Warburg Drives Deeper Into The Midstream –

With energy prices soaring at record highs, private equity firms privy to the ins and outs of investing in the sector find themselves in a favorable position for consolidation plays. This is so partly because many of the larger corporate players in the sector-from upstream players in the oil and gas exploration and production arena to the niche service providers dealing in pipelines, drill bits and logistics-are shedding assets deemed non-essential to their core operations.

A recent example that underscores private equity’s appeal to energy is New York-based Warburg Pincus’s agreement earlier this month to acquire Dynegy Inc.’s midstream natural gas business in a transaction valued at $2.475 billion. Of the total cost, $2.35 billion will be paid upon the deal’s closing, expected to take place in the fourth quarter of this year. Dynegy expects to realize the remaining $125 million in the form of a return of cash collateral within 60 days after the deal’s close.

Dynegy’s Houston, Texas-based midstream natural gas business includes approximately 9,300 miles of natural gas gathering pipeline systems and 11 operated gas plants located in Texas, New Mexico and on the Texas and Louisiana Gulf Coast. Other assets include natural gas liquids transportation and logistics operations throughout the U.S., and interests in six non-operated gas plants and three stand-alone fractionation facilities and strategic storage, transportation and terminalling.

“Deals like Warburg/Dynegy-while often complicated and a bit on the technical side-are the kinds of deals that provide sophisticated buyers with the assurance of a strong return,” said one private equity player who deals in the energy space. “Midstream natural gas assets, if you’ll excuse the expression, are likely to blow up with the introduction of a robust [liquefied natural gas] infrastructure in the U.S.”

Upon the deal’s close, the Dynegy assets will become a part of Targa Resources Inc., a midstream energy holding company, formed by Warburg Pincus in April 2003, which targets gathering, processing and transmission acquisitions. Warburg has already made two major acquisitions through Targa, which include the midstream assets of ConocoPhillips and a 40% stake in Enron’s interest in Bridgeline LLC for approximately $100 million. In all, Targa currently owns operations in Texas and Louisiana and operates more than 2,000 miles of natural gas gathering and intrastate pipelines and five gas plants.

Peter Kagan, a managing director at Warburg Pincus, said that the firm’s goal for Targa is to grow it into a “leading midstream company,” adding that the acquisition of Dynegy’s midstream assets presents “a number of attractive value enhancement and growth opportunities” for the platform.

For Dynegy, the intended sale will allow the company to pursue new strategic directions for its power generation business.

Post closing, the former Dynegy midstream asset will continue to be headquartered in Houston. In addition, nearly 800 field and corporate workers currently employed by Dynegy will join Warburg-led Targa, which is headed by CEO Rene Joyce. Stephen Furbacher, executive vice president of Dynegy’s midstream business, will retire from Dynegy but has agreed to serve as a consultant to Targa after the closing of the transaction to help ensure a smooth transition.