Targa Resources Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; financial statements are unaudited. Amounts are in U.S. dollars. Targa operates natural gas gathering and processing, NGL logistics and transportation, and crude oil gathering and handling businesses.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $3,415.9 million | $1,523.5 million | $7,048.7 million | $3,572.4 million |
| Operating margin (non-GAAP) | $522.1 million | $479.5 million | $1,147.6 million | $1,145.5 million |
| Net income (loss) | $155.4 million | $177.1 million | $383.3 million | $(1,643.2) million |
| Net income attributable to common shareholders | $34.4 million | $48.9 million | $158.9 million | $(1,720.8) million |
| Adjusted EBITDA (non-GAAP) | $460.0 million | $351.2 million | $975.7 million | $779.3 million |
| Distributable cash flow (non-GAAP) | $339.5 million | $273.7 million | $737.0 million | $575.5 million |
| Free cash flow (non-GAAP) | $256.1 million | $130.4 million | $592.6 million | $171.0 million |
- Six-month operating cash flow was $1,303.6 million, versus $738.9 million a year earlier. Investing cash outflow was $185.9 million; cash capital outlays were $198.9 million, down from $615.9 million.
- Cash and cash equivalents were $209.0 million at June 30, versus $242.8 million at year-end 2020. Total assets were $15.4 billion.
- Consolidated debt obligations were $6,975.5 million, down from $7,755.7 million at year-end. The balance includes Partnership debt; Targa states it is not itself obligated to make payments on the Partnership’s debt. The Partnership’s senior unsecured notes had a reported fair value of $6,933.3 million versus carrying value of $6,465.7 million.
- At July 30, 2021, reported consolidated liquidity was $2,930.3 million, including $279.1 million cash. Targa and the Partnership were in compliance with debt covenants at June 30.
- Common dividends were $0.10 per share for each of the first two quarters of 2021. Series A Preferred Stock carries a cumulative 9.5% dividend; $21.8 million was accrued at June 30.
Material changes versus prior comparable period
- Q2 revenue more than doubled, primarily reflecting higher commodity prices and higher NGL and natural gas volumes. Product purchases and fuel also rose substantially, so revenue growth did not translate proportionately into margin growth: operating margin increased 9% to $522.1 million.
- Q2 Adjusted EBITDA rose 31%. Common-shareholder income declined 30%, to $34.4 million, despite higher operating margin; the filing cites higher income tax expense and less favorable financing results among the factors.
- Six-month operating margin was broadly flat year over year. Adjusted EBITDA increased 25% and free cash flow increased to $592.6 million, helped in part by lower growth capital spending.
- The six-month 2020 comparison includes a $2,442.8 million noncash impairment charge. No impairment indicators were identified in the first half of 2021.
- Permian natural gas inlet volumes improved, while volumes in several Central and Coastal areas remained lower. Q2 Logistics and Transportation operating margin rose 26%, supported by higher pipeline, fractionation, marketing and export activity.
Outlook, commentary, risks and unusual items
- Capital spending: Management estimated 2021 net growth capital expenditures of approximately $350–$450 million for announced projects and maintenance capital expenditures, net of noncontrolling interests, of approximately $120 million. Growth spending may vary with investment opportunities.
- Projects: The Heim processing plant, a relocated 200 MMcf/d facility, was expected to begin operations in Q3 2021. The filing also reports an August 2021 announcement of a new 250 MMcf/d Legacy plant expected to start in Q4 2022.
- Liquidity outlook: Management stated that operating cash flow, available credit facilities and potential capital-market, joint-venture or asset-sale proceeds were expected to provide sufficient resources for operations, capital spending, debt obligations, collateral needs and dividends for at least the next 12 months, subject to operating and market conditions.
- Winter storm and COVID-19: February 2021 winter weather temporarily disrupted operations and throughput in Texas, Oklahoma and Louisiana. Facilities had returned to full operations and volumes to pre-storm levels, but management said the full financial impact remained uncertain, including potential effects from regulatory changes and customer or counterparty risks. COVID-19 market and commodity-price uncertainty also remained.
- Commodity exposure: The fair value of derivatives was a net liability of $349.2 million at June 30, compared with a $51.2 million net liability at year-end. A hypothetical 10% commodity-price increase would widen the estimated net liability to $475.9 million; a 10% decrease would reduce it to $222.5 million. The filing cautions that this sensitivity does not include the offsetting effects on hedged physical items. Deferred hedge losses expected to be reclassified into earnings before tax totaled $387.4 million, including $266.1 million over the next 12 months.
- Debt transactions: The Partnership issued $1.0 billion of 4% notes due 2032 and used proceeds in part to refinance or repay other debt. Debt extinguishments generated a net $16.6 million loss for the six months. The receivables securitization facility was increased from $350 million to $400 million and extended to April 2022.
- Legal contingency: Vitol litigation concerns a terminated splitter agreement. A 2020 trial-court award to Vitol was $129.0 million plus interest and $10.5 million in additional damages; Targa appealed, and the appeal was pending. Targa retained the liability after selling Targa Channelview.
- Other notable matters: Early adoption of convertible-instrument accounting rules changed the Series A Preferred presentation and increased its carrying value by $448.3 million through additional paid-in capital, with no impact on retained earnings. The IRS completed its examination of Targa’s 2014–2016 federal returns without proposed adjustments.
Most important facts for investors to verify
- Whether operating-margin and cash-flow improvement is sustained as commodity prices, hedge settlements and volumes change; commodity sales and product costs both move materially with prices.
- Actual 2021 growth and maintenance capital spending, project timing and returns, and whether the stated liquidity outlook remains adequate.
- Debt repayment and refinancing needs, facility availability and restrictions on distributions, including the distinction between parent-company and Partnership debt obligations.
- Developments and potential exposure in the Vitol appeal, and any further financial impact from the February winter storm or counterparty stress.
- How derivative liabilities and deferred hedge losses affect subsequent earnings and cash flows; the filing does not provide specific full-year earnings guidance.