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Targa Resources Can Produce 10% Distribution Growth in 2013

Targa Resource Partners (NGLS) is a buy recommendation for income investors.  The MLP has a current dividend yield of 5.98%.  NGLS has a 5-year average annual dividend growth rate of 10%.  NGLS is a strong buy recommendation with a 12-month target price of $51.

Targa Resource Partners announced that the board of directors of its general partner has declared a quarterly cash distribution of $0.6975 per common unit, or $2.79 per common unit on an annualized basis, for the first quarter 2013.  The approved distribution represents an increase of approximately 3% over the previous quarter’s distribution and 12% over the distribution for the first quarter 2012. This cash distribution will be paid May 15, 2013 on all outstanding common units to holders of record as of the close of business on April 29, 2013.

First quarter 2013 net income attributable to Targa Resources Partners

was $38.9 million compared to $70.1 million for the first quarter of 2012. Net income per diluted limited partner unit was $0.16 in the first quarter of 2013 compared to $0.63 for the first quarter of 2012. The Partnership reported earnings before interest, income taxes, depreciation and amortization and other non-cash items (“Adjusted EBITDA”) of $132.2 million for the first quarter of 2013 compared to $145.4 million for the first quarter of 2012.

NGLS is a quality mid-cap natural gas processing and fractionation MLP that has an impressive array of fee-based expansion projects set to come into service over the next 18-24 months that should help to offset an over-supplied, and consequently, soft NGL pricing environment for the next three years. The key question regarding investing in NGLS is how the fee-based operating margin from the expansions will offset the drag from likely NGL over-supply. We believe that NGLS’ recent emphasis on fee-based operations will allow it to continue providing its unitholders distribution growth well above the sector average. Given the increasing percentage of fee-based projects, NGLS’s mix should improve to near 55% by the end of 2013 and 65% by the end of 2014. NGLS reiterated its guidance of 10%-12% distribution growth for 2013 and is comfortable having 0.9x coverage for the first half of the year which improves as the year goes on and as expansion projects are completed. Management is guiding to an average of ~1.0x for FY2013. We are modeling high single digit distribution growth for the next several years.

We are holding our three-year distribution growth forecast of 9% CAGR. NGLS’s 4Q results give us confidence that the growing fee-based portion of its business (Logistics, Marketing, Badlands) could support distribution growth despite a challenged NGL pricing environment for the next few years.

We are making minor changes to our outlook with DCF/unit adding $0.03 to $2.97 in FY2013 on lower assumed equity issuance, though EBITDA drops $23mm to $623mm after the 1Q miss and re-setting our commodity price deck. NGLS reiterated its $595mm-$655mm EBITDA guidance for 2013 and 1.0x distribution coverage for 2013 overall.

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