Chesapeake Sells Pipelines To Subsidiary For $500 Million

Chesapeake Energy Corp. (CHK) will sell 220 miles of its Louisiana pipelines to subsidiary Chesapeake Midstream Partners LP (CHKM) for $500 million, the companies said on Thursday.

The deal allows Chesapeake Energy Corp., the second largest natural gas producer in the U.S., to shed the pipelines along with any debt that may be tied to them while still retaining a degree of control over the assets as the lead, or general, partner in Chesapeake Midstream. Chesapeake Midstream, meanwhile, can expand the pipelines by tapping into equities markets and not its parent company's balance sheet.

Oklahoma City-based Chesapeake Energy spun off several gas distribution assets earlier this year as the master limited partnership, but still owns nearly 35% of Chesapeake Midstream's shares, according to FactSet Research.

Master limited partnerships such as Chesapeake Midstream pay out profits to investors each quarter and Chief Executive J. Mike Stice said that Thursday's asset "drop-down" should immediately generate cash for those disbursements.

Located in Caddo and De Soto parishes in western Louisiana, the pipelines distribute natural gas culled from the Haynesville shale formation.

Chesapeake Energy has 525,000 acres in the Haynesville formation and believes its reserves there could exceed the equivalent of 30,000 billion cubic feet of natural gas. Chesapeake said it produces around the equivalent of 785 million cubic feet there each day.

The company's pipelines there carried about 400 million cubic feet per day during the third quarter.

Along with the sale, Chesapeake Energy has agreed to send a certain volume of gas through the pipelines at a fixed fee for 10 years.

Terms of the transaction were approved by a panel of independent directors, which enlisted outside financial and legal advisors, the companies said.

Shares of Chesapeake Energy closed up 6 cents, or 0.3%, at $23.57 on Thursday. Chesapeake Midstream shares closed down 5 cents, or 0.2%, at $26.93.

-By Ryan Dezember, Dow Jones Newswires; 713-547-9208; [e-mail]