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Spectra, Phillips 66 Bolster DCP Midstream in Cash And Asset Deal Valued at $3B

Six weeks after unveiling a plan to help DCP Midstream LLC (DCP) weather low commodity prices, Spectra Energy Corp. has agreed to acquire a one-third stake in two natural gas liquids (NGL) pipelines from its master limited partnership, while Phillips 66 (PSX) has agreed to contribute $1.5 billion in cash to DCP.

On Monday, Houston-based Spectra said it will acquire a one-third interest in the Sand Hills and Southern Hills NGL pipelines from Spectra Energy Partners LP (SEP) and contribute the assets to DCP. A spokeswoman for DCP told NGI on Wednesday that the assets were also valued at $1.5 billion, so collectively the deal is worth $3 billion.

Greg Ebel, CEO of both Spectra and SEP, said the cash and interests "will provide DCP with a stronger balance sheet and increased financial flexibility while positioning it to grow through future commodity cycles...[and it] allows DCP to retain and expand upon its leading position in the NGL sector while preserving the upside for the owners that will occur when commodity prices ultimately recover."

Under the agreement, which was announced on Sept. 8, Spectra will transfer for redemption and cancellation 21.56 million limited partner units; 440,000 general partner units; and reduce distribution right payments associated with the cancelled units. Spectra will also grant a three-year, $4 million per calendar quarter giveback of distributions on its incentive distribution rights, beginning with distributions payable in 1Q2016.

Both transactions, which are subject to customary closing conditions, are expected to close in 4Q2015. SEP's board has approved the deal with Spectra.

The Sand Hills system measures 1,110 miles, includes a 720-mile mainline (250,000 b/d current capacity, expandable to 350,000 b/d), and transports NGLs from the Permian Basin and the Eagle Ford Shale. Meanwhile, the Southern Hills system is 940 miles long, includes an 800-mile mainline (175,000 b/d capacity) and transports NGLs from the Midcontinent. Both bring NGLs to Gulf Coast markets and a hub in Mont Belvieu, TX. They entered service in June 2013 (see Shale DailyJune 18, 2013). DCP operates both pipelines.

Phillips 66 Partners LP (PSXP) and DCP Midstream Partners LP each own a remaining one-third stake in the Sand Hills and Southern Hills pipelines. DCP owns nearly all of DCP Midstream GP LP, the general partner of DCP Midstream Partners LP. Meanwhile, DCP is a 50-50 joint venture of Spectra and PSX (see Daily GPIMarch 8, 2007).

DCP owns two interstate NGL pipelines. The Wattenberg pipeline (22,000 b/d of capacity) measures 500 miles in length and traverses Colorado and Kansas, while the Black Lake pipeline (40,000 b/d) runs from Louisiana to Texas. It also owns two intrastate NGL pipelines in Texas: the Seabreeze pipeline (56 miles, 41,000 b/d) and the Wilbreeze pipeline (39 miles, 11,000 b/d).

DCP owns a one-third stake in the 450-mile Front Range NGL pipeline (150,000 b/d of capacity), and a 10% stake in the 583-mile Texas Express NGL pipeline (280,000 b/d). It also holds a 15% stake in the 181-mile Panola NGL pipeline. Enterprise Product Partners LP, the majority owner and operator of Panola, is expanding its capacity by 50,000 b/d and hopes to have it available in 1Q2016.

According to DCP's website, the company is the largest producer of NGLs in North America. It is also the continent's largest gas processor and the third-largest operator of NGL pipelines.

Spectra first acquired the one-third stake in the two pipelines in November 2012, while they were still under construction (see Shale DailyNov. 1, 2012). One year later, it dropped down its interest in the pipelines and other assets to SEP for $2.3 million in cash and a debt transfer of $2.4 million (see Daily GPINov. 4, 2013).

Last March, PSXP acquired PSX's one-third equity interest in the two pipelines, plus Explorer Pipeline Co., in a transaction valued at more than $1 billion (see Shale DailyFeb. 17). At the time the deal was announced, PSXP said the Sand Hills pipeline could be expanded to 350,000 b/d of capacity with additional pumping stations.

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