Targa Resources Partners, Targa Resources: A Guide to the Merger
(Continued from Prior Part)
NGLS-TRGP deal may reduce leverage
The consolidation of Targa Resources Partners (NGLS) and Targa Resources (TRGP) is expected to result in $400–$600 million of incremental cash-flow coverage. These funds could be used to reinvest in the business or reduce borrowings.
Since this is an equity-only transaction, no additional financing is required. This may help reduce Targa’s existing leverage over time as a result of the increased retained cash flow. For the consensus pricing scenario, pro forma compliance leverage related to debt covenants will be reduced by 0.3 times in 2018.
No change in outstanding debt post TRGP-NGLS deal
The TRGP-NGLS consolidation itself will not change outstanding debt for NGLS, which will remain outstanding as is. The company expects to retain the same compliance covenants, which are currently 5.5 times debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization). The above graphs show expected improvement in NGLS and TRGP leverage levels over three years.
The debt-to-EBITDA ratio is often used to assess a company’s ability to repay debt. It’s commonly used by credit rating agencies to determine a company’s credit rating. A lower ratio is considered better from a credit perspective. MLPs generally target a ratio below 4x.
Just like an NGLS stand-alone, the consolidated entity is also expected to benefit from increased cash flows. It should be noted that TRGP is not subject to any compliance covenant for leverage. The expected deleveraging will improve the company’s financial flexibility, helping it to better capitalize on investment opportunities.
TRGP forms ~3.3% of the Global X MLP & Energy Infrastructure ETF (MLPX). Targa Resources intends to keep long-term leverage of 3x to 4x.
You can read about the merger of MarkWest Energy Partners (MWE)and MPLX (MPLX) in Key for Investors: Analyzing the MarkWest-MPLX Merger.
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