Texas Eastern Products Pipeline Co. LLC, the general partner of TEPPCO Partners LP, made its largest purchase ever last Tuesday, paying $444 million for Burlington Resources’ 1 Bcf/d Val Verde gathering system in the San Juan Basin. TEPPCO officials said they expect the addition of the system to be immediately accretive to earnings and cash flow and to show moderate annual growth going forward.

As a result of the positive impact of the Val Verde System acquisition, TEPPCO plans to increase its annual distribution by $0.10 per unit, effective with the distribution to be declared in July 2002 and payable in August 2002. TEPPCO projects first full-year earnings before interest, taxes, depreciation and amortization (EBITDA) from the Val Verde System of $55-60 million.

“These quality, fee-based assets will provide an immediate and substantial increase to the partnership’s cash flow, as well as attractive growth opportunities,” said Barry R. Pearl, CEO of the general partner of TEPPCO.

“This acquisition, combined with our recent acquisitions of the Jonah Gas Gathering System and the Chaparral and Quanah pipelines, clearly demonstrates the strength of the TEPPCO/Duke Energy Field Services (DEFS) team in adding value to the partnership,” he added. DEFS, parent of TEPPCO’s general partner, will operate the Val Verde system.

Located in San Juan and Rio Arriba Counties, NM, Val Verde gathers coal seam gas from the Fruitland Coal formation of the San Juan Basin, a premier long-term source of natural gas supply. The basin consists of both conventional gas reserves and prolific coal seam gas reserves, although the company doesn’t expect conventional resources to contribute to throughput in the near term.

The system is one of the largest coal seam gas gathering and treating facilities in the United States. Under the proposed transaction, TEPPCO will acquire 360 miles of pipeline ranging in size from four inches to 36 inches in diameter, 14 compressor stations with over 93,000 hp of compression and a large amine treating facility for the removal of carbon dioxide. The gathering system’s capacity is 1 Bcf/d and it is currently transporting 520 MMcf/d. The processing facilities can handle about 800 MMcf/d of production.

Pearl said the company expect substantial production growth in the basin and throughput increases on the gathering system after an infill drilling program is approved later this year. He said TEPPCO expects 10% per year throughput growth.

The system, which was built in the late 1980s, gathers gas from more than 544 wells throughout northwest New Mexico and southern Colorado and provides gathering and treating services pursuant to 60 long-term contracts with 40 different natural gas producers in the San Juan Basin. Burlington Resources is the largest producer in the San Juan Basin and is the biggest shipper on the gathering system with 50% of the current throughput.

Burlington spokesman James Bartlet said the company sold the assets in an effort to reduce its debt. Burlington acquired Canadian Hunter late last year for $2.1 billion, which increased its debt level. At the time, Burlington said it intended to sell off about $500 million in non-core assets.

“Because of the favorable prices that we’re generating for these assets, we’ve now increased that anticipated [asset sale] range from $750 million to $1.2 billion,” said Bartlet. “Our role is primarily drilling and production,” so other assets could be on the block.

Bartlet also noted that Burlington has nearly completed the development of its San Juan coalbeds and is focusing on conventional resources. Burlington’s San Juan production has declined slightly over the last couple of years. “We expect [production there] to remain relatively stable to a slight decline.”

Lehman Brothers analyst Thomas R. Driscoll said the sale price for the Val Verde system “equates to 7.4-8.1 times the $55-60 million of annual EBITDA that these assets are expected to contribute to TEPPCO.”

“We believe that these assets held modest growth potential for BR,” said Driscoll. “The $444 million sale is part of BR’s objective of divesting $750-1,200 million of non-core assets following its $2.1 billion acquisition of Canadian Hunter $350 million acquisition of ATCO’s Viking Kinsella assets.”

TEPPCO said the Val Verde sale is expected to close by June 30. TEPPCO will use a combination of equity and debt financing to fund the acquisition.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.