Targa Resources Corp. (NYSE: TRGP) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Targa is a North American midstream company providing natural gas gathering and processing, NGL transportation and logistics, and crude oil services. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $4,959.1 | $3,632.7 | Up 37% |
| Income from operations | $295.8 | $344.1 | Down 14% |
| Net income | $168.6 | $227.9 | Down 26% |
| Net income attributable to Targa | $88.0 | $146.4 | Down 40% |
| Net income attributable to common shareholders | $13.1 | $124.6 | Down 89% |
| Basic / diluted EPS | $0.06 / $0.06 | $0.54 / $0.53 | Lower |
| Operating cash flow | $748.2 | $679.8 | Up $68.4 |
| Adjusted EBITDA (non-GAAP) | $625.8 | $515.7 | Up 21% |
| Distributable cash flow (non-GAAP) | $494.6 | $397.4 | Up 24% |
| Adjusted free cash flow (non-GAAP) | $373.2 | $336.4 | Up 11% |
- Commodity sales rose 36% to $4,566.2, reflecting higher commodity prices and natural gas volumes, partly offset by lower NGL volumes and unfavorable hedge impacts. Midstream service fees increased 48% to $392.9.
- Product purchases and fuel increased 48% to $4,204.1, outpacing revenue growth. Operating income declined despite higher segment activity and adjusted EBITDA.
- Gathering and Processing adjusted operating margin was $514.2, up 35%; Logistics and Transportation adjusted operating margin was $419.0, up 1%. Other included $178.3 of losses, primarily mark-to-market losses on derivatives not designated as cash flow hedges.
- Capital expenditures were $162.5 before changes in project payables; cash outlays for capital projects were $204.4, versus $96.2 a year earlier. Investing cash flow was negative $197.0. Financing cash flow was negative $573.8, including the $926.3 DevCo JV repurchase.
Balance sheet, debt and liquidity
- At March 31, 2022, cash was $135.9; total assets were $15,295.4; total debt obligations were $7,248.7, including $283.8 current debt and $6,964.9 long-term debt. Total debt obligations increased from $6,597.2 at year-end 2021.
- Current assets were $1,900.5 and current liabilities were $2,910.4. The company attributed the $481.2 decrease in working capital from year-end primarily to higher commodity-related payables, derivative liabilities and securitization borrowings.
- The new $2.75 billion TRGP revolving credit facility matures in February 2027. At March 31, availability was $1.7 billion; the Partnership’s receivables securitization facility had $130.0 million available. Targa and the Partnership were in compliance with debt covenants.
- As of May 3, reported total liquidity was $1,335.3, after outstanding borrowings and letters of credit. Management said expected operating cash flow, borrowing capacity and other funding sources should cover operations, capital needs, debt obligations, collateral requirements and dividends for at least the next 12 months.
Material changes and significant transactions
- In January, Targa paid $926.3 to acquire Stonepeak’s interests in the DevCo joint ventures, including interests in Grand Prix, Train 6 and GCX. The transaction reduced noncontrolling interests by $857.9 and generated a $53.1 after-tax premium that reduced income attributable to common shareholders.
- Targa agreed to sell its 25% interest in Gulf Coast Express for approximately $857; proceeds were expected in Q2 2022. In April, it completed the approximately $200 Southcross acquisition in South Texas.
- In March, the Partnership redeemed its 5.375% notes due 2027, recording a $15.0 extinguishment loss. In April, Targa issued $1.5 billion of senior notes due 2033 and 2052; proceeds funded the tender and redemption of Partnership 5.875% notes and repaid revolver borrowings. A further $33.5 extinguishment loss was expected in Q2.
- In May, Targa redeemed all Series A preferred stock for approximately $973.4, including accrued dividends; a $223.7 deemed dividend was expected in Q2. The preferred carried a 9.5% cumulative dividend. Targa also raised the common dividend to $0.35 per share quarterly, or $1.40 annualized.
Outlook, risks and contingencies
- Management estimated 2022 net growth capital expenditures of $700–$800 and maintenance capital expenditures of approximately $150. Projects included two 275 MMcf/d Permian Midland processing plants expected online in Q4 2022 and Q2 2023, and a 275 MMcf/d Permian Delaware plant expected online in Q3 2023; the Midway plant is expected to replace the idled Sand Hills plant.
- Commodity prices, production and throughput, customer and counterparty credit, capital-market access, interest rates, regulation, weather, and COVID-19-related disruptions could affect results. Targa disclosed the Ukraine conflict and commodity volatility among its forward-looking risks.
- Derivative positions had a net fair-value liability of $737.7 at March 31, versus $316.7 at year-end. A hypothetical 10% commodity-price increase would raise the estimated liability to $930.6; a 10% decrease would reduce it to $544.8. Targa reported that a one-notch downgrade below investment grade by both Moody’s and S&P could require approximately $126 of collateral under its ISDA agreements.
- Vitol litigation remains a material contingency. A trial court awarded Vitol $129.0 plus interest and $10.5 in additional damages; Targa appealed, and the appeal was pending. Targa retained the liabilities after selling the relevant subsidiary.
- The IRS is examining Targa’s CARES Act NOL carryback; management did not anticipate material changes in prior-year taxable income. The filing also describes environmental and other ordinary-course proceedings.
Important facts for investors to verify
- Whether rising commodity prices and volumes translate into sustained cash generation, given the increase in product purchases and fuel and the effect of hedges.
- Post-quarter uses of the GCX sale proceeds and note-issuance proceeds, the resulting debt balance, and the effect of the preferred-stock redemption on liquidity and common-shareholder returns.
- Execution, timing, cost and expected returns of the announced processing-plant projects and the Southcross acquisition.
- Progress and potential exposure from the Vitol appeal, IRS examination, derivative collateral requirements and counterparty credit risk.
- How the non-GAAP measures reconcile to GAAP results; common-shareholder earnings included the $53.1 repurchase premium in Q1, while the preferred redemption was a subsequent event.