CenterPoint $10.7 Billion Partnership May Prompt More Deals

March 15 (Bloomberg) -- CenterPoint Energy Inc. agreed to form a $10.7 billion master-limited partnership with a jointly owned subsidiary of OGE Energy Corp. and ArcLight Capital Partners LLC, paving the way for other utilities to follow suit.

The partnership will have pipelines, processing plants and storage assets near shale formations in Oklahoma, Texas, Arkansas and Louisiana, the companies said in a statement yesterday. Utility owners CenterPoint and OGE Energy plan an initial public offering of equity in the partnership. CenterPoint rose the most in almost two years, and OGE climbed the most in four years.

Master-limited partnerships, or MLPs, don’t pay federal income taxes and distribute most of their available cash to holders of their units, which are similar to shares in a corporation. More companies are placing assets into partnerships, allowing them to maintain control while taking advantage of the tax-sheltered structure.

The transaction “would be one of two marquee IPOs” in late 2013 and early 2014, Joe Herman, an analyst at Tudor Pickering Holt & Co., said in a note to clients today. The deal may prompt other utility companies such as Sempra Energy, Dominion Resources Inc. and NiSource Inc. to form similar partnerships, he said.

CenterPoint, which distributes power to Houston, rose 7.2 percent to $23.41 at the close in New York. It earlier gained 10 percent, the most intraday since March 18, 2011. OGE Energy, owner of the Oklahoma Gas & Electric utility, climbed 10.2 percent to $67.63, the most since Nov. 13, 2008.

Ownership Stakes

CenterPoint and OGE’s Enogex LLC unit were both considering forming partnerships of their own and decided to join forces, CenterPoint Chief Executive Officer David McClanahan said on a conference call with analysts.

“Each one of us does similar things, but we’re much stronger on the pipeline side, the Enogex folks are much stronger on the processing side,” he said. “We think this is just a much stronger entity together than we would be separately.”

The new company may be able to save $50 million by combining operations, McClanahan said, without specifying a time frame.

North Dakota

About 60 percent of the partnership’s profit margin is expected to come from fee-based contracts with oil and gas producers, which aren’t exposed to changes in prices, said Greg Harper, CenterPoint’s vice president of pipelines.

CenterPoint is planning to build oil pipelines in the Tuscaloosa Marine Shale formation, and is operating a rail yard that unloads and blends crude oil in East Texas, Harper said. The partnership may expand in the Bakken formation in North Dakota, OGE CEO Pete Delaney said on the call.

The transaction is expected to close in the third quarter, according to the statement.

CenterPoint and OGE Energy will evenly split governance of the new entity’s general partner. CenterPoint will have a 59 percent interest in the partnership, OGE Energy will have a 28 percent interest and ArcLight, a private-equity investor, will hold a 13 percent interest, the companies said in the statement. CenterPoint will hold a 40 percent interest and OGE Energy will have a 60 percent interest in distribution payments made by the new company to the general partner.

IPO Market

The new partnership will own 8,400 miles (13,515 kilometers) of interstate pipelines, 2,300 miles of intrastate pipelines and have more than 11,000 miles of gathering lines. It will also include 11 gas processing plants and storage facilities.

An MLP sponsored by a utility would be attractive because investors already consider utilities a stable investment, said Hinds Howard, a fund manager at Guzman Investment Strategies LLC in Austin, Texas.

“It makes perfect sense,” Howard said in a telephone interview yesterday. “The IPO market for MLPs has pretty much dried up, a new IPO would be welcome at this point.”

OGE Energy and Boston-based Arclight jointly own Enogex, the subsidiary that will be combined with CenterPoint’s pipeline business.

CenterPoint was advised by Citigroup Global Markets Inc. and Baker Botts LLP. OGE was advised by UBS Investment Bank and Jones Day. ArcLight was advised by Wells Fargo Securities LLC and McDermott Will & Emery LLP.

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net; Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net