Provident Energy Trust, a Calgary-based open-ended energy income trust, has agreed to acquire the Redwater Natural Gas Liquids (NGL) Processing System from Williams Energy Canada. Provident, which plans to operate the facilities, will pay C$268 million for the fixed assets and an estimated C$14 million for inventory when the transaction closes.

Strategically located in one of four main NGL hubs in North America, Redwater has a 25% share of processing capacity in western Canada. The system includes 100% interest in the five-year-old, 62,000 bbl/d Redwater fractionation plant, a storage and transportation facility located near Edmonton, AB; a 43.3% ownership of the 38,500 bbl/d Younger NGL extraction plant in northeastern BC; and 100% interest in a proprietary liquids gathering system.

“The acquisition of the Redwater system adds a new dimension to Provident’s long-term growth strategy,” said CEO Tom Buchanan. “Redwater provides for a stable source of long-life cash flow that is complementary to cash flow generated from our existing oil and gas production activities.”

Buchanan noted that the Redwater system would “substantially expand the scope of Provident’s business across the energy value chain,” and would also reduce its risk profile by “ensuring that a substantial portion of the trust’s cash flow is generated by assets with long-term fee-for-service and fixed margin contracts, effectively reducing the trust’s exposure to volatile commodity prices.”

In conjunction with the transaction, Provident agreed to sell, on a bought deal basis only in Canada, 14.3 million trust units at a price of C$10.50 per trust unit, and C$75 million of convertible extendible unsecured subordinated debentures to a syndicate of underwriters co-led by Scotia Capital and National Bank Financial. The convertible debentures will have a coupon of 8.75% and be convertible into trust units of Provident at a price of C$11.05 per trust unit.

Provident also has secured a C$120 million bank credit facility, which will be used to finance the portion of the purchase price not covered by the equity and convertible debenture offering. The transaction’s effective sale date is Aug. 1, and the close is scheduled for Sept. 30. Provident’s financial adviser on the transaction is National Bank Financial.

The midstream business will be led by Randy Findlay, Provident’s president. Before joining Provident, Findlay was president of TransCanada’s North American midstream business. From 1995 to 1998, Findlay led NOVA’s midstream business and was responsible for the planning, development, construction and operations of the Redwater system. The system will be managed by operations and commercial teams that will join Provident from Williams.

The increased focus on natural gas exploration, development and production in the northwestern portion of the Western Canadian Sedimentary Basin has resulted in more demand for NGL processing capacity and higher utilization rates among Edmonton area midstream facilities, said Findlay.

“Given supply demand balance and the growing need for a range of services, the midstream business today is more relationship-based than it was just five years ago,” said Findlay. “Of the available capacity at Redwater, 97% is contracted through fee-for-service and fixed margin contracts with major oil and gas producers and petrochemical businesses. These contracts account for 93% of Redwater’s total earnings and provide for very stable and predictable cash flows. As a result of these contracts, 67% of Redwater’s plant volume is contracted for 10 years or longer.”

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