Targa Resources Corp. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Targa is a North American midstream operator providing natural gas gathering and processing, NGL logistics and transportation, and crude oil services. All dollar amounts below are in millions unless otherwise stated.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5,360.1 | $4,459.7 | $16,375.0 | $11,508.2 |
| Operating income | $430.0 | $366.5 | $1,177.6 | $956.4 |
| Net income | $279.3 | $288.0 | $1,135.5 | $671.3 |
| Net income attributable to Targa | $193.1 | $182.2 | $877.5 | $384.8 |
| Net income attributable to common shareholders | $193.1 | $160.4 | $578.9 | $319.3 |
| Adjusted EBITDA (non-GAAP) | $768.6 | $505.9 | $2,060.8 | $1,481.4 |
| Distributable cash flow (non-GAAP) | $594.9 | $383.9 | $1,623.2 | $1,120.7 |
| Adjusted free cash flow (non-GAAP) | $290.8 | $297.2 | $998.4 | $892.8 |
Q3 operating margin was approximately 8.0% of revenue. Revenue rose 20% year over year in Q3; operating income increased 17%, while consolidated net income declined 3%. Targa-attributable income increased 6% in Q3 and 128% for the nine-month period. Nine-month common-shareholder income includes a $435.9 million gain on the GCX investment sale and is reduced by $215.5 million of deemed preferred dividends and a $53.1 million premium on repurchased noncontrolling interests.
- Cash flow and investment: Nine-month operating cash flow was $1,843.3, versus $1,798.8 a year earlier. Investing cash outflow was $3,647.6, including $3,514.8 for the Delaware Basin acquisition and $815.4 in property, plant and equipment outlays, partly offset by $857.0 of GCX sale proceeds. Financing cash inflow was $1,838.7. Cash at September 30 was $192.9.
- Margins and operations: Q3 segment operating margin was $564.6 for Gathering and Processing and $340.2 for Logistics and Transportation, compared with $361.4 and $280.7, respectively, in Q3 2021. Higher volumes, fees and commodity realizations supported growth; unhedged mark-to-market derivative losses reduced “Other” margin to negative $112.2.
- Debt and liquidity: Total debt obligations were $11,197.8 at September 30, up from $6,597.2 at year-end 2021; long-term debt was $10,431.3. Variable-rate borrowings were $3.4 billion; management estimated a 100-basis-point rate increase would add $34.3 million to annual interest expense. At October 28, reported total liquidity was $2,146.5. The company and Partnership were in compliance with debt covenants.
- Capital returns: Common dividends were $0.35 per share quarterly ($1.40 annualized). Targa repurchased 3.0 million shares for $196.8 during the first nine months; $171.8 remained under its $500 million repurchase authorization.
Material changes versus the prior comparable period
- Q3 revenue increased $900.4; commodity sales rose 17% and midstream-service fees rose 64%. Management attributed the changes to higher natural gas and condensate prices, greater volumes, higher service fees and the Delaware Basin acquisition, partly offset by lower NGL prices and unfavorable hedges.
- Q3 adjusted EBITDA increased 52%, but adjusted free cash flow declined 2%, reflecting substantially higher growth capital expenditures. Nine-month growth capital expenditures, net of specified contributions, were $624.8 versus $227.9.
- The July acquisition of Lucid Energy Delaware for approximately $3.5 billion added about 1,050 miles of pipelines and 1.4 Bcf/d of processing capacity. The acquired operations contributed $104.0 of revenue and $4.7 of net income from August 1 through September 30.
- Other significant transactions included the $926.3 DevCo joint-venture interest repurchase, the $857.0 GCX sale, and redemption of all Series A Preferred Stock in May for approximately $973.4 including unpaid dividends.
Outlook, risks and unusual items
- Management estimated 2022 net growth capital expenditures of $1.1–$1.2 billion for announced projects and maintenance capital expenditures of approximately $150 million. It stated that available cash, operating cash flows, borrowing capacity and capital-market access should be adequate for operations, obligations, capital spending and dividends for at least the next 12 months.
- Planned projects include Permian processing plants, Train 9 fractionation capacity expected in Q2 2024, and the Daytona NGL pipeline, expected in service by year-end 2024 at an estimated cost of approximately $650 million. These plans and timing are subject to execution and market risks.
- Key risks include commodity-price and interest-rate volatility, hedge and counterparty performance, producer activity and throughput, access to capital, regulation, weather and economic conditions. Commodity derivative liabilities had a net fair value of $330.1; a hypothetical 10% commodity-price increase would increase the net liability to $556.2. A one-notch downgrade below investment grade by both Moody’s and S&P could trigger an estimated $77.4 collateral posting under derivative agreements.
- Vitol litigation remains material: a Texas appellate court upheld the $129.0 million return-of-payments award but removed $10.5 million of crude-oil loss and demurrage damages. Targa is preparing a further appeal; accrued interest on the award would have been approximately $39.6 through September 30 if accrued.
- The filing notes an error in disclosure of future debt-interest payment obligations in earlier quarterly filings, which the company said was not material to previously issued historical financial-statement disclosures. The 10-Q reports $4,870.7 of total future interest obligations at September 30.
- The company did not anticipate near-term applicability of the Inflation Reduction Act corporate alternative minimum tax, but said it may become applicable in a subsequent tax year. IRS examinations of tax matters were ongoing; management did not anticipate material changes.
Most important facts for investors to verify
- Whether acquisition-driven volume and fee growth translates into sustained cash generation after elevated growth capital spending and higher interest costs.
- Debt trajectory, variable-rate exposure, refinancing needs and liquidity following the Delaware Basin acquisition; confirm current borrowing availability and covenant headroom.
- Progress, cost and expected returns for announced processing, fractionation and pipeline projects, including the Daytona pipeline and Train 9.
- Outcome and potential financial impact of the Vitol appeal, including interest exposure.
- How commodity hedges, mark-to-market movements and any collateral requirements affect reported results and liquidity.
- Final purchase-price allocation for the Delaware Basin acquisition and any subsequent changes to acquired asset values or amortization.