Penn Virginia Resource Partners, L.P. announced that it has signed a definitive agreement to acquire Chief Gathering LLC "Chief Gathering" for $1.0 billion. Chief Gathering, which is owned by Chief E&D Holdings LP "Chief", is a midstream pipeline company with operating assets serving Marcellus Shale natural gas producers primarily in northeastern Pennsylvania. This transaction, when closed, will result in a major expansion of PVR's pipeline systems in the gas-rich Marcellus Shale. PVR expects to finance the purchase through a combination of committed equity and debt. The transaction is expected to close in the second quarter of 2012, subject to regulatory clearances and other customary closing conditions.
Chief Gathering's assets include six natural gas gathering systems serving over 300,000 dedicated acres in Bradford, Lycoming, Sullivan, Susquehanna, Wyoming and Greene Counties, Pennsylvania and Preston County, West Virginia. Additionally, Chief Gathering is currently constructing a new 750 MMcfd trunkline, anticipated to be in service in the third quarter of 2012, extending from northern Wyoming County to Luzerne County with a connection to Transco's interstate pipeline. PVR currently owns two gathering systems in Lycoming and Wyoming Counties, with a third system in early stage development in Susquehanna County.
William H. Shea, Jr., Chief Executive Officer of PVR's general partner, said, "The acquisition of the Chief Gathering systems is a transformational transaction for PVR. We expect that by year-end 2013 our midstream business unit will account for almost 75% of PVR's EBITDA, up from 40-45%. These assets, together with our Lycoming and Wyoming County gathering assets, position us well to capture significant midstream opportunities in six of the most prolific counties in the northeastern area of the Marcellus Shale. We believe that there are substantial operating synergies and capital cost savings to be realized because of the proximity of the PVR and Chief Gathering systems, and the connectivity to both the Transco and Tennessee interstate pipelines. We expect to capture additional volumes from producers as a result of these synergies and delivery options.
We believe that this acquisition clearly solidifies PVR as a leading midstream company with significant assets in both the Marcellus Shale and the Granite Wash, two of the lowest cost natural gas production areas in the United States. We are also pleased that Chief, one of the premier E&P companies in the country, and Riverstone Holdings, LLC, a private equity firm with a proven record of success in the energy industry, will be significant owners of PVR units following the acquisition. Their confidence in the benefits of this acquisition and PVR's business going forward is gratifying and appreciated."
All of the gathering, compression, and dehydration services for the Chief Gathering systems are provided under fee-based agreements with active Marcellus producers including Chesapeake, Anadarko, Statoil, Mitsui, EXCO/BG Group, ExxonMobil/XTO, Chief, Enerplus and Chevron. As of February 2012, volumes on the Chief Gathering systems were approximately 235 MMcfd and volumes on PVR's Marcellus systems were approximately 210 MMcfd. The new Wyoming County trunkline has 15-year firm transportation volume commitments of 255 MMcfd for 2012, increasing to 355 MMcfd in 2013.
The purchase price of $1.0 billion, subject to adjustments to reflect, among other things, a January 1, 2012 economic effective date of the acquisition, will be paid in a combination of cash and the issuance to Chief of $200 million in a new class of PVR limited partner interests ("Special Units"). The Special Units are substantially similar to PVR common units, except that the Special Units will not pay or accrue distributions until they automatically convert to common units, on a one-for-one basis once the Special Units have not received six consecutive quarterly distributions following issuance.
Trevor Rees-Jones, founder and CEO of Chief, said, "We are very pleased with the PVR acquisition of Chief Gathering, allowing their expansion in a prime producing area of the Marcellus Shale. On the upstream front, Chief owns acreage in northeast Pennsylvania, which will now be gathered by PVR and we plan to continue to drill and increase production in this prolific area of the Marcellus. My conviction in this transaction is evidenced as a substantial new investor in PVR and my confidence in their management team and ability to grow value in the company."
PVR expects to finance the cash portion of the transaction through a combination of debt and committed equity issuances as follows:
- Investment entities affiliated with Riverstone Global Energy and Power Fund V, LP ("Riverstone") have committed to acquire $400 million in units of a new class of PVR limited partner interests ("Class B Units") in a private placement concurrent with, and conditioned on, the closing of the Chief Gathering acquisition. The Class B Units will be substantially similar in all respects to PVR's common units, except that PVR will pay distributions in respect of the Class B Units through the issuance of additional Class B Units rather than cash. After the eighth full fiscal quarter following the closing of the Chief Gathering acquisition, at the option of either PVR or Riverstone, the Class B Units will convert into common units on a one-for-one basis. Riverstone will be entitled to name two directors to the board of directors of PVR's general partner until the Class B Units convert to common units, and thereafter for so long as Riverstone owns 10% or more of the total outstanding PVR common units.
- Institutional investors, co-led by Kayne Anderson Capital Advisors and Magnetar Capital, have committed to acquire approximately $180 million in PVR's common units in a private placement concurrent with, and conditioned upon, the closing of the Chief Gathering acquisition.
- PVR has obtained a commitment from Royal Bank of Canada for a senior unsecured bridge facility of up to $220 million to provide the remainder of the proceeds necessary to finance the Chief Gathering acquisition. Rather than draw on this facility, PVR intends to raise the remainder of the required cash by issuing term debt prior to the closing of the Chief Gathering acquisition.
Pierre Lapeyre and David Leuschen, Co-Founders of Riverstone said, "Riverstone is pleased to make a significant investment in PVR to help facilitate this transformative transaction. This acquisition clearly increases PVR's presence in the gas-rich Marcellus Shale and establishes PVR as a strong midstream gathering and processing company. We look forward to working with PVR in the future as it capitalizes on the growth opportunities in the midstream business."
RBC Capital Markets served as PVR's exclusive financial advisor on the transaction and sole placement agent in the $180 million private placement of equity. ARAD Energy served as exclusive financial advisor to Chief on the transaction.