01—Abstract
Summary
Summary of the 10-K filed February 14, 2014. Cited figures are marked; the original filing is the authoritative source.
Targa Resources Corp. (TRGP) is a holding company with no direct operating assets; its cash flow comes entirely from distributions on its 2%a general partner interest, all incentive distribution rights (IDRs, paying up to 48%), and 12.9 million common units (about 11.5%) of Targa Resources Partners LP (NGLS).
Consolidated 2013 revenue rose 11% to $6.56 billionb, operating margin rose 16% to $801 million, and net income attributable to TRC common shareholders rose 71% to $65.1 million. Partnership adjusted EBITDA reached $629 million, up 22%, and distributable cash flow to TRC grew to $116.6 million from $78.3 million. The Partnership's growth was driven by its Badlands Bakken acquisition (about $976 million), CBF Train 4, the international LPG export expansion, and new North Texas and SAOU processing plants.
Investors should weigh the structural dependence on the Partnership's distributions and IDR economics. The IDRs are disproportionately exposed to distribution levels, and the company carries $84 millionc on its own revolver, while the Partnership carries roughly $2.9 billion of consolidated debt. Commodity exposure is partly hedged, with natural gas hedges through 2016 and NGL and condensate hedges through 2014.
Management guided to roughly $650 milliond of Partnership growth capex in 2014, funded by the Partnership's revolver, securitization facility, and equity issuance. The quarterly dividend was $0.6075 per share, annualized at about $2.43, up from $1.64 in 2012. Overall, the filing shows a strong growth year for the Partnership and a rising dividend at TRC, but TRC's dividend coverage and growth depend on continued Partnership distribution increases, which in turn depend on capital market access and commodity-driven volume and margin trends.
02—Key points
Key Highlights
- Consolidated revenue of $6,556.0M (up 11% from $5,885.7M) and operating margin of $801.2M (up 16%).
- TRC net income attributable to common shareholders of $65.1M, up 71% from $38.1M, or $1.55 diluted EPS (vs. $0.91).
- Partnership adjusted EBITDA of $629.2M, up 22% from $514.9M; Partnership distributable cash flow of $440.3M (up 24%).
- TRC distributable cash flow of $116.6M (up 49% from $78.3M), covering declared dividends of about $87.8M paid in 2013.
- TRC declared dividends of $2.2050 per share in 2013 (up 35% from $1.6388), with the Q4 2013 dividend at $0.6075 per share.
- Growth capex of about $1.0B in 2013 (Badlands, CBF Train 4, export Phase I) with about $650M planned for 2014 (International Exports Phase II, Badlands, Longhorn and High Plains plants).
- Partnership total debt of about $2.9B, with a TRC non-Partnership revolver of $84M; both entities reported compliance with covenants as of December 31, 2013.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 14, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Gross Profit | $1.18B$1.01B | +17.0% |
| Operating Income | $368.20M$336.30M | +9.5% |
| Interest Expense | $134.10M$120.80M | +11.0% |
| Net Income | $65.10M$38.10M | +70.9% |
| EPS (Basic) | $1.56$0.93 | +67.7% |
| EPS (Diluted) | $1.55$0.91 | +70.3% |
| Shares Outstanding (Basic) | 41.60M41.00M | +1.5% |
| Shares Outstanding (Diluted) | 42.10M41.80M | +0.7% |
05—Questions
Frequently Asked Questions
How does Targa Resources Corp. generate its cash to pay dividends?
TRC owns no operating assets directly. Its cash comes from distributions on its 2% general partner interest, its IDRs (13%, 23% and 48% of incremental distributions above defined thresholds), and 12,945,659 Partnership common units (about 11.5%). After paying taxes, corporate G&A and debt service, the remainder is paid as dividends.
What drove the increase in TRC's earnings in 2013?
Higher Partnership operating margin, driven by the Badlands acquisition, new fractionation capacity at CBF Train 4, higher LPG export volumes, and higher fee-based revenue. Net income attributable to TRC also benefited from higher IDR distributions, which rose to $103.1M from $63.3M, and from a $15.3M reversal of Badlands contingent consideration.
What are the main risks to TRC's dividend?
The main risks are a reduction in Partnership distributions, which are disproportionately felt through the IDRs; commodity price and volume declines affecting percent-of-proceeds contracts; the Partnership's ability to access capital markets for growth; and regulatory developments, including FERC, pipeline safety and hydraulic fracturing rules. The filing also notes that TRC's own dividend is not cumulative, and that its credit facility limits dividends during a default.
How leveraged is the Partnership and the parent company?
The Partnership had about $2.93B of total debt at year-end 2013 (including $2.26B of senior unsecured notes and $395M drawn on its $1.2B revolver), with $718M of revolver availability. TRC's non-Partnership revolver had $84M drawn against a $150M commitment. The Partnership reports a leverage covenant of no more than 5.50x, and TRC's covenant is 4.00x.
What is the outlook for 2014 growth investment?
The Partnership expects roughly $650M of gross growth capex in 2014 and about $90M of net maintenance capex. Major projects include Phase II of the international export expansion (about $480M total for both phases, completion in Q3 2014), the Badlands expansion (about $180M), the North Texas Longhorn plant (about $150-180M) and the SAOU High Plains plant (about $225M). Both are 200 MMcf/d cryogenic plants targeted for mid-2014.
06—Continue