CenterPoint Energy Inc., OGE Energy Corp. and ArcLight Capital Partners are forming a new midstream master limited partnership (MLP) that will start off with 8,400 miles of interstate and 2,300 miles of intrastate pipelines in Oklahoma, Arkansas, Texas and Louisiana, plus some other assets.
The MLP will include CenterPoint's interstate pipelines and field services businesses and the midstream business of Enogex LLC, owned jointly by subsidiaries of OGE and ArcLight. The partnership will be managed by a general partner whose governance will be shared by CenterPoint Energy and OGE on a 50/50 basis.
"This new company will be a significant participant in the rapidly growing midstream market," said CenterPoint Energy CEO David M. McClanahan. "With enhanced scale, broader geographic reach and expanded capabilities, the partnership will be able to compete in ways that neither we nor Enogex could do as separate companies."
During a conference call to discuss the deal, McClanahan was asked by an analyst, "why not start smaller?" For one, he responded, there's plenty of growth to come. But another reason was complexities related to indentures, and the ArcLight-OGE partnership would have made it difficult to get a "workable" dropdown strategy in place, he said. CenterPoint and OGE each had been talking about forming its own MLP. Combining efforts gives them a faster route to where they want to be, company executives said.
On Friday, CenterPoint shares closed up more than 7% at $23.41 after setting a new 52-week high at $24.01 on volume that was more than seven times the norm. OGE shares closed up more than 10% at $67.64 after setting a new 52-week high at $67.88 on volume that was five times the norm.
The MLP's interstate pipelines will have 9 Bcf/d of capacity. It will also hold more than 11,000 miles of gathering lines, which last year carried 4 Bcf/d of gas. In addition, it will have more than 90 Bcf of gas storage capacity and 11 "major" processing plants with nearly 2 Bcf/d of inlet capacity, the companies said.
Geographic diversification will give the partnership operations in major natural gas and liquids-rich producing areas in Oklahoma, Texas, Arkansas and Louisiana. It will have positions in plays such as the Granite Wash. Tonkawa, Mississippian Lime, Cana Woodford, Haynesville, Fayetteville, Barnett and Woodford shales. It will have "meaningful" synergies in operations and commercial activities, "stable and predictable" cash flow and independent access to capital, the companies said.
"The stronger financial and operational capabilities of the new partnership should allow us to realize the full potential of these assets," said OGE Energy CEO Pete Delaney. "We believe all of our shareowners will benefit from the creation of this partnership as a stronger competitor that we expect to be valued on a public MLP basis."
ArcLight Senior Partner Robb Turner said the partnership offers an attractive means to invest in the buildout of natural gas and natural gas liquids (NGL) infrastructure in the United States. "The combination of growth opportunities, long-term customer relationships and stable assets across many of the premier on-shore U.S. basins complement each other well and provide a compelling investment thesis," he said.
Last summer, consultancy Deloitte cited Energy Transfer Partners LP's $9 billion deal to acquire Sunoco (see Shale Daily, May 1, 2012) and the tie-up of Kinder Morgan Inc. and El Paso Corp. before it (see Shale Daily, Oct. 18, 2011) when it predicted consolidation to come in the midstream sector (see Daily GPI, Aug. 8, 2012).
The partnership's management is to be announced after regulatory approvals are received. Prior to closing both companies will continue to operate independently, and teams of personnel from both companies will develop an integration plan that can be implemented once the transaction has closed, which is expected during the second or third quarter.
The companies said they will seek a new $1.4 billion credit facility as well as a $1.05 billion term loan. Subject to adjustments at closing, CenterPoint Energy, OGE Energy and ArcLight will have 59%, 28% and 13%, respectively, limited partner interest. CenterPoint Energy and OGE Energy will hold 40% and 60% interests, respectively, in the incentive distribution rights of the general partner.
An initial public offering (IPO) of equity interest in the partnership, depending upon market conditions, is expected but not guaranteed, the companies said. During the conference call, executives gave a six- to 12-month estimate of when an IPO might occur, adding that the preference is for sooner rather than later.