01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Targa Resources Corp. (NYSE: TRGP) completed its IPO on December 10, 2010, selling 18.8 million common shares at $22.00a (the selling shareholders received all proceeds).
Since the September 2010 conveyance of all remaining operating assets to Targa Resources Partners LP (NYSE: NGLS), TRGP no longer directly owns operating assets. Its cash flow now comes entirely from its 2%b general partner interest, 100% of the incentive distribution rights (IDRs, which pay up to 48% of incremental distributions), and 11.6 million common units (13.7% LP interest) in the Partnership. Because TRGP controls the general partner, the Partnership is consolidated, so headline consolidated figures are dominated by the Partnership's operations.
Consolidated 2010 results were mixed. Revenue rose 20.6% to $5.47 billionc and operating margin rose 2.2% to $521.3 million, but net income attributable to TRGP fell to a loss of $15.0 million (versus $29.3 million in 2009), largely due to $177.8 million of dividends on common equivalents and $9.5 million of Series B preferred dividends that reduced net income available to common shareholders to a loss of $202.3 million, or $(30.94) per share. Interest expense fell, reflecting debt reduction funded by Partnership equity issuances, while general and administrative expense rose 20% to $144.4 million, driven partly by IPO-related compensation.
Partnership adjusted EBITDA was $396.1 milliond, roughly flat versus $400.6 million in 2009. Looking forward, the filing emphasizes growth from fractionation expansions (Cedar Bayou, ~78 MBbl/d expected in service Q2 2011; Gulf Coast Fractionators expansion expected Q2 2012) and North Texas and SAOU gathering expansions, plus liquids-rich shale activity in the Permian and Barnett.
Risks include the Partnership's substantial leverage (about $1.45 billion of total debt at year-end 2010), a heavy reliance on percent-of-proceeds contracts (about 38% of gathered volumes) that expose margins to commodity prices, dependence on a single customer group (Chevron Phillips at roughly 10% of revenue), and regulatory changes around hydraulic fracturing, greenhouse gases and derivatives. Post year-end, the Partnership raised about $298 million of equity in January-February 2011 and issued $325 million of 6% notes due 2021 to reduce bank borrowings and refinance higher-cost 11% notes.
02—Key points
Key Highlights
- TRGP no longer owns operating assets directly; its income depends entirely on distributions from Targa Resources Partners LP, including a 2% GP interest, 100% of IDRs (13%/23%/48% splits) and 13.7% of the Partnership's common units.
- Consolidated 2010 revenue rose 20.6% to $5.47 billion, and operating margin rose 2.2% to $521.3 million, though net income attributable to TRGP was a $15.0 million loss.
- Net loss available to common shareholders was $202.3 million, or $(30.94) per share, after $177.8 million of dividends to common equivalents and $9.5 million of preferred dividends, reflecting the December 2010 IPO and preferred conversion.
- The Partnership's adjusted EBITDA was $396.1 million in 2010, roughly flat versus $400.6 million in 2009, with fractionation fee increases and higher volumes offset by lower NGL and condensate realizations.
- Growth pipeline includes the 78 MBbl/d Cedar Bayou Fractionator expansion (~$78 million gross, in service Q2 2011), a benzene treater (~$33 million, Q4 2011), and a 43 MBbl/d Gulf Coast Fractionators expansion (Q2 2012, about $29 million net to the Partnership).
- The Partnership's total debt was about $1.45 billion at year-end 2010, with about $765 million on its variable-rate revolver; post year-end equity and a $325 million 6% note offering were used to pay down bank debt.
- TRGP's cash is partly restricted: of $188.4 million on hand, $76.3 million belongs to the Partnership, and TRGP must use its cash to cover roughly $88 million of tax obligations tied to asset sales to the Partnership over the next decade.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Gross Profit | $955.50M— | — |
| Operating Expenses | $6.64B$5.28B | +25.8% |
| Operating Income | $351.10M$196.10M | +79.0% |
| Interest Expense | $111.70M$110.90M | +0.7% |
| Net Income | $30.70M-$15.00M | +304.7% |
| EPS (Basic) | $0.75$-30.94 | +102.4% |
| EPS (Diluted) | $0.74$-30.94 | +102.4% |
| Shares Outstanding (Basic) | 41.00M6.50M | +530.8% |
| Shares Outstanding (Diluted) | 41.40M6.50M | +536.9% |
05—Questions
Frequently Asked Questions
How does Targa Resources Corp. generate cash to pay its dividends?
TRGP's only cash inflows are distributions from Targa Resources Partners LP: 2% of distributions on its general partner interest, incentive distributions from its IDRs (13% to 48% of incremental quarterly cash), and distributions on its 11.6 million common units. Dividends to TRGP shareholders are set by the board after reserves for public-company costs, taxes, debt service and Partnership support obligations. The initial quarterly dividend was $0.2575 per share (pro-rated $0.0616 for the stub period), and the filing warns that dividends are not cumulative and are not guaranteed.
Why did TRGP report a net loss to common shareholders in 2010 even though operating margin increased?
The loss to common shareholders reflects deductions for $177.8 million of dividends paid to common equivalent holders of the Series B preferred stock before its December 2010 conversion, plus $9.5 million of preferred dividends. Net income attributable to TRGP was a $15.0 million loss, largely because of a $78.3 million allocation to noncontrolling interests (public Partnership unitholders) and higher G&A costs of $144.4 million, including IPO-related compensation. These are largely one-time or structural items rather than a deterioration in operating performance.
How concentrated are the Partnership's customers and suppliers?
Chevron Phillips Chemical Company accounted for about 10% of consolidated revenues in 2010, down from 15% in 2009 and 19% in 2008. Louis Dreyfus Energy Services accounted for about 10% of product purchases. No other customer or supplier exceeded 10%. The filing notes CPC may elect to terminate or renegotiate some contracts, which could reduce revenue and cash available for debt service.
What are the main risks to the Partnership's distributions and therefore to TRGP?
Key risks include high leverage (roughly $1.45 billion of debt, with a $1.1 billion revolver and variable-rate exposure), commodity price exposure under percent-of-proceeds contracts (about 37% to 38% of gathered volumes), dependence on new supply to offset natural production declines, and hedge counterparty and credit risk. Regulatory risks include potential FERC or state changes affecting gathering and intrastate pipelines, hydraulic fracturing restrictions, greenhouse gas rules, and Dodd-Frank derivatives legislation. Any reduction in Partnership distributions also disproportionately reduces TRGP's IDR income, since the IDR split steps down as distributions fall.
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