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CenterPoint-OGE to Form Partnership

Zacks Equity Research

CenterPoint Energy (CNP) inked a deal with OGE Energy Corp. (OGE) and ArcLight Capital Partners LLC to form a new midstream partnership business arm. The partnership will be run by a general partner and controlled equally by CenterPoint and OGE Energy.

The partnership is expected to come into existence by the second or third quarter of 2013 and is subject to regulatory sanctions and certain third-party approvals. The business will include CenterPoint’s interstate pipeline transmission and field service units and the joint midstream unit of OGE and ArcLight, Enogex LLC.

Per the agreement, the newly formed partnership will have to make provision for a $1.4 billion credit facility and a $1.05 billion term loan. CenterPoint, OGE and ArcLight will hold 59%, 28% and 13% interests, respectively, in the business unit which is subject to certain customary closing conditions.

The agreement has received approval from the board of directors of all the three companies. CenterPoint and OGE, however, will hold 40% and 60% stakes in the incentive distribution rights of the general partner.

The partnership’s portfolio of assets will include 8,400 miles of interstate pipelines with maximum transport capacity of 9 billion cubic feet (Bcf) and an additional 2,300 miles of intrastate pipelines. In addition to this it will have 11,000 miles of gathering lines which transmitted about 4 Bcf per day of natural gas in 2012. Add to this, the partnership will have 90 Bcf of gas storage facility and eleven processing plants having inlet capacity of around 2 Bcf.

The pipeline and storage facilities of this new partnership are strategically located near some of the resource-rich properties in the U.S. The partnership will have access to the properties of Granite Wash, Tonkawa, Mississippi Lime, Cana Woodford, Haynesville, Fayetteville, Barnett and Woodford. Moreover, the partnership’s large-scale and diversified business spread across the premier gas and natural liquids regions of Oklahoma, Texas, Arkansas and Louisiana will complement its broad growth objectives.

Given the encouraging prospects of the midstream business in the U.S., we believe this partnership strategy will help strengthen the companies position in the market. Further, the growing usage of natural gas as a utility energy source in the U.S. will act as an added catalyst.

CenterPoint might gain some ground in its pipeline business which did not do too well in the fourth quarter of 2012 due to contract expirations, decline in commodity prices and lower system transportation revenue. CenterPoint currently has a Zacks Rank #2 (Buy).

We also prefer the Zacks Ranked #1 (Strong Buy) utility stocks Pike Electric Corp. (PIKE) and Otter Tail Corp. (OTTR).

Based in Houston, TX, CenterPoint operates as a public utility holding company in the United States.

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