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

By Douglas A. McIntyre Published Dec 9, 9:49AM EST

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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

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.