Vulcan Capital has sold its 50% stake in PAA Natural Gas Storage LLC to Plans All American Pipeline (NYSE: PAA). The deal is valued at $220 million, including $90 million in cash, $40 million in deferred contingent cash consideration 1.9 million PAA common units valued at $90 million. PAA Natural Gas Storage is a joint venture Vulcan launched with PAAP back in 2005.
Plains All American Pipeline, L.P. (NYSE:PAA) and Vulcan Capital today announced that they have executed definitive agreements under which a subsidiary of PAA will acquire Vulcan Capital’s 50% indirect interest in PAA Natural Gas Storage, LLC (PNGS). The aggregate purchase price of $220 million consists of $90 million cash, 1.9 million PAA common units valued at $90 million, and deferred contingent cash consideration of up to $40 million. The contingent consideration is subject to achievement of certain events and performance milestones expected to occur over the next several years. The transaction is expected to close on September 3, 2009.
As a result of the transaction, PAA will own 100% of the natural gas storage business and related operating entities, which will be accounted for on a consolidated basis. The Partnership has historically accounted for its 50% indirect interest in PNGS under the equity method. At closing, PAA will repay the joint venture’s outstanding project finance debt using joint venture cash and borrowings under its revolving credit facility. As of June 30, 2009, the joint venture had approximately $450 million of debt and approximately $52 million of cash.
“We are extremely pleased to announce this transaction and are excited about the near-term and long-term potential of the natural gas storage business,” said Greg L. Armstrong, CEO of PAA. “This transaction provides economic returns solidly in excess of our weighted average cost of capital and will result in immediate accretion to the Partnership.”
“Increasing our interest to 100% will enhance our strategic flexibility with respect to future organic growth and acquisitions, and also increase the visibility of the value that has already been created,” said Armstrong. “Notably, the cash-flow stream of our natural gas storage business is essentially 100% fee-based, with currently available storage capacity substantially committed under contracts ranging up to ten years in duration. Moreover, the cash-flow profile is expected to increase steadily over the next several years as we continue to expand the storage capacity through our development activities at our Pine Prairie facility.”
Geoff McKay, a Managing Director at Vulcan Capital, said, “We have enjoyed working with the entire PAA team over the last four years to build value together at PNGS. Through our significant equity position in PAA, we will continue to be a meaningful participant in the growth of this and PAA’s other businesses, and we look forward to continuing to support PAA’s future success.”
The transaction was approved by the board of directors of the general partner of PAA and by its conflicts committee. The conflicts committee, which is comprised entirely of independent directors, received a fairness opinion from Simmons & Company International with respect to the consideration paid by PAA in this transaction.
PAA management intends to recommend to its board of directors an increase in the Partnership’s quarterly distribution level to $0.92 per unit, or $3.68 per unit on an annualized basis, effective with the November 2009 distribution, subject to adverse developments in the economic and financial markets, or other events that would make such recommendation inappropriate. To enhance PAA’s distribution coverage ratio over the next 24 months as cash flows ramp-up from expansion activities, PAA’s general partner has agreed to reduce its incentive distributions by an aggregate of $8 million over the next two years – $1.25 million per quarter for the first four quarters and $0.75 million per quarter for the next four quarters. The IDR reduction will become effective with the planned November 2009 distribution increase.
The Partnership will host a conference call at 10:00 AM (Central); 11:00 AM (Eastern) on Friday, August 28, 2009, to discuss the acquisition. Specific items to be addressed in this call include:
a brief description of the transaction;
the Partnership’s financing plans for funding the transaction;
the strategic rationale for the transaction;
an overview of the PNGS assets and business;
certain accounting matters important to an understanding of the transaction impacts on PAA; and
the anticipated financial performance of PNGS.
To access the Internet webcast, please go to the Partnership’s website at www.paalp.com, choose “Investor Relations,” then choose “Conference Calls.” Following the live webcast, the call will be archived for a period of sixty (60) days on the Partnership’s website.
If you are unable to participate in the webcast, please dial 800-288-8974, or, for international callers, 612-332-0335 at approximately 9:55 AM (Central). No password or reservation number is required. You may access the slide presentation accompanying the conference call a few minutes prior to the call under the Conference Call Summaries portion of the Conference Calls tab of the Investor Relations section of PAA’s website at www.paalp.com.
Telephonic Replay Instructions
To listen to a telephonic replay of the conference call, please dial 800-475-6701, or, for international callers, 320-365-3844, and replay access code 113862. The replay will be available beginning Friday, August 28, 2009, at approximately 12:00 PM (Central) and continue until 11:59 PM (Central) on Monday, September 28, 2009.
Plains All American Pipeline, L.P. is a publicly traded master limited partnership engaged in the transportation, storage, terminalling and marketing of crude oil, refined products and liquefied petroleum gas and other natural gas related petroleum products. Through its ownership in PAA Natural Gas Storage, the partnership is also engaged in the development and operation of natural gas storage facilities. The Partnership is headquartered in Houston, Texas.