PAA Natural Gas Storage LP (PNG) has agreed to acquire SG Resources Mississippi LLC, owner of the Southern Pines Energy Center gas storage facility, for $750 million.

Southern Pines is a salt cavern facility in Greene County, MS, about 60 miles north of Pascagoula and 30 miles east of Hattiesburg. The facility was placed in service in 2008; three caverns are currently in operation. The facility is permitted for 40 Bcf of working capacity from four caverns. The fourth cavern is currently being drilled and the facility has the capacity for further expansion, subject to permits and market demand.

The facility has an aggregate of 48,000 hp of compression and is permitted for peak injection and withdrawal rates of 1.2 B/d and 2.4 Bcf/d, respectively. It is directly or indirectly connected to eight pipelines servicing the Gulf Coast, Northeast, Mid-Atlantic and southeastern markets.

"Southern Pines' strategic location and excellent pipeline connections provide an opportunity to optimally serve the Southeast market -- one of the fastest growing gas-fired power generation markets in North America," said PNG CEO Greg L. Armstrong. "Additionally, Southern Pines has substantial ongoing organic growth potential, underpinned by a strong portfolio of long-term firm storage contracts."

The deal is expected to close during the first quarter.

Armstrong said Southern Pines is fully contracted for the 2011-2012 and the 2012-2013 storage seasons and is estimated to have approximately 85% and 70% of projected working capacity contracted for the 2013-2014 and the 2014-2015 seasons, respectively.

"As a result of Southern Pines' anticipated growth profile and stable cash flows from long-term contracts, we expect these assets to provide predictable, stable cash flows, even during challenging market conditions," Armstrong said.

PNG is targeting to increase its annualized distribution for the February 2011 distribution to $1.38/unit and to exit 2011 at an annualized run-rate of $1.45/unit, the partnership said. Such exit rate would represent a 7.4% increase over PNG's current annualized distribution of $1.35/unit.

PNG has arranged financing of $800 million to fund the purchase, closing costs and the first 18 months of expected expansion capital. This financing is composed of $600 million of equity, approximately $262 million of which will be provided by a private placement of PNG units to funds managed by Kayne Anderson Capital Advisors, Tortoise Capital, ClearBridge Advisors and other investors. Plains All American Pipeline will provide the remaining $338 million of equity capital, including a 2% general partner contribution.

As a result of this transaction, Plains All American's aggregate ownership in PNG will decrease to 70% from 77% prior to the transaction. Plains All American will continue to own 100% of PNG's general partner and PNG's incentive distribution rights. Plains All American will also provide $200 million of debt financing to PNG.

PNG recently filed with the Federal Energy Regulatory Commission to expand its Pine Prairie Natural Gas Storage facility in Evangeline Parish, LA, with an additional 32 Bcf of working capacity (see Daily GPI, Oct. 6).

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