Targa Resources Corp. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; the supplied filing text does not provide a complete Q4 income statement or cash flow statement. Unless noted, amounts are U.S. dollars.
Business context
Targa is a North American midstream company operating Gathering and Processing and Logistics and Transportation businesses. Its assets gather and process natural gas and crude oil and transport, fractionate, store, market and export NGLs. In 2020, it processed an average 4,398 MMcf/d of natural gas and produced 529 MBbl/d of NGLs. Its operations were affected by pandemic-related demand declines, producer spending cuts and commodity-price volatility.
Key financial and operating metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $8,260 million | $8,671 million |
| Gross margin (non-GAAP) | $3,155 million | $2,553 million |
| Operating margin (non-GAAP) | $2,375 million | $1,760 million |
| Operating income (loss) | $(1,304) million | $193 million |
| Net income (loss) | $(1,325) million | $41 million |
| Net loss attributable to common shareholders | $(1,685) million; $(7.26) per share | $(334) million; $(1.44) per share |
| Adjusted EBITDA (non-GAAP) | $1,637 million | $1,436 million |
| Distributable cash flow (non-GAAP) | $1,173 million | $947 million |
| Free cash flow (non-GAAP) | $575 million | $(1,335) million |
| Cash provided by operating activities | $1,745 million | $1,390 million |
| Cash used in investing activities | $(738) million | $(3,072) million |
Gross margin rose 24% and operating margin rose 35%, while revenue fell 5%. The margin measures are non-GAAP and should be read with the company’s reconciliations. The reported net loss largely reflects $2,443 million of non-cash long-lived-asset impairments, primarily partial impairments in Central operations and a full impairment of Coastal operations. The company reported no additional impairment indicators in the remainder of 2020.
Gathering and Processing operating margin was $1,018 million, up 1%; gross margin fell 3% as lower Central volumes and prices offset Permian growth and hedge gains. Logistics and Transportation operating margin increased 30% to $1,128 million, supported by higher pipeline, fractionation and export volumes. Average total gas inlet volume declined 1% to 4,398 MMcf/d, while NGL production increased 5% to 529 MBbl/d.
Liquidity, debt and capital allocation
- Year-end cash was $243 million. At December 31, total debt obligations were approximately $7,756 million, including finance leases; reported long-term debt was $7,387 million. The filing states $7,801 million of total indebtedness excluding certain premiums, issuance costs and leases.
- At year-end, variable-rate borrowings were $555 million under the TRC revolver and $630 million across the Partnership revolver and securitization facility. A 100-basis-point increase would raise annual consolidated interest expense by an estimated $11.9 million.
- As of February 12, 2021, reported total liquidity was $3,167 million, including cash and available revolver and securitization capacity. The Partnership’s securitization facility had no availability at year-end but was reported as available in the February 12 liquidity table.
- Operating cash flow increased by $355 million year over year. Growth capital expenditures fell to $617 million from $2,567 million as major projects reached service; net growth capital expenditures for the company’s free-cash-flow calculation were $598 million.
- The quarterly common dividend was reduced from $0.91 to $0.10 per share beginning with the March 2020 quarter and remained at $0.10 through year-end. Targa also repurchased 5.49 million shares for $91.5 million during 2020.
- The Partnership redeemed its $125 million preferred units and Targa repurchased 45,800 Series A preferred shares for approximately $46 million, including unpaid dividends.
Changes, outlook and material matters
- COVID-19 and commodity conditions: Lower demand and prices, increased supply early in the year and producer shut-ins reduced activity and affected volumes and commodity sales. Targa said shut-in production had largely resumed by year-end, but demand, prices and service demand in 2021 remained uncertain. Management reported no material workforce or supply-chain disruption at the time of filing.
- Projects and asset sales: Train 7 and Train 8, each 110 MBbl/d, began operations in 2020; the Grand Prix Central Oklahoma Extension and LPG export expansion also entered service. The Channelview assets were sold for about $58 million. The Delaware crude system sale, for about $134 million, closed in early 2020 and was effective December 1, 2019.
- Capital outlook: Management estimated 2021 net organic growth capital expenditures of $350–$450 million and maintenance capital expenditures of about $130 million. No specific 2021 earnings or cash-flow guidance is provided in the supplied text. Management said existing liquidity and expected cash generation should meet anticipated 2021 needs, while emphasizing uncertainty.
- Financing after year-end: In February 2021, the Partnership issued $1.0 billion of 4% notes due 2032, using part of the proceeds to refinance 2025 notes and the remainder to repay revolver borrowings. TPL also announced redemptions of notes due 2021 and 2023.
- Legal contingency: In October 2020, a court awarded Vitol $129 million plus interest and $10.5 million for additional losses and demurrage in a dispute related to a crude splitter agreement. Targa appealed; the appeal was pending. Targa retained this liability after selling Channelview.
- Other risks: Key exposures include commodity prices and production activity, customer and derivative-counterparty credit, leverage and refinancing, potential further asset impairments, pipeline integrity and safety, severe weather, cyber incidents, environmental and climate regulation, and permitting or project execution. Management estimated average pipeline integrity testing costs of $4.9 million annually for 2021–2023, excluding potentially substantial repairs.
Important facts for investors to verify
- Review the impairment assumptions and sensitivity of the $2.443 billion charge, including forecast volumes, commodity prices, discount rates and terminal values.
- Reconcile debt measures and confirm borrowing availability, maturities, covenant headroom and the effects of the February 2021 refinancing.
- Assess whether the improved free cash flow and segment margins are sustainable as growth spending falls and commodity and producer activity remain uncertain.
- Track the Vitol appeal, potential exposure beyond the recorded deferred revenue, and any resulting cash payment or recovery.
- Confirm dividend sustainability, the remaining authorization under the $500 million share repurchase program, and the cost and terms of outstanding Series A preferred stock.
- Assess the timing, cost and expected utilization of the Heim Plant and other recent expansions, along with the impact of the temporary idling of Gulf Coast Fractionators.
Controls and audit: The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2020.