After a relatively quiet front few years in which only one or two big announcements were made, the master limited partnership (MLP) market has gotten off to a big start in 2013 as Kinder Morgan Energy Partners announced in January that it was acquiring Copano Energy and last week CenterPoint Energy, OGE Energy and ArcLight Capital Partners announced the formation of a new midstream MLP.
This announcement is a further sign that the midstream remains healthy and the MLP initial public offering (IPO) market is slowly but surely returning. The new MLP that CenterPoint, OGE and ArcLight plan on creating will combine CenterPoint’s interstate pipelines and field service businesses, while OGE and ArcLight contribute their holdings in Enogex.
CenterPoint will have a 59% interest in the privately held MLP with OGE holding a 28% interest and ArcLight the remaining 13% interest. This partnership will be governed by a general partner that is 50% controlled by both OGE and CenterPoint. The companies intend to file an IPO within six to 12 months of the partnership’s formation.
David McClanahan, president and chief executive of CenterPoint, said that the combination of these companies’ midstream holdings will accelerate previous plans by CenterPoint and OGE to form their own MLPs.
“We believe this partnership will have the attributes of a strong MLP – scale, diversity and growth—with consistent and predictable cash flows. This partnership should be much stronger and more competitive than either company could have achieved on a standalone basis,” he said during a conference call to discuss the new MLP.
“We have complementary skill sets, capabilities and assets. Together, we will have greater scale, geographic reach, diversification and service capabilities and expect to realize operating and commercial synergies. More importantly, we believe we can grow faster and capture more opportunities in a midstream industry that has become more competitive over time,” he continued.
The combination of the two companies’ assets will allow this lone MLP to reach an investment-grade rating where the individual MLPs would not have been able to achieve this designation right away.
Indeed, this combination of companies will provide the partners with more attractive access to capital due to its size and scope, which includes 8,400 miles of interstate pipelines with nearly 9 billion cubic feet (Bcf) of transport capacity, almost 2,300 miles of intrastate pipelines, more than 11,000 miles of gathering pipelines, more than 90 Bcf of natural gas storage capacity and 11 natural gas processing plants with almost 2 Bcf per day of inlet capacity.
“We all believe the formation of this partnership will allow us to accelerate our growth by combining the two companies to achieve more scale and market reach with enhanced capabilities. Our new company will have multi-state assets and a superb operational know-how with an excellent portfolio of processing and pipeline assets,” Pete Delaney, chairman, president and chief executive of OGE Energy, said during the call.
This partnership will have a strong presence in the Granite Wash, Tonkawa, Mississippi Lime, Cana Woodford, Haynesville, Fayetteville, Barnett and Woodford plays with a balanced mix of dry gas and liquids-rich plays that will soon enter the Bakken shale, according to Keith Michelle, president of Enogex.
The partnership will also feature access to customers in Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas through CenterPoint’s pipeline system, which will combine with Enogex’s processing plants to create a diversified, fee-based midstream company. Officials anticipate that approximately 60% of the MLP’s earnings will be driven by fee-based holdings with the remaining 40% of earnings being exposed to commodities.
McClanahan said that the new MLP will be able to take advantage of $50 million worth of synergies that can be captured, though officials hope to realize an even greater value going forward. However, OGE Energy and CenterPoint will compete with each other outside of the midstream sector.
He added that the reason that the companies choose to load up the MLP with all of their combined assets rather than start the MLP small and perform dropdowns was because of the complexity involved in dropdowns from two companies into one MLP. In addition, securing the assets up front will allow the partnership to take advantage of greater cash flow.
The increased scale will allow the company to expand into the Bakken as well as the crude oil gathering. “[CenterPoint and Enogex] have a customer base that doesn’t have a lot of overlap. Together we’re going to have a much broader customer base that we’re going to have direct relationships with. We believe the additional capabilities that this partnership brings means we are going to be able to create more value for our joint customers, and we’ll be able to grab more growth there,” McClanahan said.
Mitchell noted that there will be advanced opportunities for organic growth within the MLP, which has yet to be named, due to its large scale and breadth of assets and regions it operates in.
Contact the author, Frank Nieto, at fnieto@hartenergy.com
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