Targa Resources Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Dollar amounts are in millions unless otherwise stated. Targa is a North American midstream operator with Gathering and Processing and Logistics and Transportation segments.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $3,403.7 | $6,055.8 | $7,924.2 | $11,014.9 |
| Income from operations | $649.1 | $451.9 | $1,485.8 | $747.7 |
| Net income | $387.5 | $687.6 | $942.7 | $856.2 |
| Net income attributable to Targa | $329.3 | $596.4 | $826.3 | $684.4 |
| Net income per diluted common share | $1.44 | $1.61 | $1.46 | $1.66 |
| Adjusted EBITDA | $789.1 | $666.4 | $1,729.7 | $1,292.1 |
| Distributable cash flow | $575.8 | $533.4 | $1,305.2 | $1,028.2 |
| Adjusted free cash flow | $(3.7) | $334.1 | $310.3 | $707.5 |
Revenue and earnings: Q2 commodity sales fell 48% year over year to $2,914.6, primarily reflecting lower natural gas, NGL and condensate prices. Midstream service fees rose 13% to $489.1, supported by higher gathering and processing activity. Operating income improved, while net income attributable to Targa declined, in part because 2022 included a $435.9 gain on an equity-method investment sale. Q2 interest expense, net, more than doubled to $166.6, reflecting higher borrowings and interest rates.
Segment margins: Q2 adjusted operating margin was $692.3 for Gathering and Processing, up 12%, and $490.5 for Logistics and Transportation, up 24%. The first benefited from higher Permian volumes and fees; the second from transportation, fractionation and marketing margins, partly offset by lower export margin. These are non-GAAP measures as defined by the company.
Cash flow and investment: First-half operating cash flow was $1,846.6, versus $1,383.7 a year earlier. Cash capital outlays were $1,073.7, compared with $419.5, primarily reflecting growth projects. Investing cash flow was $(1,074.6); financing cash flow was $(821.6). Cash and cash equivalents were $169.4 at June 30, 2023.
Debt and liquidity: Total debt obligations were $12,398.8 at June 30, compared with $11,536.4 at year-end 2022. Long-term debt was $11,812.8 and current debt obligations $586.0. The company reported total liquidity of $2,240.6, including cash, after outstanding borrowings and letters of credit. It had $2.7 billion of variable-rate borrowings; a 100-basis-point rate change would affect annual interest expense by an estimated $27.1. Targa and the Partnership were in compliance with debt covenants.
Margins: The filing does not provide a single consolidated operating-margin percentage as a headline metric. Segment adjusted operating margins are reported above; GAAP income from operations was $649.1 in Q2.
Material changes versus the prior period
- Q2 revenue decreased 44%, primarily due to lower commodity prices; higher volumes and favorable hedge impacts partly offset the decline. First-half revenue decreased 28%.
- Despite lower Q2 net income, Q2 adjusted EBITDA rose 18% and distributable cash flow rose 8%. For the first half, adjusted EBITDA increased 34% and distributable cash flow increased 27%.
- Adjusted free cash flow turned negative in Q2 and declined 56% for the first half, as substantially higher growth capital spending absorbed cash generation.
- First-half interest expense increased to $334.7 from $174.7. Depreciation and amortization also rose, reflecting acquired assets and system expansions.
- In January, Targa acquired Blackstone’s 25% interest in Grand Prix for approximately $1.05 billion plus a $41.9 final adjustment, bringing its ownership to 100%. The transaction generated a $490.7 premium on repurchase of noncontrolling interests, reducing first-half income attributable to common shareholders.
- Targa issued $1.75 billion of senior notes in January, with coupons of 6.125% due 2033 and 6.500% due 2053, and used proceeds partly to fund Grand Prix and reduce revolver and commercial-paper borrowings.
Outlook, risks and unusual items
- Capital plan: Management estimated 2023 net growth capital expenditures of $2.0–$2.2 billion for announced projects and maintenance capital expenditures of approximately $175 million. It said available cash, operating cash flow and borrowing capacity should fund operations and anticipated obligations for at least the next 12 months, absent disruptive events.
- Expansion program: Projects described include Permian processing capacity, Mont Belvieu fractionation trains and the Daytona NGL Pipeline. Expected in-service dates span late 2023 through 2025; execution, timing and returns are subject to project and market conditions.
- Capital returns: The quarterly common dividend was raised to $0.50 per share, or $2.00 annualized. Targa repurchased $201.0 of shares in the first half and had $942.7 remaining under its $1.0 billion repurchase authorization at June 30; future repurchases are discretionary.
- Commodity and counterparty exposure: Commodity prices, hedging effectiveness, derivative counterparties, customer credit and collateral requirements may affect results and cash flows. Hedge fair value was a net asset of $167.5 at June 30; the filing illustrates sensitivity to hypothetical 10% commodity-price changes.
- Interest rates: Variable-rate debt exposes the company to further rate increases; Targa reported no interest-rate hedges at quarter-end.
- Vitol litigation: A Texas trial court awarded Vitol $129.0 plus interest; the appeals court upheld the return-of-payments award but removed $10.5 of additional loss and demurrage damages. Targa’s petition for review was pending before the Texas Supreme Court. The filing states that cumulative interest on the award, if accrued, would have been approximately $49.1 at June 30; it does not state a clear ultimate outcome.
- Other contingencies: Targa is involved in ordinary-course legal, regulatory and environmental proceedings. IRS examinations of certain subsidiaries’ 2019 and 2020 tax years were ongoing; management said it did not anticipate material changes. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting.
- Forward-looking risks: Results may be affected by producer activity and throughput, commodity and interest-rate movements, market access, project execution, regulation, weather, competition, energy-transition pressures and general economic conditions. Management cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether growth projects meet their announced budgets, schedules and expected utilization, and whether management’s 2023 capital-spending estimates change.
- How the Grand Prix acquisition and Permian volume growth translate into sustainable cash flow after higher interest expense and capital investment.
- Current debt maturities, variable-rate exposure, facility availability and refinancing needs, including the accounts-receivable securitization facility due September 2023.
- The status and potential financial effect of the Vitol litigation and any related accounting recognition.
- Whether commodity-price, hedge and counterparty developments materially change reported earnings, cash flows or collateral needs.
- Future dividend and repurchase decisions relative to free cash flow, investment requirements and debt levels.