Targa Resources Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2010)
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2010, for Targa Resources Corp. (TRC). TRC is a holding company that completed its Initial Public Offering (IPO) on December 10, 2010. Following the conveyance of all remaining operating assets to its subsidiary, Targa Resources Partners LP (the "Partnership"), in September 2010, TRC no longer directly owns operating assets. Its primary business objective is to increase cash available for dividends to stockholders by managing its interests in the Partnership, which includes a 2% general partner interest, all Incentive Distribution Rights (IDRs), and a 13.7% limited partner interest. The Partnership operates as a leading provider of midstream natural gas and natural gas liquids (NGL) services in the United States.
Key Financial Metrics
| Metric | 2010 | 2009 | 2008 |
|---|---|---|---|
| Revenues | $5,469.2 million | $4,536.0 million | $7,998.9 million |
| Net Income | $63.3 million | $79.1 million | $134.4 million |
| Net Income Attributable to TRC | $(15.0) million | $29.3 million | $37.3 million |
| Operating Margin | $521.3 million | $509.9 million | $505.2 million |
| Adjusted EBITDA (Partnership) | $396.1 million | $400.6 million | $421.0 million |
| Total Debt (Long-term) | $1,534.7 million | $1,593.5 million | $1,976.5 million |
| Cash from Operating Activities | $208.5 million | $335.8 million | $390.7 million |
Note: TRC reported a net loss attributable to common shareholders of $(202.3) million in 2010, primarily due to the conversion of Series B preferred stock and dividends paid to preferred shareholders prior to the IPO.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 20.6% to $5.47 billion in 2010 compared to 2009. This increase was driven primarily by higher realized commodity prices ($1.2 billion increase), partially offset by lower sales volumes and reduced business interruption insurance proceeds.
- Profitability: While consolidated net income decreased to $63.3 million from $79.1 million, the Partnership's operating margin increased to $521.3 million. The decline in consolidated net income was largely due to increased non-controlling interest allocations and the impact of preferred stock dividends.
- Asset Conveyance: The most significant structural change was the September 2010 conveyance of all operating assets to the Partnership. Consequently, TRC's standalone operations are now limited to holding interests in the Partnership and managing corporate expenses.
- Debt Reduction: Total long-term debt decreased by approximately $58.8 million year-over-year, reflecting equity issuances by the Partnership used to repay borrowings.
Guidance, Outlook, and Risks
Outlook and Growth Strategy: Management expects near-term growth to be driven by organic projects supported by long-term, fee-based contracts, including expansions at Mont Belvieu (Cedar Bayou Fractionator) and in the Permian and North Texas basins. The company anticipates strong supply and demand fundamentals for NGLs due to increased drilling in liquids-rich shale plays (e.g., Wolfberry, Barnett Shale).
Dividend Policy: TRC intends to pay quarterly dividends equal to cash received from the Partnership, less reserves for taxes, public company expenses, and debt service. An initial quarterly dividend of $0.0616 per share was paid in February 2011.
Key Risks:
- Commodity Price Volatility: A significant portion of the Partnership's revenue is derived from percent-of-proceeds contracts, making cash flow sensitive to natural gas and NGL price fluctuations.
- Indebtedness: The Partnership carries substantial debt ($1.45 billion total indebtedness as of Dec 31, 2010), which limits financial flexibility and increases vulnerability to interest rate hikes.
- Regulatory Environment: Operations are subject to complex federal and state regulations regarding environmental protection, pipeline safety, and hydraulic fracturing, which could increase compliance costs or restrict operations.
- Counterparty Credit Risk: Exposure to non-performance by counterparties in derivative hedging agreements and commodity transactions.
Investor Verification Checklist
- Dividend Sustainability: Verify the Partnership's ability to maintain distributions above the IDR threshold ($0.50625 per unit) to ensure TRC receives its maximum 48% incentive share.
- Debt Covenants: Review the Partnership's compliance with leverage ratios (funded indebtedness to adjusted EBITDA) and interest coverage ratios under its senior secured credit facility.
- Organic Project Execution: Monitor the completion timeline and cost adherence of key expansion projects (e.g., Cedar Bayou Fractionator expansion) to ensure projected cash flow increases materialize.
- Commodity Hedging: Assess the effectiveness of the Partnership's hedging program in mitigating cash flow volatility given the mix of fee-based and percent-of-proceeds contracts.
- Non-Controlling Interest: Understand the impact of the increasing non-controlling interest percentage on TRC's net income attributable to common shareholders as the Partnership issues additional units.