TRGPTarga Resources

We note you present consolidated non-GAAP measures titled Gross margin and Operating margin. It appears that the title of these measures should be revised to differentiate them from the similarly titled GAAP measures. Refer to Item 10(e)(1)(ii)(E) of Regulation S-K.

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Additionally, it appears that the reconciliations of these consolidated non-GAAP measures should be to a fully burdened GAAP gross margin and GAAP Income (loss) from operations, respectively, as Item 10(e)(1)(i)(B) of Regulation S-K requires reconciliation to the most directly comparable GAAP measure.

In response to the Staff’s comment, in future filings that include the non-GAAP measures Gross margin and Operating margin, the Company will (1) label such measures “Adjusted gross margin” and “Adjusted operating margin” and (2) revise its non-GAAP reconciliations to present a reconciliation of Income (loss) from operations to Adjusted operating margin and GAAP gross margin to Adjusted gross margin, beginning with the Company’s Form 10-Q for the quarter ended

September 30, 2021, expected to be filed with the Commission on November 4, 2021.

An illustrative presentation of the proposed

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revisions (added information shown underlined below) and reconciliations described above is presented below. Such illustration is based on our June 30, 2021, Form 10-Q disclosures.

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.

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

(In millions)

Reconciliation of Gross Margin to Adjusted Gross Margin

Gross margin

$

495.0

438.9

1,075.4

1,046.6

Depreciation and amortization expense

211.9

204.5

428.0

443.6

Adjusted gross margin

706.9

643.4

1,503.4

1,490.2

Reconciliation of Income (Loss) from Operations to

Income (loss) from operations

245.8

213.1

589.9

(1,864.4

)

General and administrative expense

63.7

61.5

125.1

121.9

Impairment of long-lived assets

—

2,442.8

(Gain) loss on sale or disposition of business and assets

(0.4

(0.7

(0.2

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Your computation of free cash flow appears to differ from the typical calculation of this measure (i.e., cash flows from operations less capital expenditures). Please revise the title of your non-GAAP measure to avoid potential confusion with free cash flow. Refer to Question 102.07 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.

In response to the Staff’s comment, we will amend the title of such non-GAAP measure used in all future filings to “adjusted free cash flow”, beginning with the Company’s Form 10-Q for the quarter ended September 30, 2021. An illustrative presentation of the revisions (added information shown underlined below) is as follows:

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

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(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.

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We note that your consolidated results of operations data presentation appears to closely resemble a full consolidated statement of operations. Therefore, non-GAAP measures should not be shown as part of this presentation. Refer to Item 10(e)(1)(ii)(C) of Regulation S-K.

In response to the Staff’s comment, we advise the Staff that in future filings we will revise our disclosure to exclude non-GAAP measures in our consolidated statement of operations presentation, beginning with the Company’s Form 10-Q for the quarter ended September 30, 2021. Read in the reply ↗

We note your reconciliation of non-GAAP segment gross margin to segment operating margin here and on page 69 for the Logistics and Transportation segment. For purposes of equal or greater prominence, revise so that the reconciliation starts with the GAAP measure, which appears to be segment operating margin.

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Refer to Item 10(e)(1)(i)(A) of Regulation S-K and Question 102.10 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.

In response to the Staff’s comment, we advise the Staff that in future filings, we will revise our reconciliation to start with segment operating margin, beginning with the Company’s Form 10-Q for the quarter ended September 30, 2021.

An illustrative presentation of the revisions described above is presented below. Such illustration is based on our June 30, 2021, Form 10-Q disclosures. Read in the reply ↗

As applicable and in accordance with Regulation G and Item 10(e)(1)(i) of Regulation S- K, please address the comments above in your earnings releases furnished pursuant to Item 2.02 of Form 8-K.

In response to the Staff’s comment, we will address the comments above in all future earnings releases furnished pursuant to Item 2.02 on Form 8-K, beginning with the Company’s earnings release on Form 8-K for the quarter ended September 30, 2021, expected to be filed with the Commission on November 4, 2021. Read in the reply ↗

We note your response to our prior comment 1. It appears that the Gross margin presented to reconcile to non-GAAP Adjusted gross margin is calculated without subtracting the Operating expenses line item. For the non-GAAP Adjusted gross margin measure you present, the most directly comparable GAAP-basis measure appears to be a fully burdened gross margin. Please revise your presentation accordingly.

We respectively acknowledge the Staff’s comment. In future filings, the Company will not present Adjusted gross margin or Adjusted operating margin at the consolidated level, beginning with the Company’s Form 10-K for the year ended December 31, 2021. Read in the reply ↗

We note your response to prior comment 1. With regard to non-GAAP measures such as adjusted gross margin, the most directly comparable GAAP-basis measure under Item 10(e)(1)(i)(B) of Regulation S-K is generally a fully burdened gross margin.

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Please tell us why you believe your current description and presentation of non-GAAP segment adjusted gross margin in Management's Discussion and Analysis of Financial Condition and Results of Operations remains appropriate.

In response to the Staff’s comment, we believe segment operating margin (a GAAP measure in accordance with ASC 280, Segment

Reporting), rather than a fully burdened GAAP segment gross margin, is the most directly comparable GAAP-basis measure to our non-GAAP segment adjusted gross margin. Additionally, we note the Staff’s prior comment 4 from the letter dated September 23, 2021, whereby the Staff advised us on such reconciliation to “revise so that the reconciliation starts with the GAAP measure, which appears to be segment operating margin.”

For clarification purposes, please refer to the

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table below for a description of how each segment measure discussed in our response is calculated.

As illustrated in the table above, segment operating margin is more directly comparable to segment adjusted gross margin than a fully burdened segment gross margin, as there is an incremental reconciling item (depreciation and amortization expense) to reconcile adjusted gross margin to a fully burdened gross margin.

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We note you define operating margin as "gross margin less operating expenses" on page 63. However, we note the addition of footnote (1) on page 25 in your Form 10-Q for the fiscal quarter ended September 30, 2021 that "Operating margin is calculated by subtracting Product purchases and fuel from Revenues." Please clarify for us how you calculate segment operating margin and revise your disclosure as necessary.

Targa’s segment operating margin is calculated by subtracting product purchases and fuel and operating expenses from revenues. We will revise the footnote disclosure in our future filings to reflect this calculation. Read in the reply ↗

We note your response to prior comment 1. Tell us how you concluded that the non- GAAP measure segment adjusted gross margin is appropriately named considering that you believe segment operating margin is the most directly comparable GAAP-basis measure.

In response to the

Staff’s comment, we will change the caption for adjusted gross margin for our segments to “adjusted operating margin” in future filings, beginning with the Company’s Form 10-K for the year ended December 31, 2021. Read in the reply ↗

Please confirm to us that you will apply all comments to both Targa Resources Corp. and Targa Resources Partners LP as applicable.

The Company acknowledges the Staff’s comment and confirms that the below comments and our responses are applicable to both Targa

Resources Corp. and Targa Resources Partners LP. Read in the reply ↗

We note the adjustment for the Splitter Agreement to your non-GAAP measure TRC Adjusted EBITDA. Please tell us why revenue that is required to be deferred under GAAP is added back to your non-GAAP performance measure. In doing so, please tell us the basis for computation of the amounts added back in each year.

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Additionally, tell us how you considered whether this is an individually tailored revenue recognition and measurement method pursuant to Question 100.04 of the Non-GAAP Compliance & Disclosure Interpretations. Finally, please tell us how you intend to recognize the $129 million on the income statement and non-GAAP measure if the Vitol dispute results in your favor. We may have further comment.

We respectfully acknowledge the Staff’s comment. In our Annual Reports, we define Adjusted EBITDA as “net income (loss) attributable to Targa before interest, income taxes, depreciation and amortization, and other items that we believe should be adjusted consistent with our core operating performance.” We also state, “The economic substance behind our use of Adjusted EBITDA is to measure the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness and pay dividends to our investors” (emphasis added).

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To that end, we believe that our non-GAAP measure Adjusted EBITDA measures our ability to generate cash from operations and thereby, is also a measure of our ability to service our debt and pay dividends, the latter of which has been the key valuation metric in the midstream sector of the oil and gas industry.

Under a contractual agreement (“Splitter Agreement”) between Targa and Noble Americas Corp. (“Noble”), Noble was required to pay to Targa approximately $43 million on an annual basis, beginning on October 1, 2016. While the payments received under the Splitter Agreement were required to be deferred under GAAP, we included the nonrefundable payments received in Adjusted EBITDA as those payments were available for us to use for any purpose, including servicing our debt and paying dividends. Management determined that allocating each payment ratably throughout the year following receipt of each payment, as an add-back to Adjusted EBITDA, provided the most appropriate and decision-useful information to our investment community, and was consistent with the definition and economic substance of Adjusted EBITDA. Thus, the first payment of $43 million received in October 2016 was allocated on a pro rata basis to the fourth quarter of 2016 and the first three quarters of 2017, while the second payment received in October 2017 was allocated on a pro rata basis to the fourth quarter of 2017 and the first three quarters of 2018. Targa received the third payment of $43 million in September 2018.

In January 2018, Vitol US Holdings Co. (“Vitol”) acquired Noble. On

December 23, 2018, Vitol elected to terminate the Splitter Agreement, such termination being Vitol’s “sole and exclusive remedy” under the Splitter Agreement for claimed failure to achieve startup. Subsequently, Vitol has disputed this clear and unambiguous language and filed a lawsuit against Targa seeking remittance of payments made under the Splitter Agreement.

Management concluded that the filing of legal action by Vitol introduced a level of uncertainty that caused us to delay recognition of the related income for GAAP purposes. As such, the Company is treating the $129 million received as a contingency in accordance with ASC 450 Contingencies. As we received the third payment and had no other obligation under the Splitter

Agreement, the full amount of the third payment of $43 million and three quarters of the second payment ($32.2 million) resulted in our presentation of $75.2 million within Adjusted EBITDA for the year ended December 31, 2018.

In preparing our non-GAAP disclosures, we considered the

Non-GAAP Compliance and Disclosure Interpretations and specifically Question 100.04. The Company noted that Question 100.04 states “Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G” (emphasis added). The Company does not believe that we are in violation of Rule 100(b) of Regulation G, as our presentation of Adjusted EBITDA does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the presentation of Adjusted EBITDA, in light of the circumstances under which it is presented, not misleading. In addition to presenting the Splitter Agreement adjustment as a separate line item in the non-GAAP reconciliation, we included clear explanation of the adjustment within the non-GAAP presentation table footnotes presented in our Annual Reports. Additionally, since the execution of the Splitter Agreement, we have continued to provide transparent disclosures around the treatment of such payments within our public filings.

The recognition of the full $129 million on the income statement is dependent on the outcome of the legal proceedings with Vitol. Ultimately, upon a successful resolution in our favor, we will recognize the $129 million in GAAP income in the period of resolution. At such time, we will also include an offsetting adjustment within our non-GAAP reconciliation of Adjusted EBITDA in the period of resolution, with similar explanations and table footnotes, so as to eliminate the effect of the amounts included in Adjusted EBITDA during prior periods.

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You disclose that you proportionally consolidate certain gas and processing facilities in which you hold an undivided interest in and are responsible for your proportionate share of costs and expenses. Please identify which facilities you proportionately consolidate, the proportionate share relative to the total share of the revenues, expenses, assets and liablities of these undivided interests.

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Please explain in detail your basis in GAAP for using proportionate consolidation to reflect such operations. In doing so, please tell us the reasons your application of proportionate consolidation does not violate ASC 810-1045-14. If you believe that you are in either the construction or extractive industies, please explain why.

We respectfully acknowledge the Staff’s comment. ASC 810-10-45-14 (formerly EITF 00-1) provides that proportionate consolidation is appropriate if an investor-venturer owns an undivided interest in assets and is proportionately liable for its share of the liabilities. As defined in the ASC Master Glossary, an undivided interest is “an ownership arrangement in which two or more parties jointly own property, and title is held individually to the extent of each party’s interest.” An undivided interest can be contrasted from an ownership interest in a separate legal entity that owns the assets,

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for which the guidance in ASC 810-10-45-14 does not allow for proportionate consolidation unless the investee is in either the construction industry or an extractive industry.

The facilities that we proportionately consolidate include the gathering and processing facilities of our WestTX system, which are included in the Permian Midland business unit within our Gathering and Processing reporting segment. We own approximately a 72.8 percent undivided interest in the WestTX system, comprised of gas processing plants, gathering systems and related assets, for which no separate legal entity exists, and we are proportionately liable for our share of the WestTX system’s liabilities.

As our ownership interest is in the underlying assets of the WestTX system and not in a separate legal entity, we do not believe the exception to proportionate consolidation for unincorporated legal entities under ASC 810-10-45-14 is applicable. As such, we refer to the guidance in ASC 810-10-45-14 as it relates to undivided interests. Accordingly, we proportionately consolidate our share of the revenues, expenses, assets and liabilities of our undivided interest in the WestTX system. We believe our undivided ownership interest in the WestTX system is appropriately accounted for on a proportionate basis in accordance with ASC

810-10-45-14.

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We are unclear as to the reasons that the amendment to increase the priority return for capital contributions made on or after January 1, 2018 and the addition of a non-consent feature with respect to certain capital projects undertaken during the same time frame would result in the elimination of the redemption value.

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Please explain the mechanics of the adjustment to interest income as well as the economic reasons the amendments had a positive effect on net income and the reasons the preferred holders would agree to amendments that reduced the redemption value of their interests. Please be detailed in your response.

We respectfully acknowledge the Staff’s comment. To provide background, we entered into the original agreements with the joint venture partner for the WestTX and WestOK joint ventures in 2007 prior to the substantial growth in production of hydrocarbons recently observed in the Permian region. At that time, the expectation was that the agreed-upon redemption value of the partner’s preferred interests would be offset by the value of the notes receivable due from the partner at the date of redemption.

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The original intent of the arrangement was for the existing facilities to continue operating without significant asset additions requiring further capital investments from the partner. With the subsequent production growth in the Permian region and resulting expansion of the joint ventures’ operations, the partner benefited from growth in the value of the businesses without any additional funding for its share of capital investment, which was inconsistent with the intent of the agreements.

The purpose of the amendments executed in February 2018 was to revise the terms of the preferred interests to align with the original underlying intent of the joint ventures. These amendments added a non-consent feature effective with respect to certain capital projects undertaken on or after January 1, 2017

(please note this date is consistent with our disclosure in our Annual Reports, but differs from the date reflected in your comment above of January 1, 2018). As a result, the partner will no longer participate in the income or loss associated with non-participatory capital projects, which aligns the economic arrangement with the intent of the original agreements. Non-participatory capital projects are defined in the amendments as those in process or that began commercial operations on or after January 1, 2017 involving any extension, improvement, expansion or addition of the assets or facilities for which the non-participating partner declines to fund the required capital for such capital projects.

As described in our Annual Reports, upon redemption, (1) the distributable value of our partner’s interest in the joint ventures is required to be adjusted by (i) mutual agreement or (ii) under valuation procedures outlined in each joint venture agreement based on, among other things, changes in the market value of the joint ventures’ assets allocated to our partner (including the value of the notes receivable) and (2) the parties are obligated to offset the value of the notes receivable from our partner against the value of our partner’s interests in the joint ventures. The amendments limit the joint ventures’ value of assets allocated to our partner to those that are funded by the partner (i.e., those that are not non-participatory capital projects, as defined in the amendments). As discussed with the partner prior to entering into the amendments, we could have structured future growth projects outside of the joint ventures in order to avoid the partner sharing in the growth of the businesses without funding its share of capital investment but thought the amendments to the existing arrangement offered a more beneficial route to both parties. As an incentive to the partner to amend the terms of the joint ventures, the amendments provided the partner with an increase in priority returns should they choose to contribute capital in the future. Also, consistent with the original intent of the joint ventures, the partner has not contributed capital to the joint ventures since their initial capital contribution in

2007.

Changes in the estimated redemption value are reflected within interest (income) expense, net, on our consolidated statements of operations in accordance with the guidance in ASC 480-10-35-3, which states:

“Forward contracts that require physical settlement by repurchase of a fixed number of the issuer’s equity shares in exchange for cash and mandatorily redeemable financial instruments shall be measured subsequently in either of the following ways:

a. If both the amount to be paid and the settlement date are fixed, those instruments shall be measured subsequently at the present value of the amount to be paid at settlement, accruing interest cost using the rate implicit at inception.

b. If either the amount to be paid or the settlement date varies based on specified conditions, those instruments shall be measured subsequently at the amount of cash that would be paid under the conditions specified in the contract if settlement occurred at the reporting date, recognizing the resulting change in that amount from the previous reporting date as interest cost.” (emphasis added)

As noted above, the amendments reduced the distributable value of our partner’s interest in the joint ventures by limiting the assets and associated market value changes (i.e., earnings growth) allocated to our partner to exclude non-participatory capital projects. The amendments did not impact the value of the notes receivable. As a result, in the first quarter of 2018, the amendments reduced the redemption value net liability balance, which is recorded in accordance with ASC 480-10-35-3 as the estimated redemption value at the reporting date. Accordingly, the change in the net liability resulted in the recognition of a reduction of interest expense, net, with a positive effect on our consolidated net income for the period.

Future changes to the estimated redemption value will continue to be reflected within interest expense, net. As the net redemption value is a function of both the value of the businesses and the value of the notes receivable, as well as the partner’s ability to make contributions in the future, it is possible that the net balance could be a liability or an asset in future reporting periods.

To summarize, the amendments demonstrate the spirit of cooperation with our joint venture partner to agree on a mutually satisfactory arrangement and aligns the structure of the agreements with the intent of the original transaction.

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We have reviewed your response to comment 2. Please revise this measure in all future filings to exclude the adjustment for the "Splitter Agreement" presented in your Adjusted EBITDA measure. The measure as presented does not conform to Question 100.04 of the Non-GAAP Compliance & Disclosure Interpretations.

We respectively acknowledge the Staff’s comment. The Company and the Partnership will no longer include the adjustment for the

“Splitter Agreement” in its respective Adjusted EBITDA measure in all prospective filings, beginning with the Company’s earnings release on Form 8-K for the quarter ended June 30, 2019. Read in the reply ↗