Veresen Announces US$1.425 Billion Acquisition of 50% Interest in the Ruby Pipeline and Acquisition Financing

abarrelfullabarrelfull wrote on 29 Sep 2014 12:21
Tags: n-america pipeline usa veresen

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Veresen Inc. ("Veresen") (TSX: VSN) is pleased to announce that it has entered into an agreement with Global Infrastructure Partners ("GIP") to acquire GIP's 50% convertible preferred interest (the "Preferred Interest") in the Ruby pipeline system ("Ruby") for US$1.425 billion. The acquisition will be made through a wholly-owned subsidiary of Veresen.

Ruby is a newly-built, large-scale natural gas transmission system delivering U.S. Rockies natural gas production to markets in the western United States. The 680-mile, 42-inch pipeline has a current capacity of approximately 1.5 billion cubic feet per day (bcf/d), with expansion potential to 2.0 bcf/d through the addition of compression. Ruby originates at the Opal hub in Wyoming and extends to the Malin hub in Oregon. The Malin hub is the main interconnect to the proposed Pacific Connector Gas Pipeline (50% owned by Veresen), which would supply Veresen's proposed Jordan Cove LNG terminal.

El Paso Pipeline Partners, an affiliate of Kinder Morgan Inc. ("Kinder Morgan"), holds the remaining 50% ownership interest in Ruby through a common equity interest (the "Common Interest"). Kinder Morgan, North America's largest natural gas pipeline operator, will continue to operate Ruby on a day‐to‐day basis.

"This is a rare opportunity to acquire a large interest in a core U.S. pipeline asset. Ruby is an ideal fit for Veresen because it offers immediate long-term contracted cash flows with downside protection through the preferred interest structure, and provides significant future added upside related to our Jordan Cove LNG project," commented Don Althoff, President and CEO of Veresen. "This transaction is consistent with Veresen's growth strategy, where we are focused on leveraging our existing footprint, adding assets with further growth potential, and providing natural gas connectivity from competitive supply regions to high-value markets."

Mr. Althoff added, "Concurrent with this transaction, we are pleased to announce that we have entered into an $800 million bought deal subscription receipt financing which, together with our access to sources of credit as a result of our strong balance sheet, will successfully fund this acquisition."

This transaction is expected to close in the fourth quarter of 2014 and is subject to customary closing conditions and the receipt of approval by the Committee on Foreign Investment in the United States.

Highlights of Strategic Acquisition

Key investment highlights of the Ruby acquisition are as follows:

Long-term Contracted Asset Supporting Stable Cash Flow

  • High quality, long-term ship‐or‐pay contracts for approximately 1.1 bcf/d, representing 71% of total current capacity, provide stable base cash flows.
  • Strong mix of investment grade shippers.
  • Weighted average remaining contract term of approximately nine years.
  • Enhances Veresen's portfolio of contracted pipeline assets providing diversification into a high value market in the U.S.

Strong and Growing Financial Performance and Impact

  • Veresen will receive US$91 million of preferred distributions annually based on the Preferred Interest structure (as described below).
  • Immediately accretive to distributable cash per share.
  • Limited maintenance capital and a low cost structure enhance free cash flow.
  • Significant future cash flow growth potential upon conversion to common equity following additional contracting and/or de-leveraging.
  • Estimated after-tax return on equity in the low teens based on current toll structure and expected volumes.

Synergistic to Veresen's Jordan Cove LNG Project

  • Ruby provides direct access to the U.S. West Coast through the proposed Pacific Connector Gas Pipeline which would supply the proposed Jordan Cove LNG terminal.
  • Provides significant future upside associated with Jordan Cove LNG.

Attractive Convertible Preferred Structure

  • Preferred Interest structure provides strong downside protection while preserving upside.
  • Preferred distributions are payable prior to any distributions on the Common Interest, with any unpaid preferred distribution compounding at an annual return until paid.
  • Contractual debt amortization will substantially de-lever Ruby over the initial shipper contract term while Veresen earns its preferred distribution.
  • 50/50 joint control governance provides alignment of interests with experienced operating partner.
  • Preferred Interest can convert to a 50% common equity interest in Ruby at Veresen's option, providing the opportunity to participate in cash flow growth.
  • Contracting of an incremental approximately 250 million cubic feet per day of long-term firm capacity at rates generally consistent with current contracts activates an automatic conversion of the Preferred Interest to common equity.

Significant Opportunity for Additional Long-term Contracting and Expansion

  • Opportunity to participate in significant potential cash flow growth from contracting the remaining 29% of capacity.
  • Average capacity of approximately 1.5 bcf/d is expandable to 2 bcf/d through the addition of compression.
  • Attractive market dynamics in higher growth areas including California, Oregon, Washington, and northern Nevada.
  • Ruby provides western U.S. natural gas consumers with critical supply diversity.
  • Shifting market dynamics, including the potential development of U.S. West Coast LNG, support Ruby's continued and growing long‐term utilization.

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