TEXT - S&P rates Targa Resources notes 'BB'
Overview -- U.S. midstream energy limited partnership Targa Resources Partners is issuing $400 million of senior unsecured notes due 2023. Targa plans to use net proceeds to redeem its 2016 notes, repay revolving credit facility borrowings, and for general corporate purposes. -- We are assigning our 'BB' issue rating and '4' recovery rating to the notes. -- The stable outlook reflects our view that Targa will maintain consolidated leverage below 4x and adequate liquidity while executing its 2013 organic expansion. Rating Action Oct 22 - Standard & Poor's Ratings Services assigned its 'BB' issue-level rating and '4' recovery rating to Targa Resources Partners L.P.'s and Targa Resources Partners Finance Corp.'s proposed $400 million senior unsecured notes due 2023. The '4' recovery rating indicates our expectation of average (30% to 50%) recovery if a payment default occurs. The partnership intends to use net proceeds to redeem its 2016 unsecured notes, reduce borrowings under its secured revolving credit facility, and for general corporate purposes, which may include redeeming or repurchasing some of its other outstanding notes, working capital, and funding acquisitions. Pro forma for the notes offering, Targa has total balance-sheet debt of about $1.6 billion. Rationale The rating on Houston-based Targa Resources Partners reflects a "fair" business risk profile and "significant" financial risk profile. Key factors for the business risk include cash flows that are largely vulnerable to volatile commodity prices and volume risk, limited asset diversity, and the master limited partnership (MLP) structure, under which the partnership distributes virtually all cash flow. Targa's growing geographic diversity and fee-based cash flows, low financial leverage, and solid liquidity partly mitigate these risks. Under our 2013 base-case forecast, we assume 10% growth in field gathering and processing volumes, a 5% decline in coastal gathering and processing volumes, and modest growth in marketing and distribution and logistics segment EBITDA. Our forecast incorporates our price assumptions for West Texas Intermediate (WTI) crude oil of $80 per barrel, Henry Hub natural gas prices of $3.00 per million Btu, and a composite natural gas liquids (NGL) price of 96 cents per gallon. We have not assumed any additional equity issuance in our forecast. Based on these assumptions, we believe Targa will achieve EBITDA between $580 and $590 million, including our adjustments. We expect debt to EBITDA to be between 3.75x and 3.9x. We believe financial leverage could improve to about 3.5x if Targa funds its 2013 capital spending with a balance of debt and equity. We have also assumed distributable cash flow coverage of about 1.1x for 2013, based on 10% distribution growth. In our opinion, this projected coverage ratio provides limited cushion to distributable cash flow if commodity prices fall sharply. Targa's consistent hedging policy supports its credit profile. The partnership hedges the commodity risk of expected natural gas, NGL, and condensate equity volumes with a combination of swaps and purchased puts that are rolled through 2015. Management stated that it has hedged 60% of natural gas and 80% of its NGL equity volumes for 2012 and between 45% and 55% of natural gas, NGL, and condensate volumes for 2013, which should provide some cash flow certainty, in our view. Targa's gathering and processing contract mix is about 40% percentage-of-proceeds/percentage-of-liquids, 21% keep-whole, 36% hybrid, and 3% fee-based. Fee-based cash flows accounted for about 40% of total EBITDA when including Targa's downstream business segment. Targa's field gathering and processing segment is the primary contributor to cash flows, accounting for about 40% of total operating margin. The partnership's gathering systems access the Barnett Shale in North Texas and the Permian Basin and Wolfberry Trend in West Texas. We believe volumes in North Texas and certain parts of the Permian Basin will be higher in 2013 because of producers' focus on the oil- and liquids-rich areas of these plays. In our view, Targa's coastal straddle plants carry more risk than the field segment, because of the potential for cash flow volatility from its largely hybrid and keep-whole contract mix. Although the partnership hedges some of its field gathering and processing margins, the keep-whole volumes aren't hedged. However, its mostly industrial customer base can burn gas with a higher Btu content when these contracts are uneconomic, which partly mitigates keep-whole risk. We believe the coastal segment's volumes will decline slightly in 2013. Nevertheless, we expect the strong processing environment (i.e., the higher price of NGLs relative to the price of natural gas). Cash flow from the downstream business (the logistics and marketing and distribution segments) is generally fee-based, which mitigates the effect of changes in petrochemical demand and NGL prices. These assets are connected to important hubs such as Mont Belvieu--including the Galena Park marine terminal, near Houston--and Lake Charles, La., where Targa manages its equity and third-party volumes. The NGL logistics and marketing division is a fully integrated system that can fractionate, store, and distribute NGLs under fee-based and margin-based contracts. Liquidity We consider Targa's liquidity to be "adequate" under our corporate criteria. We estimate the partnership's sources of liquidity will exceed uses by about 1.4x in the next 12 months pro forma for the notes offering. Sources of liquidity include FFO of $450 million and $1.1 billion available under the revolving credit facility that matures in 2015. Key uses include capital spending (growth and maintenance) of $760 million and distributions of about $350 million. Targa has no near-term maturities. In addition, the partnership's hedges have no collateral posting requirements, because counterparties' mark-to-market exposure is secured pari passu with the bank debt. We expect Targa to remain in compliance with its bank covenants in 2013, which include a minimum EBITDA interest coverage of 2.25x, maximum total leverage of 5.5x, and maximum senior leverage of 4x. As of June 30, 2012, Targa has a significant EBITDA cushion of 47% under its total debt to EBITDA leverage test before it would breach that covenant. Recovery analysis The rating on Targa's senior unsecured debt is 'BB' (the same as the corporate credit rating), and the recovery rating is '4', indicating our expectation that lenders would receive average (30% to 50%) recovery if a payment default occurs. Outlook The stable outlook on the ratings reflects our view that Targa will maintain consolidated leverage below 4x and adequate liquidity while executing its 2013 organic expansion. Higher ratings are unlikely in the next 12 to 18 months, but are possible over time if Targa expands its geographic reach into new resource plays, diversifies its business mix, meaningfully increases its fee-based cash flows, and keeps financial leverage in the low-3x area. We could lower the rating if lower commodity prices or a decrease in volumes cause EBITDA to decline and financial ratios to deteriorate, such that total debt to EBITDA is more than 4.75x for a sustained period. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Standard & Poor's Revises Its Natural Gas Liquids Price Assumptions For 2012, 2013, And 2014, June 11, 2012 -- Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Targa Resources Partners L.P. Corrporate credit rating BB/Stable/-- New Ratings Targa Resources Partners L.P. Targa Resources Partners Finance Corp. $400 mil senior unsecured notes BB Recovery rating 4
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