Targa Resources Corp. (NYSE: TRGP) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Targa operates domestic midstream natural gas, NGL and crude oil gathering, processing, transportation, storage and marketing assets through Gathering and Processing and Logistics and Transportation segments. Dollar amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4,459.7 | $2,115.1 | $11,508.2 | $5,687.5 |
| Income (loss) from operations | $366.5 | $295.5 | $956.4 | $(1,568.9) |
| Net income (loss) | $288.0 | $172.2 | $671.3 | $(1,471.0) |
| Net income (loss) attributable to common shareholders | $160.4 | $36.9 | $319.3 | $(1,684.0) |
| Adjusted EBITDA (non-GAAP) | $505.9 | $419.1 | $1,481.4 | $1,198.5 |
| Distributable cash flow (non-GAAP) | $383.9 | $294.7 | $1,120.7 | $878.9 |
| Adjusted free cash flow (non-GAAP) | $297.2 | $189.3 | $892.8 | $360.4 |
- Revenue and margins: Q3 adjusted gross margin was $845.0, up from $792.2; adjusted operating margin was $655.6, versus $630.0. Nine-month figures were $2,348.4 and $1,803.1, respectively, versus $2,282.4 and $1,775.6. These are non-GAAP measures as defined by the company.
- Cash flow: Nine-month operating cash flow was $1,798.8, versus $1,095.7. Investing cash outflow was $299.6, including $321.6 of cash capital expenditures. Financing cash outflow was $1,513.4. Cash ended the period at $228.6.
- Debt and liquidity: Total debt obligations were $6,786.7 at September 30, down from $7,755.7 at December 31, 2020. Long-term debt was $6,434.1; current debt obligations were $352.6. Cash and cash equivalents were $228.6. Current liabilities exceeded current assets by approximately $875.0. Management reported $3,128.3 of total liquidity as of October 29, 2021, including cash and available revolving/securitization capacity, net of outstanding securitization borrowings and letters of credit. The company and Partnership were in compliance with debt covenants at quarter-end.
- Interest and distributions: Net interest expense was $91.0 in Q3 and $284.2 for nine months. Common dividends declared were $0.10 per share per quarter through Q3; Series A Preferred carries a cumulative 9.5% dividend.
Material changes versus prior comparable periods
- Q3 revenue rose 111% year over year, primarily reflecting higher commodity prices and increased NGL and natural gas volumes; commodity sales increased 124%, while midstream service fees rose 25%. Product purchases and fuel costs increased 173%, so the revenue increase did not translate proportionately into operating margin.
- Q3 common-shareholder income increased to $160.4 from $36.9. For the first nine months, the company reported a $671.3 net profit compared with a $1,471.0 net loss in 2020, which included a $2,442.8 noncash long-lived asset impairment charge.
- Nine-month adjusted EBITDA rose 24%; distributable cash flow increased 28%, and adjusted free cash flow increased 148%. Operating cash flow increased, while cash capital expenditures declined substantially from 2020 as major projects entered service.
- Commodity hedge effects were less favorable: nine-month commodity hedge-related revenue impacts included losses, and the fair value of derivatives moved from a $51.2 net liability at year-end 2020 to a $527.4 net liability at September 30, 2021.
- Debt transactions included issuing $1.0 billion of 4% senior notes due 2032 and redeeming several higher-coupon or nearer-term notes. The company recorded a net $16.6 loss from financing activities for the nine months, compared with a $47.4 gain in 2020.
Outlook, management commentary and risks
- Capital outlook: Management estimated 2021 net growth capital expenditures of approximately $350–$450 and maintenance capital expenditures, net of noncontrolling interests, of approximately $120. Future growth spending may vary with investment opportunities.
- Projects and capital allocation: The 200 MMcf/d Heim processing plant began operating in Q3 2021. The 250 MMcf/d Legacy Plant was expected to begin operations in Q4 2022. In November 2021, Targa also announced long-lead-item orders for a potential additional Permian Midland gas plant. Management said it intended to recommend increasing the Q4 2021 common dividend to $0.35 per share, payable in February 2022; it also announced plans to repurchase development-company joint venture interests for approximately $925 million in January 2022 and to redeem Series A Preferred over time after the redemption premium steps down in March 2022.
- Liquidity outlook: Management believed internally generated cash, borrowing capacity and other financing sources should be sufficient for operations, capital spending, debt obligations, collateral needs and dividends for at least the next twelve months, absent disruptive events. This is subject to commodity markets, operating performance, financing access and other factors.
- Operating risks: Key exposures include volatile natural gas, NGL and crude prices; hedging and counterparty risks; producer activity and throughput; interest rates; customer credit; and regulatory, permitting and weather-related events. COVID-19 impacts remained uncertain. The February 2021 winter storm temporarily disrupted operations and counterparties; Targa said its facilities had returned to full operation, though potential regulatory and counterparty impacts remained uncertain.
- Hedges: Commodity derivatives had a $527.4 net liability fair value at quarter-end. A hypothetical 10% commodity-price increase would raise that net liability to $676.5; a 10% decrease would reduce it to $378.3. The company expected to reclassify $581.7 of deferred hedge losses into earnings through 2025, including $433.7 over the following 12 months. Targa cautioned that derivative accounting can create earnings volatility.
- Contingency: In the Vitol dispute concerning the Channelview splitter agreement, a trial court awarded Vitol $129.0 plus interest and $10.5 in additional damages. Targa appealed; the appeal was pending. Targa retained liabilities related to the proceedings after selling Channelview in 2020.
Most important facts for investors to verify
- Whether higher commodity prices and Permian volumes sustain operating margin and cash generation, given the substantial rise in product costs and the sensitivity of results to hedging.
- Execution, timing, cost and expected returns of the Legacy Plant and potential additional Permian capacity, alongside the stated capital-spending outlook.
- Debt repayment and refinancing needs, the composition and availability of reported liquidity, and the effect of planned joint-venture interest repurchases and preferred-stock redemptions on leverage and cash distributions.
- Outcome and potential financial exposure from the Vitol appeal, and developments in FERC rate proceedings and winter-storm-related counterparty matters.
- Whether the proposed dividend increase and other capital-allocation plans are implemented as announced; these are forward-looking statements, not guarantees.