Is preferred equity a trend for master limited partnerships? (Part 3 of 5)
Atlas Pipeline Partners
Earlier in March, Atlas Pipeline Partners (APL)—a gathering and processing master limited partnership (or MLP)—announced an offering of preferred equity. Through this offering, APL raised net proceeds of $106.5 million through the sale of 4.4 million 8.25% cumulative redeemable perpetual preferred units at a price of $25.00 per unit. APL may end up with net proceeds of $122.5 million if the underwriters that helped the company carry out the deal exercise an option they have to purchase an additional 660,000 units of preferred stock. Atlas Pipeline stated that it intends to use the proceeds to repay a portion of its debt under its senior secured revolving credit facility (which acts as a sort of credit card for companies).
As the preferred equity will be used to repay debt, the capital markets transaction has the immediate effect of reducing leverage (the ratio of debt to EBITDA—earnings before interest, tax, depreciation, and amortization) and lowering the debt-to-capitalization ratio. Current leverage stands at 4.9x, and management has stated that its goal is to lower leverage to 4.25x or better by year end 2014.
Note that APL will likely raise common equity or draw more on its credit facility soon to fund its growth capital expenditure plans, which the company expects will require $450 million to $500 million in 2014. The proceeds from the issuance of the preferred equity at least fill in some of the funding required to fund capex, and without further leveraging APL’s balance sheet. Earlier in the month, APL also announced plans to sell its 20% interest in the West Texas LPG pipeline, which some market participants estimate could generate ~$90 million in proceeds, and which would also help to fund capex plans. Plus, while the preferred equity and asset sales don’t fill all of the cash funding needs, they may help the trading levels of APL’s common units if investors feel that less common equity now needs to be issued. Generally, when a lot of new equity is issued, it tends to weigh down stock prices, given the new supply on the market and the fear of the transaction being dilutive.
Note that the preferred equity still is associated with a cash outflow from APL to pay distributions. Assuming the underwriters exercise their option to purchase the additional 660,000 units of preferred stock, 5.06 million units will be outstanding. At a sales price of $25, the par value of the preferred units is $126.5 million, on which an 8.25% distribution is paid. So the cash effect to APL is a payment of $10.4 million a year. However, distributions aren’t like interest payments on debt in that they’re not required to be paid out. We’ll discuss the nuances of this difference later in this series.
Atlas Pipeline Partners is part of the Alerian MLP ETF (AMLP) and the Global X MLP ETF (MLPA). In the next part of this series, we’ll discuss the preferred equity issuance of Vanguard Natural Resources (VNR), which is part of the Global X Junior MLP ETF (MLPJ).
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