TransCanada pounces on weakened U.S. natural gas pipelines

Firm stands to open direct link to California if deal goes through

Gary Park

Petroleum News Calgary Correspondent

TransCanada has carved itself a direct link to the huge California natural gas market by negotiating a US$1.7 billion purchase of U.S. pipelines with combined capacity of 3.6 billion cubic feet per day. If the transaction with a unit of troubled PG&E Corp. is concluded, Canada’s largest gas carrier will lock up a 1,350 mile link from the British Columbia-Idaho border to the Oregon-California line, opening the door to California. A spokeswoman for TransCanada described California as a “high demand market.”

The deal, including US$500 million of assumed debt, would see TransCanada acquire Gas Transmission Northwest, a Bethesda, Md.-based gas pipeline company, formerly known as Pacific Gas Transmission.

The system can move 2.1 billion cubic feet per day to California and 1 billion cubic feet to the U.S. Pacific Northwest.

Gas Transmission Northwest is a subsidiary of National Energy & Gas Transmission, which in turn is a unit of PG&E, one of the largest U.S. energy utilities that has been unloading assets since last July to pay down debt after filing for Chapter 11 bankruptcy protection along with several sister companies.

With a stable of coveted pipelines on the market, there is a long list of prospective buyers, including Nebraska-based billionaire Warren Buffet. The deal for Gas Transmission Northwest needs U.S. bankruptcy court approval, which TransCanada expects within 75 days.

National Energy & Gas Transmission is obliged to wait for better offers, which TransCanada would have the right to match. If another bid is accepted, the Calgary-based company is entitled to a break fee and reimbursement of expenses.

Robert Hastings, an analyst with Raymond James, told the Globe and Mail that TransCanada has a good chance of wrapping up the deal, given that the break fee involved would make it difficult for a rival to trump the offer.

Other analysts said TransCanada has learned from its past mistakes when it bought operations that were geographically and strategically distant from its core.

In addition to the pipeline business, National Energy & Gas Transmission has more than 7,300 megawatts of generation including a mix of natural gas, coal/oil, hydroelectric, waste coal and wind power at many plants across the United States.

The package also positions TransCanada to acquire the 80-mile North Baja pipeline, which has capacity for 500 million cubic feet per day from Arizona to the Mexico-California border. That sale is subject to a right of first refusal by another firm.

Since the collapse of several major U.S. pipeline firms, TransCanada has been biding its time, weighing the available options.

The Canadian firm said its acquisition war chest includes C$1.35 billion and US$650 million of debt and/or equity issuance capacity remaining under its Canadian and U.S. shelf prospectuses.

However, it may consider selling some assets within its existing portfolio to finance the Gas Transmission Northwest purchase.

With 24,900 miles of gas pipelines, TransCanada has a market capitalization of C$12.9 billion. It posted sales last year of C$5.3 billion.

The company also owns, controls or is building 4,700 megawatts of power and is a key player in proposed pipelines from the North Slope and Canada’s Mackenzie Delta.