Targa Resources Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Targa provides natural gas gathering and processing, NGL logistics and transportation, and crude oil services. The filing describes the quarter as affected by the COVID-19 demand shock and a sharp decline in commodity prices.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $2.049 billion | $2.299 billion | Down 11% |
| Gross margin (non-GAAP) | $860.6 million | $573.4 million | Up 50% |
| Operating margin (non-GAAP) | $666.0 million | $383.2 million | Up 74% |
| Operating income (loss) | $(2.078) billion | $61.3 million | Includes $2.443 billion impairment charge |
| Net income (loss) | $(1.820) billion | $(24.7) million | Loss substantially increased |
| Net loss attributable to common shareholders | $(1.770) billion | $(69.7) million | $(7.60) per diluted share, versus $(0.30) |
| Adjusted EBITDA (non-GAAP) | $428.1 million | $304.2 million | Up 41% |
| Distributable cash flow (non-GAAP) | $301.9 million | $187.0 million | Up 61% |
| Cash provided by operating activities | $452.6 million | $307.6 million | Up $145.0 million |
| Cash used in investing activities | $(201.9) million | $(1.069) billion | Lower capital spending and asset-sale proceeds |
Revenue fell as commodity prices weakened, partly offset by higher volumes and favorable hedge effects. Lower product-purchase costs supported higher reported margins. Management also cited a change in Badlands transportation arrangements that shifted certain amounts from net fee presentation to gross commodity sales and purchases, without changing operating or gross margin.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $375.2 million; total assets were $16.027 billion and total owners’ equity was $6.373 billion.
- Total debt obligations were $7.920 billion, including $280.6 million of current debt obligations and $7.640 billion of long-term debt. The company consolidates Partnership debt, but states it is not contractually obligated to make payments on that debt.
- Current assets of $1.214 billion slightly exceeded current liabilities of $1.196 billion. At quarter-end, the Partnership’s $400 million receivables securitization facility had no availability; the company reported $235 million available under its $670 million TRC revolver and $1.767 billion under the Partnership’s $2.2 billion revolver.
- As of May 1, 2020, reported consolidated total liquidity was $2.085 billion. The filing says the company and Partnership were in compliance with debt covenants at March 31.
- Net cash used in financing activities was $206.6 million. Targa paid $239.1 million in common and preferred dividends, while net borrowings and debt repurchases also affected financing cash flows.
Material changes and operating performance
- The $2.443 billion non-cash impairment was primarily related to partial impairment of Mid-Continent gas processing and gathering assets and full impairment of Coastal operations, within Gathering and Processing. It included $208.6 million of intangible-asset impairment. Management used a 14.0% weighted-average discount rate and warned that further impairments could occur.
- Gathering and Processing operating margin rose 7% to $255.7 million. Total plant inlet volumes increased 11% and NGL production increased 19%, with growth in the Permian and Badlands partly offset by weaker Central-region volumes.
- Logistics and Transportation operating margin rose 93% to $294.0 million, driven by higher fractionation, pipeline transportation and export volumes, including Grand Prix and new fractionation capacity.
- Interest expense increased 22% to $98.0 million, attributed to higher average borrowings and lower capitalized interest. The Partnership recognized a $39.3 million gain from repurchasing $162.7 million of notes for $122.1 million.
- Growth capital expenditures were $277.0 million, versus $870.0 million a year earlier; maintenance capital expenditures were $26.8 million, versus $35.6 million.
Outlook, risks and unusual items
- Management reduced 2020 growth-capital guidance to approximately $700–$800 million, net of noncontrolling interests and net contributions to unconsolidated affiliates, from $1.2–$1.3 billion. Expected 2020 maintenance capital expenditures were approximately $130 million. Management said most remaining growth spending relates to projects already predominantly funded.
- The quarterly common dividend was cut to $0.10 per share from $0.91 per share in the prior quarter. Management estimated the reduction would provide approximately $755 million of additional annual direct cash flow for debt reduction. The filing reports the $0.10 dividend declared for Q1, payable May 15, 2020; it does not establish future dividend levels.
- Management said it believed liquidity would be sufficient for working capital, debt service and capital expenditures through the remainder of 2020 and beyond, while acknowledging uncertainty about the pandemic’s duration and effects. It also described cost-reduction efforts and no material workforce or supply-chain disruption as of the filing.
- COVID-19, reduced energy demand, low commodity prices, producer spending cuts and potential production shut-ins may reduce throughput and service demand. Reduced crude storage availability and financing-market volatility add risk. Fee-based contracts and hedging mitigate, but do not eliminate, exposure.
- In April, the Partnership repurchased $140.5 million face value of senior notes for $117.8 million. On April 22, it amended its receivables securitization facility, reducing its size from $400 million to $250 million and extending its termination date to April 21, 2021. Targa also requested a $44.2 million tax refund under the CARES Act.
- Targa and Vitol are litigating over a terminated crude-oil and condensate splitter agreement. Vitol seeks return of $129 million in prior payments and additional damages; Targa disputes that it owes a refund. The filing does not provide a clear estimate of the ultimate outcome.
- The company established a $251.4 million valuation allowance against deferred tax assets in the quarter. It also disclosed an IRS examination of its 2014–2016 federal tax returns and said it did not anticipate material changes in prior-year taxable income.
Important facts for investors to verify
- Whether subsequent commodity prices, producer activity, shut-ins and volumes lead to additional impairments or weaker operating cash flow.
- Whether available liquidity remains adequate, particularly after the securitization facility reduction, and how debt levels and maturities evolve.
- Whether the revised capital-spending plan and dividend reduction are maintained, and whether the intended cash savings support debt reduction.
- How much of reported margin and cash-flow improvement is sustainable; review non-GAAP reconciliations and the effect of hedges, presentation changes and noncontrolling interests.
- The outcome and potential financial exposure from the Vitol litigation, and any changes to tax refunds, deferred-tax valuation allowances or the IRS audit.