Southern Star shines through
The Central system is a 6,000-mile interstate pipeline transports natural gas from Kansas, Oklahoma, Texas, Wyoming and Colorado to markets in the Midwestern United States. The system's design capacity is 2.3 billion cubic feet per day, with an annual throughput of 337.5 trillion British thermal units.
Central is a much more complicate system than many of the pipeline assets that have been on the market, in that it is more of a web in shape. It is not a tidy point-to-point pipeline that connects shippers with a single set of customers. The system essentially operates as a standalone business, with multiple entry and exit points.
It also has a more diverse group of customers, which range from corporates to utilities, to local gas distribution companies, to municipals. The service territory's target markets are Kansas and Missouri, states where ONEOK and Aquila and its subsidiaries are strong. In 2000, ONEOK and Missouri Gas accounted for 59% of its revenues. But now, according to sources close to debt providers, the pipeline's customer base is so broad that no one offtaker accounts for more than 4% of total volumes.
The system's previous owner was Williams, which has been in the process of selling off its assets and attempting to restructure its balance sheet. The first, and most high-profile, disposal, was the Kern River Pipeline Company, a strong project financed asset that has been the subject of numerous well-rated financings and refinancings (for details of the last, see Project Finance, May 2003).
The Central Pipeline is another asset that benefits from strong revenues that fall under the remit of the Federal Energy Regulatory Commission (FERC). This produces earnings that will not ever show double-digit growth, but are stable and do not require substantial trading and marketing acumen.
Williams sold the pipeline to AIG, which bought it through a series of companies, including AIG Highstar Capital LP, and the Southern Star Central Corporation. The sale closed in November 2002, and raised $555 million, consisting of $380 million in cash, and $175 million in assumed debt. Williams said it would use the proceeds to pay down debt and improve its liquidity situation. It also disposed of two natural gas liquids pipelines, the Mid-America system and the Seminole system, for $1.15 billion.
Highstar's first challenge would be to raise the necessary purchase price by leveraging the asset, while working around its existing debt profile. The prepayment penalties on the existing $175 million were evidently too onerous for the new sponsor to disturb the existing debt, so the owner decided to issue as much debt as the operating company could support, and create a new holding company to take on debt.
The first bank in the frame to provide the debt was WestLB, known for its high-yield private placement capabilities, and a Highstar investor. The original plan posited an approach to the B loan market to provide short-term, highly-priced debt. However, as a result of the turmoil surrounding the bank's principal finance activities in the UK, the bank is understood to be reluctant to work both sides of a deal.
As a result, the fund settled upon Lehman Brothers, which placed some of Highstar's funding, to lead the holding company financing, and Union Bank of California, one of the leads on the last Kern River bank deal, to do the operating company piece.
Both tranches closed at the same time, which Lehmans' $180 million holding company piece placed privately to long-term investors. This portion gained a rating of B1/B+ (Moody's/S&P), had a seven-year term, and an 8.5% coupon. The $60 million UBOC bank piece was targeted much more squarely at project finance players, those with whom its syndications team are most experienced.
This piece has been structured so as to rank pari passu with the existing $175 million note issue. It received ratings of BBB- and Ba1 from S&P and Moody's, but the split rating did not prevent the deal from selling down. Indeed, the piece, while small, also served to broaden Highstar's bank group, which will be called upon to support further distressed acquisitions. As Project Finance went to press, Allied Irish, Bank of Scotland and KBC had all committed.
The three-year deal is priced at 225bp over Libor, and amortizes little over term. The intention of the sponsor will be to refinance both the new debt and the existing notes in the capital markets. The two pieces now share a security package, and the tenor has been set so that the two pieces mature at the same time.
One indication that the fund will exert closer operational control comes from the fact that it has dropped plans to co-operate with the Southern Union Company both on this deal, and the CMS Panhandle purchase. Southern Union has decided to buy the CMS property alone.
At the time that the Central purchase closed, Southern Union's Energy Worx division signed a management agreement with AIG, and David Stevens, the head of the division was appointed president of Central. On 13 May, this agreement was terminated, and Michael Walsh, an AIG executive, replaced Stevens.
Sources at AIG say that the length of the potential anti-trust investigation was one factor in ending the agreement. But the signs are that AIG intends to keep its pipeline properties close at hand.
Southern Star Central
Corporation
Status: Closed 8 August, syndication launched 8 September
Size: $240 million
Location: Midwestern US
Description: Acquisition of 6,000-mile gas pipeline system
Sponsor: AIG Highstar
Debt: $180 million high-yield not issue, $60 million bank piece
Bank arranger: Union Bank of California
Placement agent: Lehman Brothers
Lawyers to the sponsor: Bingham McCutchen
Lawyers to the lenders:
Chadbourne & Parke
Insurance: Marsh
Market consultant:
International Gas Consultants
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.