Targa Resources Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Targa is a North American midstream company operating gathering and processing and logistics and transportation businesses. Unless otherwise noted, amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $3,632.7 million | $2,048.9 million |
| Gross margin | $796.4 million | $846.8 million |
| Operating margin | $625.3 million | $666.0 million |
| Net income (loss) | $227.9 million | $(1,820.3) million |
| Net income (loss) attributable to Targa | $146.4 million | $(1,737.8) million |
| Net income attributable to common shareholders | $124.6 million | $(1,769.7) million |
| Diluted earnings (loss) per common share | $0.53 | $(7.60) |
| Adjusted EBITDA | $515.7 million | $428.1 million |
| Distributable cash flow | $397.4 million | $301.9 million |
| Free cash flow | $336.4 million | $40.7 million |
| Cash from operating activities | $679.8 million | $452.6 million |
- Revenue rose 77%, primarily reflecting higher commodity prices and increased NGL volumes. Commodity sales increased 89%; midstream service fees declined 2%.
- Despite higher revenue, gross and operating margin each fell 6%. Segment operating margin increased in Gathering and Processing (8%) and Logistics and Transportation (19%), but Other segment margin fell to $1.5 million from $116.3 million, chiefly reflecting lower mark-to-market derivative results.
- Cash used in investing activities was $90.0 million, including $96.2 million of property and equipment outlays. Financing activities used $584.1 million; cash increased $5.7 million to $248.5 million.
- Total debt obligations were $7,372.7 million at quarter-end, down from $7,755.7 million at December 31, 2020. Series A Preferred Stock had a $749.7 million carrying value and a 9.5% cumulative dividend.
Material changes and notable items
- Q1 2020 results included a $2,442.8 million noncash impairment charge related primarily to certain Central and Coastal operations; no impairment indicators were identified in Q1 2021. The prior-period loss also included a tax benefit.
- In February, the Partnership issued $1.0 billion of 4% notes due 2032, using proceeds in part to redeem 5.25% notes due 2025 and repay revolving-credit borrowings. Debt extinguishments resulted in a net loss from financing activities of $14.7 million in Q1 2021.
- Early adoption of ASU 2020-06 changed the accounting presentation for Series A Preferred Stock and eliminated accretion of its beneficial-conversion discount as a deemed dividend.
- February’s severe winter storm temporarily disrupted operations and throughput. Targa reported facilities had returned to full operation and volumes to pre-storm levels, but recognized an estimated $30 million aggregate benefit in Q1 from storm-related price and operational volatility.
- Management reported $3.3 billion of total liquidity as of April 30, 2021, including cash and available capacity under credit and receivables facilities. The Partnership’s receivables facility was increased to $400 million in the second quarter.
Outlook, risks and contingencies
- Management estimated 2021 net growth capital expenditures of approximately $350–$450 million for announced projects and maintenance capital expenditures of approximately $130 million, net of noncontrolling interests.
- Management said existing cash, operating cash flow, borrowing capacity and potential capital-market, joint-venture or asset-sale resources were expected to cover operations, capital expenditures, debt obligations, collateral needs and quarterly dividends for at least the next 12 months, absent disruptive events.
- The Heim Plant, a relocated 200 MMcf/d Permian Midland processing plant, was expected to begin operations in Q4 2021.
- Management cited continuing uncertainty around COVID-19 effects on energy demand and commodity markets. It also said the full financial effect of the winter storm remained uncertain, including due to potential repricing, settlement adjustments and customer or counterparty risks.
- Targa is appealing a court award to Vitol of $129.0 million plus interest and $10.5 million in additional damages related to a terminated splitter agreement. Targa retained these liabilities after selling Targa Channelview in October 2020; the appeal was pending at filing.
- Commodity prices, throughput, hedging outcomes, counterparty performance, weather, access to capital and debt-market conditions are key risks. Derivative contracts had a net fair-value liability of $90.3 million at March 31; a hypothetical 10% commodity-price increase would move it to a net liability of $182.8 million. The filing states Targa and the Partnership were in compliance with debt covenants.
- The Partnership gave notice on April 1 to redeem its outstanding 4.25% notes due 2023 on May 17, 2021. The filing provides no earnings guidance.
Important facts for investors to verify
- Track segment margins and volumes separately from reported revenue, which is heavily affected by commodity prices and product purchases.
- Monitor resolution and potential cash exposure from the Vitol litigation, including the appeal and retained liabilities.
- Review debt maturities, refinancing activity, facility availability and the distinction between Targa’s obligations and Partnership debt consolidated in its financial statements.
- Assess commodity hedge settlements, mark-to-market volatility, and collateral or counterparty exposure.
- Confirm actual 2021 capital spending, Heim Plant timing, and whether management’s liquidity and distribution assumptions remain achievable.