Targa Resources Inc. last week completed its $2.35 billion acquisition of Dynegy Inc.'s formidable midstream natural gas business, which includes gas gathering and processing facilities, as well as its natural gas liquids (NGL) fractionation, terminaling, storage, transportation, distribution and marketing assets. With the sale, which was announced in August (see NGI, Aug. 8), Dynegy is now a pure power generation player.
Before the Dynegy purchase, Targa held midstream operations in West Texas and southwest Louisiana, operating more than 2,000 miles of natural gas gathering and intrastate pipelines, five gas plants with 400 MMcf/d capacity and system throughput of about 370 MMBtu/d. Targa's website describes the company as "the midstream portfolio company of Warburg Pincus," which "is targeting midstream gathering, processing and transmission asset acquisitions in stable supply and demand areas, primarily located in the Gulf Coast, Gulf of Mexico, MidContinent and Rocky Mountain regions. When it was formed in April 2003, its investors projected Targa's enterprise value would "top $1 billion within the first 18 months of operation."
The Dynegy assets are located in West Texas, southeast New Mexico, North Texas, and along the Texas and Louisiana Gulf Coast. Included are about 9,300 miles of natural gas gathering pipeline systems and 11 operated gas plants. The midstream business also holds a stake in six nonoperated gas plants and in three stand-alone fractionation facilities and strategic storage, transportation and terminalling facilities on the Texas and Louisiana Gulf Coast. It also owns or controls NGL transportation and logistics assets throughout the United States.
Included in the sale are Dynegy's Louisiana-based gas processors, some of which were severely damaged by Hurricanes Katrina and Rita. Supply constraints caused by damage to Dynegy's Venice, LA gas processing plant led several major Gulf Coast interstate pipelines, including Texas Eastern Transmission and Discovery Gas Transmission LLC, to recently seek transportation alternatives to undamaged facilities (see NGI, Oct. 31; Oct. 17).
David Byford, Dynegy's director of corporate communications, told NGI that Targa has assumed responsibility for the Louisiana assets and recovery of the damaged facilities.
Dynegy's sale proceeds include $2.35 billion in cash, which was received last Monday. In addition, Targa has assumed responsibility for approximately $47 million in letters of credit provided by Dynegy for the midstream business, with the replacement of those letters of credit to occur within 90 days.
The payment to Dynegy for most of the balance of the sale proceeds, representing its cash collateral related to the midstream business, is expected to be received by Dec. 31, 2005. The total amount of cash collateral, which is approximately $95 million, is lower than Dynegy's Aug. 2, 2005 estimate of $125 million primarily because it posted less cash collateral after the business interruptions from the hurricanes.
In connection with the transaction, Dynegy amended its $1.3 billion credit facility into a $1 billion facility, which consists of a $600 million cash-collateralized revolving credit facility due in 2005 and a $400 million cash-collateralized letter of credit facility due in 2008. Proceeds from the new $600 million revolving credit facility will be used to repay the outstanding balance of the company's term loan. Dynegy expects the $600 million revolving credit facility to be repaid in the "very near term," it said.
When combined with the repayment of $189 million in debt related to Dynegy's Riverside, KY power plant, which will be satisfied using cash-on-hand, the company's immediate net debt reduction will total about $800 million. Dynegy's Byford said the company would issue an update on its debt reduction when it releases its third quarter report Nov. 8.
"In building a viable merchant power company, our first priority has been to develop a sustainable capital structure, an objective that is largely achieved by the sale of the midstream business and the attendant reduction in net debt outstanding," said Dynegy CEO Bruce A. Williamson. "In addition to providing the company with the means to dramatically reduce our debt, the transaction also provides significant optionality for Dynegy to capture value for our equity investors through reinvestment and recapitalization opportunities in the future."
Targa CEO Rene Joyce said the acquisition establishes the company as "a leading midstream energy company and a trusted service provider across all segments of the NGL value chain." Dynegy's former midstream business will continue to be based in Houston, and its existing 800-member workforce will join Targa, which is affiliated with private equity investor Warburg Pincus.
Targa also announced last week it will appoint James W. Whalen as president of finance and administration. Whalen has served as an outside director on the Targa board since 2004. Previously, he was CFO and vice chairman of Parker Drilling Co. He also worked with Joyce at Tejas Gas and Coral Energy.
Last year, Targa bought two integrated gas systems in Texas and Louisiana from ConocoPhillips for an undisclosed amount (see NGI, April 5, 2004). In August of this year Targa announced it would sell its 40% interest in the Bridgeline LLC to Chevron, which owns the other 60% (see NGI, Aug. 8). The terms of that sale also were not disclosed. The announcement came several days after Targa announced the planned Dynegy purchase. Targa had bought the Bridgeline interest less than a year before for about $100 million.
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