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Southcross Energy. to Acquire a Portion of TexStar Midstream

Source: 6/12/2014, Location: North America

Southcross Energy LLC, the owner of the general partner of Southcross Energy Partners, L.P., has entered into a definitive agreement to combine with TexStar Midstream Services, LP (“TexStar”), a privately held gas gathering and processing partnership located in the Eagle Ford shale region of South Texas. The transaction will create the premier Eagle Ford-focused midstream combination, which will include four processing plants, three fractionation facilities and approximately 3,700 miles of pipeline.

After the transaction closes, a newly formed company, Southcross Holdings LP (“Holdings”) will own 100% of the general partner of Southcross and equity interests in Southcross as well as former TexStar assets. EIG Global Energy Partners, Charlesbank Capital Partners and Tailwater Capital will each indirectly own approximately one-third of Holdings.

Simultaneously with closing, Southcross will acquire roughly one-third of TexStar’s midstream assets for approximately $450 million, consisting of $180 million in cash and 14.633 million newly-issued payment-in-kind (“PIK”) Southcross common units. The acquisition is expected to be accretive to Southcross’ distributable cash flow during the first year of operations. Holdings expects to offer over time TexStar’s remaining midstream assets to be sold as drop-downs into Southcross.

Strategic Highlights of Transaction
- Scale – Significantly increases size of Southcross, enhancing its ability to attract rich gas in the Eagle Ford region.
- Growth – Supports sustainable distribution growth for Southcross through expected future drop-downs of the substantial assets remaining at Holdings.
- Operational and Financial Stability – More predictable distributable cash flow and enhanced customer service is expected from the large interconnected asset base in South Texas.
- Integrated Business – Southcross’ existing model of an integrated wellhead to end user midstream business is complemented by the TexStar assets.
- Synergies – Significant capital expenditure savings accrue through the combination of existing capacities.
- Strong Sponsorship – Board leadership and financial backing come from three leading private equity sponsors: EIG Global Energy Partners, Charlesbank Capital Partners and Tailwater Capital.

Combined Entity
Holdings and Southcross together will operate 685 MMcf/d of processing capacity near the heart of the Eagle Ford shale region, over 90,000 barrels per day of fractionation capacity in South Texas and approximately 3,700 miles of pipeline. Following closing of the transaction, it is planned that Holdings’ and Southcross’ processing and fractionation facilities in South Texas will be interconnected, along with the majority of the pipeline systems.

Holdings and Southcross will continue on-going growth projects including Southcross’ Webb Pipeline, TexStar’s expansion of its Lancaster Gathering System and TexStar’s start-up of its fractionation facility near Corpus Christi (“Robstown Fractionator”). Southcross will continue to own and operate its existing Mississippi and Alabama properties.

Immediate Drop-Down into Southcross
In conjunction with the closing of the transaction, Southcross will acquire the TexStar Rich Gas System. The Rich Gas System consists of a 300 MMcf/d cryogenic processing plant (“Lone Star Plant”), located in Bee County, Texas, and over 230 miles of rich natural gas gathering pipelines with approximately 300 MMcf/d of capacity across the core producing areas extending from Dimmit to Karnes Counties in the liquids-rich window of the Eagle Ford shale. A gas pipeline delivering the residue gas from the Lone Star Plant is also included in the Rich Gas System and is planned to be connected with the Southcross lean gas pipeline system and its end use markets in the Corpus Christi area.

The Rich Gas System will be acquired by Southcross for approximately $450 million funded with 14.633 million newly-issued PIK Southcross common units issued to Holdings and $180 million of cash from new borrowings at Southcross. The PIK units will have a 7% coupon and will be convertible into common units entitled to cash distributions upon, among other conditions, a 10% increase above Southcross’ current $0.40 per unit quarterly distribution payment. Southcross has also entered into a commitment for a new, fully-underwritten $570 million credit facility. The new credit facility will be used to finance the acquisition and provide additional funds for future growth capital projects and other partnership purposes.

The drop-down is expected to be accretive to Southcross’ distributable cash flow during the first year of operations and is also expected to enable Southcross to increase its distributions per unit commencing with distributions for the first quarter of 2015. In further support of distribution coverage while the Rich Gas System is ramping cash flow, Holdings has committed to forego, to the extent necessary and available, distributions on subordinated units following closing until distributable cash flow exceeds total distributions on Southcross’ issued and outstanding common and subordinated units.

The Rich Gas System has averaged approximately 100,000 MMBtu/d in processed volumes thus far during the second quarter of 2014 and is expected to increase to twice that by the second quarter of 2015.

David Biegler, Chairman and Chief Executive Officer of Southcross’ general partner, said, “There is a great deal to be excited about with the combination. These are highly complementary businesses. The transactions create a premier, fully integrated Eagle Ford-focused midstream company. The enhanced asset base and potential for further drop-downs, we believe, give us a clear path to generate significant distribution and value growth for our unitholders.”

“We are excited to join our business with Southcross and look forward to combining our capabilities to grow the business to a new level,” said Phil Mezey, Chief Executive Officer of TexStar. “We believe this transaction will significantly enhance the combined company’s ability to serve customers and compete effectively.”

Retained Systems at Holdings
The two remaining systems of TexStar - the Lancaster Gathering System and the NGL System - will be retained at Holdings and are expected to be available as future drop-downs into Southcross.

The Lancaster Gathering System in Frio and LaSalle Counties, Texas consists of over 550 miles of sweet and sour rich gas gathering lines and a gas treating facility with capacity of 90 MMcf/d that is expandable to over 250 MMcf/d. It is connected to the Rich Gas System and its gathered gas is processed at the Lone Star Plant. Gas throughput is rapidly ramping with expansion into new producing areas. Major construction is underway to add approximately 36 miles of gathering pipelines which are supported by additional volume commitments.

The NGL system consists of the Robstown Fractionator, a new 63,000 barrels per day fractionation facility approaching completion near Corpus Christi, Texas and over 100 miles of NGL pipelines. All NGL products will be delivered to end markets via pipelines, with multiple take away options for each, including a pipeline to a new export terminal and an adjacent petrochemical complex near Corpus Christi. Startup of the fractionator is anticipated in the third quarter of 2014. The Robstown Fractionator is already connected to the Lone Star Plant and connections to Southcross’ two processing plants in the area are planned.

Transaction Details
The transactions will be effected through a series of steps on the closing date. After the closing, Holdings will be indirectly owned approximately 36% by EIG Global Energy Partners, 30% by Charlesbank Capital Partners and 34% by Tailwater Capital. The applicable TexStar and Southcross entities have all signed the definitive agreements to effect the transactions.

With the completion of the above described transactions and the issuance of new common PIK units, Holdings will own the Lancaster Gathering System, the NGL System, an approximate 57% limited partner interest in Southcross and 100% of Southcross’ general partner, which owns a 2% general partner interest in Southcross and Southcross’ incentive distribution rights. Public unitholders will own the remaining 43% limited partner interest in Southcross.

The acquisition of the Rich Gas System by Southcross has been approved by the applicable committees and boards of directors of Holdings, TexStar and Southcross’ general partner. Financing for the entire transaction has been fully underwritten by a group of lenders including Wells Fargo, UBS Investment Bank and Barclays at the Southcross level and by UBS Investment Bank and Barclays at the Holdings level. Citi is serving as financial advisor to Southcross; Barclays, Evercore Partners and UBS Investment Bank are serving as financial advisors to TexStar. Jefferies is serving as financial advisor to the Conflicts Committee of the general partner of Southcross on the acquisition. The combination and the drop-down acquisition are expected to close during the third quarter of 2014, subject to customary closing conditions, including expiration of any required anti-trust filings under Hart-Scott-Rodino.

Benefits of the Combination
The transactions are expected to generate revenue and expense benefits and enable the companies to avoid substantial capital expenditures due to combined and rationalized assets. Southcross and TexStar have entered into a separate agreement that will link Southcross’ new Webb Pipeline to TexStar’s capacity on an existing western pipeline system, enabling Southcross to reduce the Webb Pipeline expenditures by approximately $50 million and accelerate timing for the opening of the pipeline.

Management and Board
Current management of Southcross and TexStar will fill key operating positions at Holdings, which will retain its Dallas headquarters. Holdings will continue to maintain its significant presence in San Antonio, Houston, Corpus Christi and Jackson, Mississippi. Key officers of the general partner of Southcross and Holdings will be David Biegler, the current Chairman and Chief Executive Officer of Southcross, who will be the Chairman and Chief Executive Officer; John Bonn, the current President and Chief Operating Officer of Southcross who will retain that position; Phil Mezey, the current Chief Executive Officer of TexStar who will be Executive Vice President; and J. Michael Anderson, the current Chief Financial Officer of Southcross who will be Chief Financial Officer.

The board of Holdings will consist of equal representation among Charlesbank Capital Partners, EIG Global Energy Partners and Tailwater Capital. The board of the general partner of Southcross will consist of equal representation of the same private equity sponsors plus representation of three independent directors and David Biegler as Chairman of the Board of Directors.

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