Duncan Energy & Enterprise Swap Cash for Assets (DEP, EPD)

Duncan Energy Partners L.P. (NYSE:DEP) announced yesterday that it had purchased limited partnership interests in several midstream assets belonging to Enterprise Products Partners L.P. (NYSE:EPD). These two companies have more in common than just anagrammatic stock tickers. The general partner of Duncan Energy is wholly-owned by Enterprise, so the exchange of $730 million in Duncan cash for shares in some Enterprise assets in the state of Texas resembles a bookkeeping entry.

In reality, though, Enterprise just went to the bank and got ahigh-interest loan from Duncan. Enterprise received $280.5 million incash and more than 37 million Class B units of Duncan. Duncan fundedthe loan with a three-year bank loan, and the Class B units convert tocommon units on February 1, 2009. Enterprise will then ownapproximately 74% of Duncan’s outstanding common units.

Duncan expects to receive a return of 12% annually from its investmentin Enterprise. For its part, Enterprise has increased its liquidity to$2.2 billion, which it says it can use "to fund our growth capitalexpenditures and October 2009 debt maturity should the volatility inthe financial markets continue throughout next year." Enterprise hassenior notes in the amount of $500 million due in October 2009. Thecompany’s total debt is about $6.9 billion, and its market cap based onyesterday’s closing price is about $12.5 billion.

The transaction between Enterprise and Duncan is not terribly unusualin the world of MLPs.l But it is quite tricky to figure out what thedeal means. Enterprise is the engine that drives Duncan Energy, andEnterprise needs to generate cash flow. With MLPs like Enterprise andDuncan, that’s the number to watch. The second thing to watch is therelation of that cash flow to unitholder distributions. If a company isborrowing money to fund distributions, that is not a good sign.

Paul Ausick
December 9, 2008