Targa Resources Corp. — Q2 2022 Form 10-Q
Business context and reporting period
For the quarter and six months ended June 30, 2022; financial amounts below are in millions unless stated otherwise. Targa is a North American midstream company operating Gathering and Processing and Logistics and Transportation businesses, with exposure to natural gas, NGLs, crude oil and fee-based services.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $6,055.8 | $3,415.9 | $11,014.9 | $7,048.7 |
| Operating income | $451.9 | $245.8 | $747.7 | $589.9 |
| Net income | $687.6 | $155.4 | $856.2 | $383.3 |
| Net income attributable to Targa | $596.4 | $56.2 | $684.4 | $202.6 |
| Net income attributable to common shareholders | $372.7 | $34.4 | $385.8 | $158.9 |
| Adjusted EBITDA (non-GAAP) | $666.4 | $460.0 | $1,292.1 | $975.7 |
| Distributable cash flow (non-GAAP) | $533.4 | $339.5 | $1,028.2 | $737.0 |
| Adjusted free cash flow (non-GAAP) | $334.1 | $256.1 | $707.5 | $592.6 |
- Q2 operating income was approximately 7.5% of revenue, versus 7.2% a year earlier. Revenue increased largely with commodity prices; commodity sales rose 82% in Q2, while midstream service fees rose 33%.
- For the six months, cash from operations was $1,383.7, versus $1,303.6. Investing activities provided $248.4, primarily reflecting GCX sale proceeds, while cash used in financing was $1,636.6. Cash ended June at $154.0, compared with $158.5 at year-end 2021.
- At June 30, total debt obligations were $7,460.8, including $414.6 current debt and $7,046.2 long-term debt. Debt was $6,597.2 at year-end 2021. Cash was $154.0; current liabilities exceeded current assets by about $989 million.
- As of July 29, management reported total liquidity of $1,267.1 after borrowings and letters of credit, including cash of $178.7. Management stated available resources were expected to fund operations, capital spending, debt obligations, collateral needs and dividends for at least 12 months.
Material changes versus the prior comparable period
- Q2 revenue rose $2,639.9 year over year, reflecting higher commodity prices and volumes; management attributed $2,506.1 of the increase to prices and $98.0 to higher NGL and natural gas volumes. Higher product purchases and fuel costs partly offset the revenue benefit.
- Q2 adjusted EBITDA increased 45%; six-month adjusted EBITDA increased 32%. Six-month operating cash flow increased $80.1.
- Growth and maintenance capital spending increased: six-month cash outlays for capital projects were $419.5, compared with $198.9 in 2021.
- Q2 net income included a $435.9 gain on the sale of the GCX equity-method investment. Common-shareholder earnings also reflected $215.5 of deemed dividends arising from the Series A Preferred redemption. These unusual items make reported earnings less representative of recurring operations.
Guidance, outlook, risks and unusual items
- Management estimated 2022 net growth capital expenditures of $1.0–$1.1 billion for announced projects and maintenance capital expenditures of approximately $150 million. Projects include new 275 MMcf/d processing plants and a planned 120 MBbl/d fractionator; expected start-up dates range from late 2022 to 2024. The filing does not provide earnings guidance.
- On July 29, 2022, after quarter-end, Targa completed the approximately $3.55 billion cash acquisition of Lucid Energy Delaware. It also issued $1.25 billion of notes and entered a $1.5 billion, three-year term loan to fund part of the acquisition. The company said purchase accounting and pro forma information were not yet available.
- Targa redeemed all Series A Preferred in May for $973.4 million, including unpaid dividends, and had none outstanding at quarter-end. It also repurchased $926.3 million of noncontrolling interests in its development joint ventures and continued common-stock buybacks.
- Commodity derivatives had a net fair-value liability of $556.5 at June 30. Management cited commodity-price volatility, potential collateral requirements, counterparty credit, interest rates and operating costs as risks. A one-notch downgrade below investment grade by both Moody’s and S&P could have required $69.6 of collateral under derivative agreements.
- The Vitol dispute remains on appeal: a trial court awarded $129.0 plus interest and $10.5 in additional damages; Targa retained the related liabilities after selling Targa Channelview. Environmental and other proceedings also arise in the ordinary course of business. The filing does not state a clear ultimate loss estimate for these matters.
- Management reported compliance with debt covenants at June 30. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of earnings and cash generation is recurring after excluding the GCX gain, preferred-stock redemption effects and derivative mark-to-market movements.
- Lucid acquisition financing, purchase accounting, integration and resulting leverage, including subsequent borrowing and liquidity needs.
- Progress, timing, cost and expected returns for announced processing and fractionation projects, against the 2022 capital expenditure estimates.
- Commodity hedge settlements, derivative liabilities and collateral exposure as prices and credit ratings change.
- Outcome and financial exposure of the Vitol appeal, including interest and any additional damages.