American Midstream Partners LP's CEO said that while the partnership was disappointed by Southcross Energy Partners LP recent decision to terminate a planned merger, American Midstream had known from the start that credit issues would present tough challenges.
"We were hard at work pursuing alternative financing structures when we received Southcross' notice of termination, but it was getting increasingly difficult to identify a path to financing the transaction that would generate the type of returns we expected to see from the deal when our board approved the transaction in October of last year," Lynn Bourdon said during American Midstream's second-quarter earnings call Aug. 9.
Southcross in a July 30 news release blamed the merger's collapse on a "funding failure" on the part of American Midstream.
Under the agreement, Southcross parent Southcross Holdings LP is eligible to receive a $17 million termination fee, which Bourdon said represented about 2% of the total transaction value due to "their very high debt metrics."
During the call, Bourdon also elaborated on the decision-making process behind the recent 75% distribution cut that sent American Midstream shares into free fall.
"The [self-funding] model and our inability to access the public equity markets has inherently put more pressure on our balance sheet than we are comfortable with," Bourdon said. "We were confronted with a difficult decision of continuing to pay out 14% to 16% effective yield money. And with no practical ability to raise public equity capital at an acceptable cost, we would either have to forgo significant accretive growth opportunities or cut the distribution."
American Midstream joins several other energy pipeline master limited partnerships that have unveiled plans to limit distribution growth or cut payouts in recent months, but Stewart Glickman, an energy equity analyst at investment research firm CFRA, said American Midstream faced a more dire cash retention problem. "Over the last 12 months, spending on CapEx and dividends was extremely high relative to cash from operations, a lot more so than the midstream names I cover."
American Midstream expects the distribution cut to free up an additional $65 million of capital per year that can be used to pay down debt and be put toward growth projects.
The partnership's shares settled at $6.05 per unit Aug. 9, down more than 47% since the distribution cut announcement.