TARGA RESOURCES CORP. 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
Overview
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
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
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
In
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Permian Delaware Processing Expansion
In
Capital Investments and Divestitures
In
In
In
Common Share Repurchases and Preferred Stock Redemption
In the first quarter of 2022, we repurchased 737,799 shares of our common stock
at a weighted average price of
In
Financing Activities
In
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In
In
In
In
For additional information about our debt-related transactions, see Note 7 - Debt Obligations to our Consolidated Financial Statements.
COVID-19 Pandemic
The global spread of COVID-19 during 2020 and 2021 caused significant commodity market volatility. 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
Corporation Tax Matters
In
FERC Regulatory Matters
On
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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 to 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 EBITDA, distributable cash flow, adjusted free cash flow and adjusted operating margin (segment).
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
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
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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 EBITDA,
distributable cash flow, adjusted free cash flow and adjusted operating margin
(segment) are non-GAAP measures. The GAAP measures most directly comparable to
these non-GAAP measures are income (loss) from operations, Net income (loss)
attributable to
Adjusted Operating Margin
We define adjusted operating margin for our segments 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 adjusted operating 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 settlements, fuel and transport and our equity volume hedge
settlements.
Logistics and Transportation adjusted operating 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 operating margin impacts of mark-to-market hedge unrealized changes in fair value are reported in Other.
Adjusted operating margin for our segments provides useful information to investors because it is used as a supplemental financial measure 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.
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Management reviews adjusted operating margin and operating margin for our segments 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. The reconciliation of our adjusted operating margin to the most directly comparable GAAP measure is presented under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - By Reportable Segment."
Adjusted EBITDA
We define adjusted EBITDA as Net income (loss) attributable to
Distributable Cash Flow and Adjusted Free Cash Flow
We define distributable cash flow as adjusted EBITDA less cash interest expense on debt obligations, cash tax (expense) benefit and maintenance capital expenditures (net of any reimbursements of project costs). 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 March 31,
2022 2021
(In millions)
Reconciliation of Net income (loss) attributable
to Targa Resources Corp. to Adjusted EBITDA,
Distributable Cash Flow and Adjusted Free Cash
Flow
Net income (loss) attributable to Targa Resources $ $
Corp. 88.0 146.4
Interest (income) expense, net 93.6 98.4
Income tax expense (benefit) 22.9 15.0
Depreciation and amortization expense 209.1 216.2
(Gain) loss on sale or disposition of assets (1.0 ) -
Write-down of assets 0.5 3.5
(Gain) loss from financing activities (1) 15.8 14.7
Equity (earnings) loss (5.6 ) (11.8 )
Distributions from unconsolidated affiliates and
preferred partner interests, net 12.5 33.3
Compensation on equity grants 13.5 15.0
Risk management activities 178.2 (1.5 )
Noncontrolling interests adjustments (2) (1.7 ) (13.5 )
Adjusted EBITDA $ 625.8 $ 515.7
Interest expense on debt obligations (3) (91.7 ) (98.8 )
Maintenance capital expenditures, net (4) (37.7 ) (19.0 )
Cash taxes (1.8 ) (0.5 )
Distributable Cash Flow $ 494.6 $ 397.4
Growth capital expenditures, net (4) (121.4 ) (61.0 )
Adjusted Free Cash Flow $ 373.2 $ 336.4
(1) Gains or losses on debt repurchases or early debt extinguishments.
(2) Noncontrolling interest portion of depreciation and amortization expense.
(3) Excludes amortization of interest expense.
(4) Represents capital expenditures, net of contributions from noncontrolling
interests and includes net contributions to investments in unconsolidated
affiliates.
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