Why master limited partnerships have to rely on external funding (Part 4 of 5)
DCP Midstream Partners, LP (DPM) owns, operates, acquires, and develops midstream energy assets in the U.S. The company serves retail and wholesale propane customers, refining and petrochemical companies, and NGL marketers operating in the liquid hydrocarbons industry. It has three operating segments: Natural Gas Services, NGL Logistics, and Wholesale Propane Logistics. The Natural Gas Services segment is engaged in gathering, compressing, treating, processing, transporting, storing, and selling natural gas. This segment holds approximately 11,500 miles of pipelines; 20 plants; five fractionators; approximately 3.2 billion cubic feet per day of processing capacity; and 15 billion cubic feet of natural gas storage capacity.
The NGL Logistics Segment is involved in producing, fractionating, transporting, storing, and selling natural gas liquids (NGLs), and recovering and selling condensate. This segment operates four fractionators; approximately 1,500 miles of NGL pipelines; and 7 MMBbls of NGL storage capacity. The Wholesale Propane Logistics segment is engaged in transporting, storing, and selling propane in wholesale markets. This segment owns/leases terminals: six rail, one pipeline, and two marine net storage capacities with 975 thousand barrels.
As of March 11, 2014, DPM had market capitalization of $4.4 billion and enterprise value of $6.3 billion. The company recorded revenues of $2.9 billion in last 12 months (LTM) and recorded LTM earnings before interest, tax, and depreciation and amortization (EBITDA) of $326.0 million.
On March 5, 2014, DPM issued 14,375,000 common units at $48.90 per common unit. Net proceeds from the issuance were approximately $677 million after deducting underwriting discounts and commissions and estimated offering expenses.
With the offer money, DPM will repay debt under its commercial paper program, partially fund purchase price of the dropdown transaction, and use the rest for organic growth projects and general operational purposes. Previously, the company announced a $1.15 billion acquisition from DCP Midstream through a drop-down transaction. A “drop-down” is the sale of an asset from an MLP’s general partner to the MLP.
In DPM, the drop-down includes a one-third interest in the 720-mile, fee-based Sand Hills natural gas liquids (or NGL) pipeline with an initial capacity of 200,000 barrels per day (Bbls/d); a one-third interest in the 800-mile, fee-based Southern Hills NGL pipeline; the remaining 20% interest in the Eagle Ford system; and Lucerne 1, a 35 million cubic feet per day (MMcf/d) cryogenic natural gas processing plant located in the prolific DJ Basin. As a part of an organic growth project, DPL would finance the Lucerne 2 plant, a 200 MMcf/d plant which is currently under construction with the offer money. DPL estimates additional expenditures of approximately $180 million for this project.
Since the total fund required for these projects is approximately $1.3 billion and the total available from the new issuance is $677 million, the entire amount from new units will be mopped up to finance the projects. The deficit amount of $653 million needs to be plugged through debt. Long-term debt, or LTD, of the company stands at $1.59 billion. If the entire financing is done through LTD, it would increase to $2.24 billion. The leverage ratio, which was 47%, pre-transaction, would decrease to 44%, post financing. However, because the company would incur more LTD, the last 12 months debt-to-EBITDA ratio would increase to 6.9x from 5.9x. Following the issuance, limited partner common units outstanding will increase from 61,346,058 as of December 31, 2014, to 75,721,058.
Atlas Resource Partners (ARP), Vanguard Natural Resources (VNR), DCP Midstream Partners (DPM), and Niska Gas Storage Partners (NKA) all recently tapped the capital markets for cash at generally favorable rates, signaling the ongoing ability of MLPs to access capital. Note that the above companies are all MLPs, and the benchmark index to track energy MLPs is the Alerian MLP Index which is investable through the Alerian MLP ETF (AMLP).
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