Veresen Inc. (TSE: VSN) will acquire Global Infrastructure Partners' 50% convertible preferred interest in the Ruby pipeline system—a line nearly as long as Texas is wide.

The $1.425 billion deal will make it and the Kinder Morgan Inc. (NYSE: KMI) affiliate—El Paso Pipeline Partners—owners in Ruby through a common equity interest. Kinder Morgan, North America's largest natural gas pipeline operator, will continue to operate Ruby on a day‐to‐day basis.

The transaction sheds light on valuation of El Paso Pipeline Partners’ 50% ownership stake, said Raymond James Equity Research analysts John Freeman and Andrew Coleman. El Paso obtained the remaining 50% following the drop down of the asset from Kinder Morgan in April for $1.3 billion.

The Veresen deal comes in at $1.425 billion, with $800 million cash and $625 million in assumed debt.

“Bottom line: Veresen has acquired a 50% interest in the Ruby Pipeline at a price about 10% higher compared to KMI's drop down of its 50% ownership interest in Ruby,” the analysts said. “While this transaction has no impact on our estimates for EPB, it goes to show that prices are generally rising for midstream assets as M&A activity continues to pick up along with increased competition.”

Ruby is a newly-built, large-scale natural gas transmission system delivering U.S. Rockies natural gas production to markets in the western United States.

The 680-mile, 42-inch pipeline has a current capacity of about 1.5 billion cubic feet per day (Bcf/d), with expansion potential to 2 Bcf/d through the addition of compression. Ruby originates at the Opal hub in Wyoming and extends to the Malin hub in Oregon. The Malin hub is the main interconnect to the proposed Pacific Connector Gas Pipeline (50% owned by Veresen), which would supply Veresen's proposed Jordan Cove LNG terminal.

"This is a rare opportunity to acquire a large interest in a core U.S. pipeline asset,” said Don Althoff, president and CEO of Veresen.

“Ruby is an ideal fit for Veresen because it offers immediate long-term contracted cash flows with downside protection through the preferred interest structure, and provides significant future added upside related to our Jordan Cove LNG project," he said. "This transaction is consistent with Veresen's growth strategy, where we are focused on leveraging our existing footprint, adding assets with further growth potential, and providing natural gas connectivity from competitive supply regions to high-value markets."

Veresen obtained $800 million financing which, together with credit, will fund the acquisition. It will receive $91 million of preferred distributions annually based on the preferred interest structure.

This transaction is expected to close in the fourth quarter of 2014 and is subject to customary closing conditions and the receipt of approval by the Committee on Foreign Investment in the U.S.

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