corp. (TRC) is a parent company whose primary cash source is distributions from Targa Resources Partners LP (the Partnership). TRC consolidates the Partnership’s results, including amounts attributable to noncontrolling interests; consolidated results are not equivalent to cash available to TRC shareholders.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $6,556.0 million | $5,885.7 million | Up 11% |
| Income from operations | $368.2 million | $336.3 million | Up 9% |
| Net income | $201.3 million | $159.3 million | Up 26% |
| Net income attributable to TRC/common shareholders | $65.1 million; $1.56 basic EPS | $38.1 million; $0.93 basic EPS | Up 71% |
| Operating cash flow | $382.7 million | $428.2 million | Down 11% |
| Cash used in investing | $1,026.3 million | $1,590.7 million | Lower use, with growth investment still substantial |
Consolidated operating margin was $801.2 million, up 16%; management’s non-GAAP gross margin was $1,177.5 million, up 17%. Income from operations was about 5.6% of revenue. TRC’s distributable cash flow, a non-GAAP parent-level measure, increased to $116.6 million from $78.3 million. Partnership adjusted EBITDA increased 22% to $629.2 million and distributable cash flow rose to $440.3 million from $353.9 million. These non-GAAP measures have limitations and are not substitutes for GAAP results or cash flow.
Fourth quarter 2013: Revenue was $2,159.8 million, gross margin $355.0 million, operating income $144.9 million, net income $95.6 million and net income attributable to TRC/common shareholders $20.4 million, or $0.49 basic EPS.
Debt and liquidity: At year-end, consolidated balance-sheet long-term debt was $2,989.3 million, including $84.0 million of TRC debt and Partnership debt. Partnership borrowings included $395.0 million on its revolver and $279.7 million under its receivables securitization facility; the Partnership also had $2,258.6 million of senior unsecured notes before unamortized discounts. TRC does not have the contractual obligation to repay Partnership debt. The Partnership had $718.2 million of revolver availability at year-end. At January 31, 2014, reported liquidity was $873.1 million for the Partnership and $77.5 million for TRC. Both entities were in compliance with debt covenants at December 31, 2013.
TRC cash and cash equivalents were $66.7 million at year-end, versus $76.3 million a year earlier. Current assets were $897.2 million and current liabilities $770.4 million. The filing does not present a single consolidated liquidity figure that captures the restrictions on moving Partnership cash to TRC.
Material changes and business developments
- Revenue rose with higher volumes, realized natural gas and petroleum-product prices, and fee-based revenues, partly offset by lower realized NGL prices. Partnership gross margin benefited from Badlands, higher Field Gathering and Processing volumes, fractionation fees and exports.
- Badlands, acquired for approximately $976 million on December 31, 2012, contributed a full year of operations in 2013. The Partnership gathered an average 46.9 MBbl/d of crude oil and invested about $250 million in its expansion. A potential $50 million acquisition payment was revalued to zero because management did not expect the required volume thresholds to be achieved.
- Logistics Assets operating margin increased to $282.3 million from $188.3 million, supported by higher fractionation fees, Train 4 and export activity. Field Gathering and Processing margin increased to $270.5 million from $231.2 million. Coastal Gathering and Processing margin declined to $85.4 million from $115.1 million, reflecting lower NGL prices, less favorable processing economics and lower offshore/off-system volumes.
- Partnership operating cash flow fell despite higher earnings, partly reflecting working-capital use: receivables and inventory grew with the export business. Year-end working capital increased by $88 million.
- TRC’s annual dividends declared rose to $2.205 per share from $1.6388. The fourth-quarter dividend was $0.6075 per share. The Partnership declared a fourth-quarter distribution of $0.7475 per common unit, payable in February 2014.
Outlook, risks and unusual items
The Partnership estimated 2014 growth capital expenditures of approximately $650 million and maintenance capital expenditures of approximately $90 million. Planned projects included Phase II of the export expansion, further Badlands investment, and new 200 MMcf/d processing plants in North Texas and the Permian Basin. Phase II was expected to add about 2 MMBbl per month of export capacity and be completed in the third quarter of 2014. Management cited active drilling in liquids-rich areas and demand for fractionation and exports as growth drivers, while noting reduced activity around comparatively dry-gas reserves. Management reported that Partnership 2013 adjusted EBITDA was 22% above 2012 and slightly above the midpoint of public guidance; the filing does not provide a numeric 2014 EBITDA or distribution forecast.
- Commodity prices, producer drilling and production, weather, NGL demand, and the ability to replace naturally declining supply can affect volumes, margins and distributions. About 48% of Partnership gathered gas volume was under percent-of-proceeds arrangements in 2013, exposing results to commodity prices despite hedging.
- Partnership debt was substantial; variable-rate borrowings totaled $674.7 million. A one-percentage-point rate increase was estimated to raise annual Partnership interest expense by about $6.7 million. The Partnership depends on capital markets and external financing for growth.
- Hedges cover only a portion of expected equity volumes, with coverage declining in later years; basis differences, volume changes and counterparty nonperformance may weaken protection. The Partnership’s derivative position shifted from a $22.2 million net asset at 2012 year-end to a $4.3 million net liability at 2013 year-end.
- Construction, integration and operating risks include Badlands startup challenges, project delays noted at Sound and Channelview, lower Coastal volumes, and a fire at the Saunders plant. 2013 included $4.3 million of casualty loss; debt redemptions generated a $14.7 million loss. A proposed Louisiana storage-well rule, if adopted, could require abandonment of at least one well.
- Environmental, pipeline-safety and other regulatory changes, including rules affecting hydraulic fracturing and derivatives, could increase costs or reduce customer activity. Insurance may not cover all losses. The company reported no material environmental liabilities and stated that ordinary-course legal matters were not expected to materially affect its financial position, results or cash flows.
Management stated that expected TRC distributions from the Partnership should support operations, debt service and dividends for at least the next 12 months, and that Partnership resources and financing sources should support operations, capital spending, debt obligations, collateral requirements and minimum distributions for that period. These are forward-looking expectations, not assurances. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Key facts investors should verify
- Reconcile TRC’s reported earnings and dividends to actual cash distributions received from the Partnership, and review the partnership agreement and debt restrictions governing transfers.
- Track Partnership leverage, debt maturities, revolver and securitization availability, interest-rate exposure, and the funding required for the announced 2014 capital program.
- Assess whether Badlands, the new processing plants and export expansions meet volume, timing, cost and return expectations.
- Monitor Coastal Gathering and Processing volumes, Saunders repairs, third-party pipeline availability, and the status and potential impact of the Louisiana storage-well rule.
- Review commodity-price sensitivity, hedge coverage and counterparties, and the sustainability of distributions and TRC dividends given operating cash flow and working-capital needs.