Analysts applaud new Dynegy NGL limited partnership

Sam Fletcher
OGJ Online

HOUSTON, Feb. 27 -- Dynegy Inc.'s proposal to spin off a substantial portion of its NGL business into a new limited partnership should boost the company's financing flexibility, analysts said.

"The new partnership unit could bolster Dynegy's financing flexibility, since it will provide access to the capital markets for equity and debt at the partnership," Standard & Poor's said, adding that the plan could benefit the company's overall credit profile. The New York City-based credit rating service said that it would closely monitor the partnership's capital structure to ensure the appropriate level of capitalization for Dynegy's investments.

Moreover, various agreements give the new Houston-based Dynegy Energy Partners LP the right to purchase substantially all domestic volumes of mixed NGL and NGL products from Dynegy and ChevronTexaco Inc.

"We expect to pursue strategic acquisitions independently and jointly with Dynegy Inc., and we may have the opportunity to make acquisitions directly from Dynegy Inc. or ChevronTexaco," officials said in a registration statement, filed early this week with the US Securities and Exchange Commission, for a proposed public offering of 8.75 million common units in the Delaware limited partnership,

LP details
Dynegy Inc. and affiliates will retain a 55.2% limited partner interest and all of the 2% general partner interest in the limited partnership, providing "access to management expertise and strong relationships throughout the energy industry" through the former parent company.

Dynegy Energy Partners will participate in separating, storing, terminalling, transporting, distributing, and marketing NGL. Its operations and assets will include:

-- The Cedar Bayou fractionator at Baytown, Tex., where mixed NGLs are separated into component products of an ethane-propane mix, propane, normal butane, isobutene, and natural gasoline.

-- NGL storage and terminal services at the Mont Belvieu, Tex., underground storage facility and Galena Park marine terminal.

-- NGL transportation and logistical services utilizing a diverse portfolio of distribution facilities along the Gulf Coast and elsewhere across the US.

-- Distribution and marketing of NGL products to refiners, petrochemical companies, retail propane distributors, other marketers, and end-users.

That represents "a substantial portion of Dynegy Inc.'s NGL business located along the Texas Gulf Coast in and adjacent to Mont Belvieu, Tex.," company officials said in that filing.

That filing also stated, "Mont Belvieu is the hub of the domestic NGL industry, with a concentration of fractionation and storage facilities, significant pipeline infrastructure, and local demand for NGL products from Texas Gulf Coast petrochemical and refining complexes. We also have significant NGL transportation and logistics assets located throughout the United States that provide strategic support for our operations and services to third parties."

Last year on a pro forma basis, those operations generated an operating margin of $92.5 million and earnings of $41.5 million, officials said. The operation sold an average 490,000 b/d of NGL products last year.

LP contracts
At the close of its public offering, the limited partnership will enter into a number of contracts with Dynegy or its affiliates, including:

-- A 20-year contract to buy all mixed NGL and NGL products owned or controlled by Dynegy Midstream Services LP, a wholly owned Dynegy subsidiary.

-- A 3-year agreement with Dynegy Holdings Inc., another wholly owned Dynegy subsidiary, to provide credit support for purchases of mixed NGL and NGL products.

-- An omnibus agreement with Dynegy Inc. and Dynegy Midstream that includes limited noncompetition and environmental indemnification provisions and that provides for administrative services.

At closing, Dynegy Energy Partners also will assume substantially all of Dynegy Midstream's long-term agreements with the former Chevron Corp.

In August 1996, Dynegy completed a combination with a Chevron subsidiary that merged substantially merged all of Chevron's midstream energy assets into Dynegy's operations. In connection with that transaction, Dynegy Midstream entered into long-term NGL agreements with Chevron and its affiliates to provide significant services, including:

-- Purchasing or marketing substantially all of the mixed NGL and NGL products produced or controlled by Chevron in the US.

-- Supplying NGL products to Chevron's US refining and chemical affiliates.

- - Providing transportation services in connection with Chevron's mixed NGL and NGL products.

Since Chevron completed its merger with Texaco Inc. last year to form ChevronTexaco, Dynegy Inc. has been expanding its commercial relationship to include the purchase of substantially all US natural gas and NGL production of the former Texaco.

As part of this expanded relationship, Dynegy Energy Partners agreed to buy substantially all domestic mixed NGL and NGL products produced or controlled by the former Texaco through August 2006.

Following closure of the initial public offering, Dynegy Energy Partners will enter into a $275 million bank credit facility, including a $125 million term loan and a $150 million revolving credit facility. The entire amount of the term loan will likely be borrowed at closing, officials said.

"We will have the ability to issue additional common units, which, combined with our additional borrowing capacity under our revolving credit facility, should give us the resources to finance strategic opportunities as they arise," they reported.

Although filed, the registration statement for the proposed public offering is not yet effective.

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