Tulsa-based Magellan Midstream Partners targets Longhorn system for

Journal Record, The (Oklahoma City), Jun 22, 2009 by Kirby Lee Davis

Magellan Midstream Partners would increase its pipeline network 8 percent under a bankruptcy auction purchase of the 723-mile Longhorn Partners Pipeline system.

"The potential acquisition of Longhorn pipeline complements Magellan's existing asset base and our goal to expand in Texas," said spokesman Bruce Heine. "Indeed, we see the potential opportunities to link other Magellan assets in Texas, such as our terminal in East Houston."

On Friday, Magellan announced its $340 million opening bid for the Longhorn system. That breaks down to $250 million for the system, plus $90 million for the fair market value of line fill.

Tulsa-based Magellan made that offer as the bankruptcy court's "stalking horse" bidder, a system that helps the bankruptcy court and Longhorn creditors escape lowball bids.

Falling into bankruptcy in December under Ogden, Utah-based Flying J, Houston-based Longhorn owned a 695-mile, 18-inch common carrier system transporting gasoline and diesel fuel from its headquarters city to El Paso, where Longhorn owned a five-bay truck loading rack and more than 900,000 barrels of storage.

That terminal served not only local markets but those in Arizona, New Mexico and developing sites in northern Mexico. Longhorn has a 28-mile pipeline from Crane to Odessa, Texas, an El Paso connector with a Plains All-American Pipeline extending to Albuquerque, N.M., and a connector to a Kinder Morgan line from El Paso to Tucson and Phoenix.

The El Paso terminal also will connect a pipeline Pemex is building to Ciudad Juarez, Mexico.

Magellan has extensive experience with Longhorn's assets, having operated the 90,000-barrel-a-day system since its 2006 launch. Magellan's own 8,700-mile system includes a line that runs from Houston to Odessa to El Paso. It connects to the Longhorn system at Odessa.

If it wins the auction, which Heine said could happen within 90 days, and receives approval from the bankruptcy court and industry regulators, Magellan said it would finance this purchase through debt.

Friday afternoon the fuel and ammonia pipeline operator announced plans for a $300 million offering of 10-year senior notes at 6.55 percent. The $296.5 million proceeds would be used to repay all outstanding debt under its revolving credit facility, as well as other purposes.

J.P. Morgan Securities, Banc of America Securities and SunTrust Robinson Humphrey will oversee the bond offering, which is expected to close on June 26.

Although on Wednesday Magellan cut its 2009 profit outlook for the full year and second quarter, analysts said the bond offering demonstrates the Tulsa master limited partnership's perceived market strength.

"There are a lot of players who don't have the option to do a debt offering," said M. "Jake" Dollarhide, chief executive of Tulsa's Longbow Asset Management. "They have to do a secondary offering and they have to worry about diluting their shareholders. Magellan doesn't."

Trading on the New York Stock Exchange, Magellan units rose 11 cents Friday to finish the week at $33.50. With 159,149 units trading hands, Magellan's total volume ended up about half its daily average.

While he admitted some investors may be leery of buying bonds during a period of low interest rates, analysts noted rates have shown some signs of increasing over the last few weeks.

"Magellan's always been very attractive as a dividend play," said Dollarhide, who projected the Magellan bonds would end up with a triple-B rating or higher. "It's been one of the better performers among MLPs since its inception."