Targa Resources Corp. 2012 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter filing. Targa Resources Corp. (TRC) is a holding company whose cash generation depends principally on distributions from Targa Resources Partners LP (the Partnership). TRC consolidates the Partnership, including results attributable to outside unitholders, so consolidated results are not the same as cash available to TRC or its common shareholders.
The Partnership operates natural gas gathering and processing, NGL fractionation and logistics, crude oil gathering, and marketing and distribution businesses. TRC’s interests as of year-end included the Partnership’s general partner interest, all incentive distribution rights, and common units.
Financial and operating metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $5,885.7 million | $6,994.5 million |
| Income from operations | $336.3 million | $351.1 million |
| Net income | $159.3 million | $215.4 million |
| Net income attributable to TRC | $38.1 million | $30.7 million |
| Basic / diluted EPS | $0.93 / $0.91 | $0.75 / $0.74 |
| Operating cash flow | $428.2 million | $379.3 million |
| Cash and cash equivalents at year-end | $76.3 million | $145.8 million |
| Total assets | $5,105.0 million | $3,831.0 million |
| Consolidated long-term debt | $2,475.3 million | $1,567.0 million |
Gross margin was $1,006.7 million and operating margin was $693.6 million in 2012; these are non-GAAP measures. The Partnership reported adjusted EBITDA of $514.9 million and distributable cash flow of $353.9 million, versus $490.8 million and $336.7 million, respectively, in 2011. The filing does not provide a single consolidated cash-flow margin measure.
FY 2012 investing cash outflow was $1,590.7 million, including $996.2 million for acquisitions and $582.7 million for property, plant and equipment. Financing cash inflow was $1,093.0 million. Partnership distributions reached $0.68 per common unit for fourth-quarter 2012, up from $0.6025 for fourth-quarter 2011. TRC declared a fourth-quarter dividend of $0.4575 per share.
At December 31, the Partnership had $620.0 million drawn on its $1.2 billion revolver, $45.3 million in letters of credit, and $534.7 million of additional availability. TRC had $82.0 million drawn on its separate credit facility, with $68.0 million available. At February 1, 2013, reported total liquidity was $798.8 million for the Partnership and $73.8 million for TRC. Partnership debt is consolidated by TRC, but TRC states it is not contractually obligated to service that Partnership debt.
Fourth-quarter snapshot and changes from prior periods
Fourth-quarter 2012 revenue was $1,527.3 million, compared with $1,934.0 million in fourth-quarter 2011. Gross margin was broadly flat at $260.1 million versus $259.5 million, while operating income fell to $86.4 million from $108.3 million and net income declined to $27.6 million from $74.8 million. Net income attributable to TRC increased to $11.2 million from $8.5 million.
For the full year, revenue declined 16%, chiefly because lower realized commodity prices reduced revenue by $1,965.3 million, partly offset by higher sales volumes and fee-based revenue. Lower product purchases more than offset the revenue decline, lifting gross margin 5% and operating margin 4%. However, consolidated net income fell 26%, reflecting higher depreciation, operating costs, interest expense, and other items. TRC-attributable income rose 24%, in part because a smaller share of Partnership earnings was allocated to noncontrolling interests.
- Partnership operating margin rose to $693.6 million from $668.4 million. Logistics Assets improved to $188.3 million from $123.1 million, while Field Gathering and Processing fell to $231.2 million from $287.9 million and Coastal Gathering and Processing fell to $115.1 million from $174.3 million.
- Average natural gas inlet volumes declined 3% to 2,098.3 MMcf/d, while gross NGL production rose 4% to 128.7 MBbl/d. Average NGL prices and natural gas prices were materially lower than in 2011.
- Partnership operating cash flow increased to $465.4 million from $400.9 million, but growth investment and acquisitions sharply increased investing outflows.
Outlook, commentary, risks and unusual items
Management cited strong producer activity in liquids-rich areas, rising demand for fractionation, and export opportunities for propane and butane as growth drivers. It also noted depressed natural gas prices, volatile commodity markets, and the sensitivity of some gathering and processing margins to commodity prices. Management described 2012 execution as strong overall, but said Partnership EBITDA was at the low end of public guidance; the filing text does not provide a clear numeric EBITDA guidance value.
- The Partnership estimated approximately $1.0 billion of gross growth capital expenditures and $75 million of maintenance capital expenditures for 2013. Announced projects included fractionation, export, processing-plant, petroleum-logistics, and Badlands expansions; the filing estimated about $1.3 billion of future growth investment through 2014.
- The Partnership acquired Badlands on December 31, 2012 for $975.8 million cash, with a contingent payment of up to $50 million tied to crude gathering volumes. The acquisition contributed no operating results in 2012. The year-end fair value of the contingent payment was recorded as a $15.3 million liability; $6.1 million of acquisition costs were expensed.
- Hurricane Isaac contributed to operational disruption and repair costs; the Yscloskey plant was not restarted, and a $15.4 million investment write-off was recorded. Gulf Coast Fractionators’ expansion also experienced start-up issues and reduced equity earnings.
- Debt increased substantially to fund growth and the Badlands purchase. Partnership interest expense was $116.8 million, and a 1 percentage-point increase in rates on its variable-rate debt would add an estimated $6.2 million in annual interest expense. Debt agreements impose leverage, interest-coverage, and distribution restrictions; both TRC and the Partnership reported covenant compliance at year-end.
- Key risks include commodity-price and volume exposure, natural declines in connected production, dependence on external capital, acquisition integration and project execution, customer concentration (Chevron Phillips Chemical represented 10% of Partnership revenue), counterparty credit, weather and operational hazards, insurance availability, and environmental, hydraulic-fracturing, and pipeline-safety regulation.
- Management reported effective disclosure controls and internal control over financial reporting. However, the acquired Badlands business, representing 20.1% of year-end assets, was excluded from the internal-control assessment and audit scope.
Important facts for investors to verify
- Separate TRC parent-only liquidity, debt service, distributable cash flow, and dividend coverage from consolidated Partnership results and noncontrolling interests.
- Review whether the Badlands acquisition generates the expected volumes and cash flow, and track the $50 million contingent-payment conditions and integration costs.
- Compare realized commodity prices, hedge settlements, unhedged volumes, and segment margins; assess how much of cash flow is fee-based versus commodity-sensitive.
- Test the funding plan and returns for the announced growth projects against capital spending, leverage, revolver capacity, equity issuance, and distribution commitments.
- Monitor the Partnership’s debt covenants, refinancing requirements, variable-rate exposure, and the effect of any distribution changes on TRC’s IDR receipts and shareholder dividends.
- Assess the operational and financial impact of Hurricane Isaac-related matters, plant outages, regulatory compliance costs, and the Badlands control systems not included in the year-end control audit.