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Nov. 4, 2021, 12:55 p.m. EDT

10-Q: TARGA RESOURCES CORP.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2020 ("Annual Report"), as well as the unaudited consolidated financial statements and notes hereto included in this Quarterly Report on Form 10-Q.

Overview

Targa Resources Corp. /zigman2/quotes/200494488/composite TRGP -0.61% is a publicly traded Delaware corporation formed in October 2005. Targa is a leading provider of midstream services and is one of the largest independent midstream infrastructure companies in North America. We own, operate, acquire, and develop a diversified portfolio of complementary domestic midstream infrastructure assets.

Our Operations

We are engaged primarily in the business of:

gathering, compressing, treating, processing, transporting, and purchasing and selling natural gas;

transporting, storing, fractionating, treating, and purchasing and selling NGLs and NGL products, including services to LPG exporters; and

gathering, storing, terminaling, and purchasing and selling crude oil.

To provide these services, we operate in two primary segments: (i) Gathering and Processing, and (ii) Logistics and Transportation (also referred to as the Downstream Business).

Our Gathering and Processing segment includes assets used in the gathering and/or purchase and sale of natural gas produced from oil and gas wells, removing impurities and processing this raw natural gas into merchantable natural gas by extracting NGLs; and assets used for the gathering and terminaling and/or purchase and sale of crude oil. The Gathering and Processing segment's assets are located in the Permian Basin of West Texas and Southeast New Mexico (including the Midland, Central and Delaware Basins); the Eagle Ford Shale in South Texas; the Barnett Shale in North Texas; the Anadarko, Ardmore, and Arkoma Basins in Oklahoma (including the SCOOP and STACK) and South Central Kansas; the Williston Basin in North Dakota (including the Bakken and Three Forks plays); and the onshore and near offshore regions of the Louisiana Gulf Coast and the Gulf of Mexico.

Our Logistics and Transportation segment includes the activities and assets necessary to convert mixed NGLs into NGL products and also includes other assets and value-added services such as transporting, storing, fractionating, terminaling, and marketing of NGLs and NGL products, including services to LPG exporters and certain natural gas supply and marketing activities in support of our other businesses. The Logistics and Transportation segment also includes the Grand Prix NGL Pipeline ("Grand Prix"), which connects our gathering and processing positions in the Permian Basin, Southern Oklahoma and North Texas with our downstream facilities in Mont Belvieu, Texas, as well as our equity interest in Gulf Coast Express Pipeline LLC ("GCX"), a natural gas pipeline connecting the Waha hub in West Texas and other receipt points, including many of our Midland Basin processing facilities, to Agua Dulce in South Texas and other delivery points. The associated assets, including these pipelines, are generally connected to and supplied in part by our Gathering and Processing segment and, except for the pipelines and smaller terminals, are located predominantly in Mont Belvieu and Galena Park, Texas, and in Lake Charles, Louisiana.

Other contains the unrealized mark-to-market gains/losses related to derivative contracts that were not designated as cash flow hedges.

Recent Developments

Permian Midland Processing Expansion

In November 2020, we announced the transfer of an existing cryogenic natural gas processing plant from our North Texas system (the "Longhorn Plant"), to our Permian Midland system. The plant was relocated to and installed in Reagan County, Texas, in 2021, as a new 200 MMcf/d cryogenic natural gas processing plant (the "Heim Plant"). The Heim Plant, which commenced operations in the third quarter of 2021, processes natural gas production from the Permian Basin.

In August 2021, in response to increasing production and to meet the infrastructure needs of producers, we announced the construction of a new 250 MMcf/d cryogenic natural gas processing plant in the Midland Basin (the "Legacy Plant"). The Legacy Plant is expected to begin operations in the fourth quarter of 2022.

In November 2021, we announced that we were ordering long-lead items for our next potential gas plant in Permian Midland to meet the future infrastructure needs of our producers given our expectation for increasing production beyond the Legacy Plant.

Capital Allocation

In November 2021, we announced an update to our capital allocation strategy, including that for the fourth quarter of 2021, we intend to recommend to our board of directors an increase to our common dividend to $0.35 per common share or $1.40 per common share annualized. The initial recommended common dividend per share increase is expected to be effective for the fourth quarter of 2021 and payable in February 2022. We expect to continue to simplify our capital structure through repurchase of our interests in our development company joint ventures from investment vehicles affiliated with Stonepeak Infrastructure Partners for approximately $925 million in January 2022 and the redemption of outstanding shares of our Series A Preferred Stock ("Series A Preferred") over time, once the redemption price steps down in March 2022, while continuing to invest in accretive growth opportunities across our core integrated strategy. We also may opportunistically repurchase common stock under our existing $500 million authorized share repurchase program (the "Share Repurchase Program").

Financing Activities

In February 2021, the Partnership issued $1.0 billion of 4% Senior Notes due 2032, resulting in net proceeds of approximately $991 million. A portion of the net proceeds from the issuance were used to fund the concurrent cash tender offer (the "February Tender Offer") and subsequent redemption payment for the Partnership's 5?% Senior Notes due 2025 (the "5?% Notes"), with the remainder used for repayment of borrowings under the Partnership's senior secured revolving credit facility (the "TRP Revolver") and our senior secured revolving credit facility (the "TRC Revolver"). As a result of the February Tender Offer and the subsequent redemption of the 5?% Notes, we recorded a loss due to debt extinguishment of $14.9 million comprised of $12.5 million of premiums paid and a write-off of $2.4 million of debt issuance costs.

Additionally, Targa Pipeline Partners LP ("TPL") redeemed all of the outstanding TPL 43/4% Senior Notes due 2021 and TPL 5?% Senior Notes due 2023 (collectively, the "TPL Notes") on February 22, 2021 with available liquidity under the TRP Revolver. As a result of the redemptions of the TPL Notes, we recorded a gain due to debt extinguishment of $0.2 million.

The Partnership redeemed all of the outstanding 4�% Senior Notes due 2023 (the "4�% Notes") on May 17, 2021 with available liquidity under the TRP Revolver. As a result of the redemption of the 4�% Notes, we recorded a loss due to debt extinguishment of $1.9 million.

We or the Partnership may retire or purchase various series of our outstanding debt through cash purchases and/or exchanges for other debt, in open market purchases, privately negotiated transactions or otherwise. Additionally, we may redeem all or a portion of our Series A Preferred in the future pursuant to its terms or repurchase Series A Preferred shares in privately negotiated transactions. Such repurchases, exchanges or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

On April 21, 2021, we amended the Partnership's accounts receivable securitization facility (the "Securitization Facility") to increase the facility size from $350.0 million to $400.0 million to more closely align with our expectations for borrowing needs given current commodity prices and to extend the facility termination date to April 21, 2022.

For additional information about our debt-related transactions, see Note 5 - Debt Obligations to our consolidated financial statements.

COVID-19 Pandemic

The global spread of COVID-19 during 2020 and 2021 has caused significant commodity market volatility. We are currently experiencing no material issues with potential workforce, supply chain or customer relationship disruptions. Although significant progress has been made towards the development, distribution and administration of various COVID-19 vaccines, there continues to be significant uncertainty about the disruptions and other effects related to COVID-19. As a result, we are unable to determine the extent that these events could materially impact our future financial position, operations and/or cash flows.

Impact of Winter Weather

In February 2021, the Central region of the United States experienced unprecedented cold temperatures during a major winter storm that disrupted production operations, midstream infrastructure and many other services. This extreme weather caused wide fluctuations in commodity prices, short-term disruptions to Targa's operations across Texas, Oklahoma and Louisiana, including

reduced throughput volumes coming into our systems, and adversely affected the operations and financial condition of some of our counterparties. Though certain Company facilities experienced temporary outages, all facilities have since returned to full operations without sustaining any long-term impacts or significant adverse financial impacts related to the weather event, and throughput volumes have returned to pre-storm levels. The full financial impact of the winter storm still remains uncertain as it is subject to recently proposed regulatory changes and potential customer and counterparty risk. For further discussion, see "Item 1A. Risk Factors."

Corporation Tax Matters

The IRS notified us on April 3, 2019, that it will examine Targa's federal income tax returns (Form 1120) for 2014, 2015 and 2016. The IRS completed their examination without proposing any adjustments, and the Joint Committee on Taxation approved the IRS' findings without any exception. The Joint Committee on Taxation sent Targa a closing letter dated February 23, 2021. The closing letter effectively ends the IRS' audit of Targa's federal income tax returns for 2014, 2015 and 2016.

FERC Regulatory Matters

On December 17, 2020, FERC issued an Order Establishing Index Level establishing an index level of the Producer Price Index for Finished Goods plus 0.78% for the five-year period commencing July 1, 2021, and ending June 30, 2026 ("December 2020 Order"). On May 14, 2021, FERC published a revised oil pricing index factor utilizing the oil pricing index factor established in the December 2020 Order, resulting in a negative percent change for the index year July 1, 2021, through June 30, 2022. This means that the ceiling level for certain oil pipelines' rates may decrease and, if the actual transportation rate would be above such ceiling level, the rate must decrease to be equal to or less than the applicable ceiling. However, a number of our pipeline rates, including all rates on Grand Prix Pipeline LLC ("Grand Prix Joint Venture") and Targa Gulf Coast NGL Pipeline LLC, and certain rates on Targa NGL Pipeline Company LLC had not been adjusted in a number of years, and, therefore, these pipelines increased their rates to equal the applicable new ceiling level. Certain rates on the Targa NGL Pipeline Company LLC system were reduced to equal the ceiling level. However, requests for rehearing of the December 2020 Order were filed with FERC, and those requests remain pending, with rehearing granted for purposes of extending the time FERC has to review these requests. FERC's final application of its indexing rate methodology for the next five-year term of index rates will be determined based on the outcome of these requests for rehearing, and any changes to FERC's index level may impact our revenues associated with any transportation services we may provide pursuant to rates adjusted by the FERC oil pipeline index.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements that will affect us, see "Recent Accounting Pronouncements" included within Note 3 - Significant Accounting Policies in our Consolidated Financial Statements.

How We Evaluate Our Operations

The profitability of our business is a function of the difference between: (i) the revenues we receive from our operations, including fee-based revenues from services and revenues from the natural gas, NGLs, crude oil and condensate we sell, and (ii) the costs associated with conducting our operations, including the costs of wellhead natural gas, crude oil and mixed NGLs that we purchase as well as operating, general and administrative costs and the impact of our commodity hedging activities. Because commodity price movements tend to impact both revenues and costs, increases or decreases in our revenues alone are not necessarily indicative of increases or decreases in our profitability. Our contract portfolio, the prevailing pricing environment for crude oil, natural gas and NGLs, the impact of our commodity hedging program and its ability to mitigate exposure to commodity price movements, and the volumes of crude oil, natural gas and NGL throughput on our systems are important factors in determining our profitability. Our profitability is also affected by the NGL content in gathered wellhead natural gas, supply and demand for our products and services, utilization of our assets and changes in our customer mix.

Our profitability is also impacted by fee-based contracts. Our growing capital expenditures for pipelines and gathering and processing assets underpinned by fee-based margin, expansion of our downstream facilities, continued focus on adding fee-based margin to our existing and future gathering and processing contracts, as well as third-party acquisitions of businesses and assets, will continue to increase the number of our contracts that are fee-based. Fixed fees for services such as gathering and processing, transportation, fractionation, storage, terminaling and crude oil gathering are not directly tied to changes in market prices for commodities. Nevertheless, a change in market dynamics such as available commodity throughput does affect profitability.

Management uses a variety of financial measures and operational measurements to analyze our performance. These include: (1) throughput volumes, facility efficiencies and fuel consumption, (2) operating expenses, (3) capital expenditures and (4) the following non-GAAP measures: adjusted gross margin, adjusted operating margin, adjusted EBITDA, distributable cash flow and adjusted free cash flow.

Throughput Volumes, Facility Efficiencies and Fuel Consumption

Our profitability is impacted by our ability to add new sources of natural gas supply and crude oil supply to offset the natural decline of existing volumes from oil and natural gas wells that are connected to our gathering and processing systems. This is achieved by connecting new wells and adding new volumes in existing areas of production, as well as by capturing crude oil and natural gas supplies currently gathered by third parties. Similarly, our profitability is impacted by our ability to add new sources of mixed NGL supply, connected by third-party transportation and Grand Prix, to our Downstream Business fractionation facilities and at times to our export facilities. We fractionate NGLs generated by our gathering and processing plants, as well as by contracting for mixed NGL supply from third-party facilities.

In addition, we seek to increase adjusted operating margin by limiting volume losses, reducing fuel consumption and by increasing efficiency. With our gathering systems' extensive use of remote monitoring capabilities, we monitor the volumes received at the wellhead or central delivery points along our gathering systems, the volume of natural gas received at our processing plant inlets and the volumes of NGLs and residue natural gas recovered by our processing plants. We also monitor the volumes of NGLs received, stored, fractionated and delivered across our logistics assets. This information is tracked through our processing plants and Downstream Business facilities to determine customer settlements for sales and volume related fees for service and helps us increase efficiency and reduce fuel consumption.

As part of monitoring the efficiency of our operations, we measure the difference between the volume of natural gas received at the wellhead or central delivery points on our gathering systems and the volume received at the inlet of our processing plants as an indicator of fuel consumption and line loss. We also track the difference between the volume of natural gas received at the inlet of the processing plant and the NGLs and residue gas produced at the outlet of such plant to monitor the fuel consumption and recoveries of our facilities. Similar tracking is performed for our crude oil gathering and logistics assets and our NGL pipelines. These volume, recovery and fuel consumption measurements are an important part of our operational efficiency analysis and safety programs.

Operating Expenses

Operating expenses are costs associated with the operation of specific assets. Labor, contract services, repair and maintenance and ad valorem taxes comprise the most significant portion of our operating expenses. These expenses remain relatively stable and independent of the volumes through our systems, but may increase with system expansions and will fluctuate depending on the scope of the activities performed during a specific period.

Capital Expenditures

Our capital expenditures are classified as growth capital expenditures and maintenance capital expenditures. Growth capital expenditures improve the service capability of the existing assets, extend asset useful lives, increase capacities from existing levels, add capabilities, and reduce costs or enhance revenues. Maintenance capital expenditures are those expenditures that are necessary to maintain the service capability of our existing assets, including the replacement of system components and equipment, which are worn, obsolete or completing their useful life and expenditures to remain in compliance with environmental laws and regulations.

Capital spending associated with growth and maintenance projects is closely monitored. Return on investment is analyzed before a capital project is approved, spending is closely monitored throughout the development of the project, and the subsequent operational performance is compared to the assumptions used in the economic analysis performed for the capital investment approval.

Non-GAAP Measures

We utilize non-GAAP measures to analyze our performance. Adjusted gross margin, adjusted operating margin, adjusted EBITDA, distributable cash flow, and adjusted free cash flow are non-GAAP measures. The GAAP measure most directly comparable to these non-GAAP measures are gross margin, income (loss) from operations and net income (loss) attributable to TRC. These non-GAAP measures should not be considered as an alternative to the comparable GAAP measures and have important limitations as analytical tools. Investors should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because our non-GAAP measures exclude some, but not all, items that affect net income, and are defined differently by different companies within our industry, our definitions may not be comparable with similarly titled measures of other companies, thereby diminishing their utility. Management compensates for the limitations of our non-GAAP measures as analytical tools by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating these insights into our decision-making processes.

Adjusted Gross Margin

We define adjusted gross margin as revenues less product purchases and fuel. It is impacted by volumes and commodity prices as well as by our contract mix and commodity hedging program.

Gathering and Processing segment adjusted gross margin consists primarily of:

service fees related to natural gas and crude oil gathering, treating and processing; and

revenues from the sale of natural gas, condensate, crude oil and NGLs less producer payments, natural gas and crude oil purchases, and our equity volume hedge settlements.

Logistics and Transportation segment adjusted gross margin consists primarily of:

service fees (including the pass-through of energy costs included in fee rates);

system product gains and losses; and

NGL and natural gas sales, less NGL and natural gas purchases, fuel, third-party transportation costs and the net inventory change.

The adjusted gross margin impacts of mark-to-market hedge unrealized changes in fair value are reported in Other.

Adjusted Operating Margin

We define adjusted operating margin as adjusted gross margin less operating expenses. Adjusted operating margin is an important performance measure of the core profitability of our operations. Adjusted gross margin and adjusted operating margin provide useful information to investors because they are used as supplemental financial measures by management and by external users of our financial statements, including investors and commercial banks, to assess:

the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

our operating performance and return on capital as compared to other companies in the midstream energy sector, without regard to financing or capital structure; and

the viability of capital expenditure projects and acquisitions and the overall rates of return on alternative investment opportunities.

Management reviews business segment adjusted gross margin and operating margin monthly as a core internal management process. We believe that investors benefit from having access to the same financial measures that management uses in evaluating our operating results.

Adjusted EBITDA

We define adjusted EBITDA as net income (loss) attributable to TRC before interest, income taxes, depreciation and amortization, and other items that we believe should be adjusted consistent with our core operating performance. The adjusting items are detailed in the adjusted EBITDA reconciliation table and its footnotes. Adjusted EBITDA is used as a supplemental financial measure by us and by external users of our financial statements such as investors, commercial banks and others to measure the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness and pay dividends to our investors.

Distributable Cash Flow and Adjusted Free Cash Flow

We define distributable cash flow as adjusted EBITDA less distributions to TRP preferred limited partners, cash interest expense on debt obligations, cash tax (expense) benefit and maintenance capital expenditures (net of any reimbursements of project costs). The Preferred Units that were issued by the Partnership in October 2015 were redeemed in December 2020, and are no longer outstanding. We define adjusted free cash flow as distributable cash flow less growth capital expenditures, net of contributions from noncontrolling interest and net contributions to investments in unconsolidated affiliates. Distributable cash flow and adjusted free cash flow are performance measures used by us and by external users of our financial statements, such as investors, commercial banks and research analysts, to assess our ability to generate cash earnings (after servicing our debt and funding capital expenditures) to be used for corporate purposes, such as payment of dividends, retirement of debt or redemption of other financing arrangements.







        Our Non-GAAP Financial Measures
        The following tables reconcile the non-GAAP financial measures used by
        management to the most directly comparable GAAP measures for the periods
        indicated:
                                                Three Months Ended September 30,            Nine Months Ended September 30,
                                                   2021                   2020                 2021                   2020
                                                                               (In millions)
        Reconciliation of Income (Loss) from
        Operations to Adjusted Operating
        Margin
        Income (loss) from operations         $         366.5        $         295.5      $          956.4        $    (1,568.9 )
        Depreciation and amortization
        expense                                         222.8                  203.7                 650.9                647.3
        General and administrative expense               67.3                   58.6                 192.4                180.6
        Impairment of long-lived assets                     -                      -                     -              2,442.8
        (Gain) loss on sale or disposition
        of business and assets                           (1.5 )                 58.0                  (1.7 )               58.0
        Write-down of assets                              0.5                   13.5                   5.0                 13.5
        Other, net                                          -                    0.7                   0.1                  2.3
        Adjusted operating margin             $         655.6        $         630.0      $        1,803.1        $     1,775.6
                                                Three Months Ended September 30,              Nine Months Ended September 30,
                                                   2021                   2020                 2021                    2020
                                                                                 (In millions)
        Reconciliation of Gross Margin to
        Adjusted Gross Margin
        Gross Margin                          $         622.2        $         588.5      $        1,697.5        $        1,635.1
        Depreciation and amortization
        expense                                         222.8                  203.7                 650.9                   647.3
        Adjusted gross margin                 $         845.0        $         792.2      $        2,348.4        $        2,282.4
                                                 Three Months Ended September 30,                Nine Months Ended September 30,
                                                   2021                    2020                  2021                    2020
                                                                                  (In millions)
        Reconciliation of Net Income (Loss)
        attributable to TRC to Adjusted
        EBITDA, Distributable Cash Flow and
        Adjusted Free Cash Flow
        Net income (loss) attributable to     $                      $                     $                       $
        TRC                                             182.2                     69.3                384.8                  (1,587.5 )
        Income attributable to TRP preferred
        limited partners                                    -                      2.8                    -                       8.4
        Interest (income) expense, net                   91.0                     97.7                284.2                     292.4
        . . .
        


Nov 04, 2021

COMTEX_396349394/2041/2021-11-04T12:54:34

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/zigman2/quotes/200494488/composite
US : U.S.: NYSE
$ 57.43
-0.35 -0.61%
Volume: 1.50M
Jan. 18, 2022 4:00p
P/E Ratio
48.71
Dividend Yield
0.70%
Market Cap
$13.23 billion
Rev. per Employee
$6.22M
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