Targa Resources to buy Atlas Pipeline, Atlas Energy

Targa Resources, Standard & Poor's

US pipeline company Targa Resources Corp., the general partner of Targa Resources Partners LP, has agreed to acquire Atlas Energy LP's incentive distribution right, limited partner, and general partner interests in Atlas Pipeline Partners LP.

Prior to closing, Atlas will spin-off its non-midstream assets to Atlas Energy unitholders. The acquisitions are contingent on one another, and the transactions will close concurrently.

Targa Resources Partners will acquire Atlas Pipeline Partners for total consideration of $5.8 billion, including $1.8 billion of debt as of September 30, 2014. Each APL common unitholder will be entitled to receive 0.5846 units of Targa Resources Partners and a one-time cash payment of $1.26 per APL common unit for total consideration of $38.66 per APL common unit, based on the closing price of the Partnership's units on October 10, 2014. The exchange ratio was negotiated as a 15% premium for APL common unitholders based on the volume weighted average prices of APL and TRP units during the 15 trading days ending October 3, 2014.  The partnership will also redeem APL's Class E Preferred Units for an aggregate amount of $126.5 million in cash.

The partnership expects to finance the cash portion of the transaction with borrowings under its revolving credit facility. In connection with the acquisitions, Targa Resources has agreed to reduce its incentive distribution rights for the four years following closing by fixed amounts of $37.5 million, $25.0 million, $10.0 million and $5.0 million, respectively. Based on the partnership's units outstanding as of September 30, 2014, current TRP unitholders will own approximately 66% of the pro forma combined partnership and current APL common unitholders will own approximately 34%.

Prior to Targa Resources' acquisition of Atlas Energy, ATLS will spin-off its non-midstream assets. After giving effect to the spin-off, ATLS's assets will solely comprise its general partner and incentive distribution rights interests in APL and 5.8 million APL common units. Immediately following the spin-off and subject to the concurrent closing of the partnership's acquisition of APL, Targa Resources will acquire Atlas Energy for total consideration of $1.869 billion, including 10.35 million TRC shares valued at $1.259 billion based on the closing price of TRC's common stock on October 10, 2014 and $610 million in cash.

Targa Resources has arranged committed financing of $1.1 billion to replace its existing revolving credit facility and to fund the cash components of the transaction, including cash merger consideration and $149 million related to change of control payments. Based on shares of TRC and units of ATLS outstanding as of September 30, 2014, current Targa Resources shareholders will own approximately 80% of the pro forma shares outstanding and current ATLS unitholders will own approximately 20%.

Midstream franchise with increased scale, geographic diversity
"The acquisitions will significantly and immediately increase our scale and geographic diversity, accelerating the growth of our premier North American midstream platform. APL's footprint solidifies the partnership's position as a leader in the Permian Basin, while adding top-tier assets in the Midcontinent and South Texas regions," said Joe Bob Perkins, CEO of Targa Resources and of the general partner of the partnership.

The combination creates a large midstream franchise with increased scale and geographic diversity in key producing basins in the US, and creates one of the largest diversified MLPs on an enterprise value basis. Notably, the combination introduces positions in the Woodford/SCOOP, Mississippi Lime, and Eagle Ford plays.

Additionally, the deal would add Permian assets to the partnership's existing Permian, Bakken, Barnett, and Louisiana Gulf Coast operations. The combined position across the Permian Basin would boost processing capacity in the basin to 1,439 MMcf/d across 10,250 miles of pipelines.

Standard & Poor's Ratings Services placed the 'B+' corporate credit and senior unsecured ratings on Atlas Pipeline Partners LP on CreditWatch with positive implications. The firm also revised the CreditWatch listing on the 'B' corporate credit and senior secured ratings on Atlas Energy LP to developing from negative. At the same time, it placed its 'BB+' corporate credit and senior unsecured debt ratings on Targa Resources Partners LP on CreditWatch with positive implications.

“In our view, Atlas Pipeline's assets are located in favorable basins with compelling drilling economics, characterized by high utilization (about 93% to date in 2014) and strong gathering and processing volumes across the firm's operating footprint. The partnership continues to grow rapidly in tandem with robust production forecasts and we expect 2014 gathering volumes to be nearly three times greater than those of 2011. Despite favorable drilling fundamentals, a slower-than-anticipated build-out of assets, meaningful amounts of ethane rejection, and the need to offload gathering volumes to third parties have contributed to compressed margins and lower cash flow. However, we believe this will partially abate in 2015,” noted the agency.

“In our view, the transaction complements Targa's core competencies in the gathering and processing business, enhances its asset position in the Permian Basin, and expands its operating footprint to attractive regions such as the Anadarko Basin and Eagle Ford Shale. Pro forma for the transaction, we expect fee-based arrangements to represent about 60% of the partnership's operating margins and that Targa will continue to manage its commodity risk in a disciplined manner,” the agency continued.

Evercore Partners acted as financial advisor to Targa Resources Partners and the special committee of the Targa Resources Partners' Board of Directors. Richards, Layton & Finger served as legal counsel to the special committee of the Board of Directors of the general partner of Targa Resources Partners. Wells Fargo Securities, LLC acted as financial advisor to Targa Resources Corp. and Vinson & Elkins LLP acted as legal counsel for the Partnership and the Company. BofA Merrill Lynch is providing committed financing to Targa Resources for the transaction.



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