Based in Dallas, TX, Southcross Energy Partners, L.P. (SXE) scheduled a $180 million IPO with a market capitalization of $500 million at a price range mid-point of $20, for Friday, November 2, 2012 (originally scheduled for Wednesday, October 31).
Before Sandy, seven IPOs were scheduled for the week of October 29th. Three have been pushed back to next week. The full IPO calendar is available here.
S-1 filed October 22, 2012.
Manager, Joint Managers: Citigroup; Wells Fargo Securities; Barclays; J.P. Morgan.
Co Managers: RBC Capital Markets; Raymond James; Baird; Stifel Nicolaus Weisel; SunTrust Robinson Humphrey.
SXE is a private equity funded midstream limited partnership paying 8% at the price range mid-point of $20. The general partner's incentive distribution rights kick in at 9.2% are increase up to 48%.
SXE seems priced appropriately and IPOdesktop believes it will edge up after the IPO. SXE lacks a strong growth providing sponsor, but it does have a decent growth plan over the next year.
- "Holdings" refers to Southcross Energy LLC, a Delaware limited liability company owned by Charlesbank and certain members of the management team.
- NGL is an acronym for Natural Gas Liquids
SXE is a growth-oriented limited partnership that was formed by members of the management team and the private equity firm Charlesbank, to own, operate, develop and acquire midstream energy assets.
SXE provides natural gas gathering, processing, treating, compression and transportation services and NGL fractionation and transportation services for producer customers, primarily under fixed-fee and fixed-spread contracts. SXE also sources, purchases, transports and sells natural gas and NGLs to power generation, industrial and utility customers primarily under fixed-spread contracts.
Assets are located in South Texas, Mississippi and Alabama.
South Texas Assets
South Texas assets which consisted of 1,445 miles of pipeline, three natural gas processing plants and one fractionation plant as of June 30, 2012, accounted for 78.7% of revenue for the six months ended June 30, 2012, operate in or within close proximity to the Eagle Ford shale region, which has experienced a strong increase in investment and drilling activity by exploration and production companies in recent years.
Based on industry data compiled by Smith Bits, a subsidiary of Smith International, Inc., 14.4% of all drilling rigs in the United States were operating in the Eagle Ford shale region as of September 7, 2012.
SXE expects this heightened Eagle Ford shale activity, as well as activity in the frequently overlying Olmos tight sand formation, will result in higher throughput on SXE's South Texas systems and opportunities to expand the asset base over the next several years.
Mississippi and Alabama assets
Mississippi and Alabama assets, which consist of 626 and 519 miles of pipeline, respectively, are strategically positioned to provide transportation of natural gas to power generation, industrial and utility customers as well as to unaffiliated interstate pipelines.
SXE expects to grow its business and distributable cash flow by expanding the capacity and utilization of assets and by making selective acquisitions, such as the acquisition in September 2011 of Enterprise Alabama Intrastate, LLC, or EAI, an intrastate pipeline and gathering system in Alabama, from a subsidiary of Enterprise Products Partners L.P.
SXE currently expects that opportunities to process liquids-rich natural gas in the Eagle Ford shale area, which is served by SXE's South Texas assets, will be the primary driver of near-term growth.
SXE completed construction and commenced operations in July 2012 of a 200 MMcf/d cryogenic processing plant in Refugio County, Texas (Woodsboro processing plant), that significantly expands SXE's South Texas processing capacity.
SXE is increasing its NGL capacity by installing the Bonnie View fractionation plant that SXE expects to be fully operational in November 2012 with capacity of 11,500 Bbl/d.
SXE recently announced an expansion of this capacity by 11,000 Bbl/d to 22,500 Bbl/d through the installation of an additional tower that is expected to be completed in January 2013.
In addition, SXE's McMullen pipeline expansion, completed in September 2011, improves SXE's ability to transport liquids-rich gas from producers in the Eagle Ford shale area to Woodsboro.
In the first quarter of 2013, SXE expects to complete a 57-mile pipeline that will bring additional supply of liquids-rich gas from Dewitt and Karnes Counties in the Eagle Ford shale area to the Woodsboro processing plant.
These capacity expansions will enable SXE to gather and process additional volumes of natural gas and fractionate and market more NGLs by commencing deliveries under contracts with producers that have been secured or are nearing expected execution.
SXE expects that processing and fractionation capacities that are coming on-line at the Woodsboro and Bonnie View plants will enable SXE to produce greater economic value from larger volumes of liquids-rich natural gas that SXE processes and greater recovery of NGLs from the fractionation operations as compared to current operations.
Holdings will convey its indirect ownership interest in SXE's operating subsidiaries to Southcross Energy Operating, LLC, which will become the operating subsidiary;
Holdings will convey an interest in Southcross Energy Operating, LLC to the general partner as a capital contribution;
The general partner will convey its interest in Southcross Energy Operating, LLC to SXE in exchange for ((i)) a continuation of its 2% general partner interest in SXE, and ((ii)) SXE's incentive distribution rights, or IDRs;
Holdings will convey its remaining interest in Southcross Energy Operating, LLC to SXE in exchange for 3,213,713 common units, representing a 12.9% limited partner interest, ((ii)) 12,213,713 subordinated units, representing a 49.0% limited partner interest, (III) the assumption of its existing debt by SXE, (iv) the right to receive $7.5 million sourced from new debt incurred by SXE and ((v)) the right to receive $38.5 million in cash, a portion of which will be used to reimburse Holdings for certain capital expenditures it incurred with respect to assets it contributed to SXE;
SXE will issue 9,000,000 common units to the public, representing a 36.1% limited partner interest;
SXE will grant up to 150,000 phantom units with distribution equivalent rights to employees, including executive officers.
SXE will enter into a new $350 million credit facility from which SXE will borrow $150 million.
SXE will us the IPO proceeds as outlined in the section below "use of proceeds."
. 12.2 million common units, 49% - the public will own 9 million and the sponsor will own 3.2 million
. 12.2 million subordinated units, owned by the sponsor, 49%
. 500,000 general partnership units owned by the sponsor, 2%
SXE's partnership agreement requires that it distribute all available cash each quarter as follows:
First, 98.0% to the holders of common units and 2.0% to the general partner, until each common unit has received the minimum quarterly distribution of $0.40 plus any arrearages from prior quarters;
Second, 98.0% to the holders of subordinated units and 2.0% to the general partner, until each subordinated unit has received the minimum quarterly distribution of $0.40; and
Third, 98.0% to all unitholders, pro rata, and 2.0% to the general partner, until each unit has received a distribution of $0.46.
If cash distributions to unitholders exceed $0.46 per unit in any quarter, then the general partner will receive, in addition to distributions on its 2.0% general partner interest, increasing percentages, up to 48.0%, of the cash distributes in excess of that amount.
PRIVATE EQUITY SPONSOR
The private equity sponsor is Charlesbank, private equity firm with over $2.0 billion of capital under management. The firm has more than 20 investment professionals and offices in Boston and New York.
Principal competitors in South Texas are Copano Energy, L.L.C., Energy Transfer Partners, L.P., Enterprise Products Partners LP and Kinder Morgan Energy Partners LP.
Principal competitors in Alabama and Mississippi are Torch Energy Corporation, Gulf South Pipeline Company, LP, Southeast Supply Header, LLC, Samson Resources Inc. and El Paso Corporation.
USE OF PROCEEDS
SXE expects to net proceeds of $169 million. Proceeds are allocated as follows:
Cash distribution to Holdings of $38.5 million, a portion of which will be used to reimburse Holdings for certain capital expenditures it incurred with respect to assets contributed to the company.
Repay $125.0 million of debt.
Pay offering expenses of $4.5 million.
Note: Holdings may use a portion of the cash distribution it receives to redeem all or a portion of Holdings' outstanding redeemable preferred units.