Plains All American Pipeline
(PAA) recently agreed to acquire a 50% stake in PAA Natural Gas Storage (PNGS) from Vulcan Capital for $220 million. The deal will bring Plains total control over its natural gas storage business and related operating entities.

The transaction comprises $90 million cash disbursement, distribution of 1.9 million common units of PAA at $90 million and deferred cash consideration of up to $40 million, which is conditional upon achievement of certain performance targets over the next few years. The deal is expected to close by Sept. 3.

As of June 30, PNGS had around $450 million in debt and nearly $52 million of cash. PAA will pay off the outstanding project finance debt by using the unit’s cash and available credit line.

Management is optimistic about the near-term and long-term prospects of the natural gas storage business and sees the deal to be accretive to earnings immediately. Moreover, it sees the deal enhancing Plains’ strategic flexibility going forward with regard to organic as well as inorganic growth objectives.

The cash flows from the PNGS business are fee-based and largely committed under long-term contracts running up to ten years. Plains continues to expand storage capacity at its Pine Prairie facility to boost cash flows from this division.

Plains closed at $47.25 on Friday, generating a distribution yield of 7.7% versus 7.0% of the peer group. We maintain our Neutral recommendation for the partnership.

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