El Paso Pipeline Partners LP (EPP) agreed Monday to become 100% owner of El Paso Corp.'s two liquefied natural gas (LNG) companies and become a 60% partner in Southern Natural Gas Co. (SNG), in a $1.13 billion transaction.
In the deal EPP would acquire the remaining 49% interests in Southern LNG Co. LLC and El Paso Elba Express Co. LLC, as well as an additional 15% stake in SNG.
The transaction is EPP's third drop-down transaction from El Paso Corp. this year, "which brings our total acquisitions to more than $2.4 billion in 2010," said EPP CEO Jim Yardley. "This acquisition, which is immediately accretive to distributable cash flow, is our largest to date.
"It will continue our rapid growth, give us controlling interest in all of our assets and simplify our ownership structure. These assets have a balance of stable cash flows supported by long-term contracts and growth opportunities as they are strategically located in a region that is expected to see the fastest future U.S. natural gas demand growth."
The acquisition, which was unanimously approved by the board of the general partner El Paso Pipeline GP Co. LLC, is expected to close by the end of this month. EPP's management plans to recommend that quarterly cash distribution be increased from 3 cent/unit, or 7%, to 44 cents/unit ($1.76/unit a year) beginning with the 4Q2010 cash distribution.
The conflicts committee of the general partner engaged Tudor, Pickering, Holt & Co. to act as its independent financial adviser and to render a fairness opinion. El Paso Corp., which formed the partnership three years ago to own and operate natural gas transportation pipelines and storage assets (see Daily GPI, Nov. 12, 2007), currently owns a 52% limited partnership interest and 2% general partner interest in the partnership.
EPP currently owns Wyoming Interstate Co., a 58% interest in Colorado Interstate Gas Co., a 45% interest in SNG, a 51% interest in Elba Express, and a 51% interest in Southern LNG, which owns the Elba Island LNG storage and regasification terminal near Savannah, GA.
In reaction, Fitch Ratings affirmed ratings on El Paso Corp.'s (EP) core pipeline and E&P subsidiaries, noting that it was "reflective of the cash flow stability and low relative business risk profile of the company's interstate pipeline franchise, as well as the hedge positions and cost improvements at the company's upstream business. The ratings recognize that EP is in the middle of a transformative capital spending plan, which will significantly increase both the size and scope of, primarily, its pipeline franchise."
The corporation "is in the middle of a multi-year $8 billion capital expenditure cycle, which will see EP grow its pipeline business significantly," said the ratings agency. "Fitch notes that these pipeline and LNG projects on a consolidated basis will have over 90% of their revenue derived from capacity reservation charges with primarily investment grade counterparties, which help to mitigate commodity price/volume exposure and lower counterparty risk..."
Capital spending, including construction and cost inflation risk, "remains a concern for EP's planned pipeline projects. Fitch notes that construction on the Ruby Pipeline has been delayed, which has increased costs on that project, roughly 10% to 15%" (see Daily GPI, Nov. 5).
"Offsetting some of this increase has been EP's completion of some of its other projects below budget. Fitch believes that capital costs will be roughly in line with revised management expectation of a roughly 5% increase as EP works through its project backlog, but notes that a more meaningful escalation in costs could drive a negative rating action given EP's already weak credit metrics."
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