If El Paso were to sell ANR Pipeline, as has been rumored since early October, it probably would fetch about $2.7 billion in after-tax proceeds, said CreditSuisse analyst Carl Kirst. El Paso hasn't commented on the rumors, but Kirst said the demise of the Continental Connector project, which would have fed gas into ANR, competition and low growth prospects in ANR's upper Midwest market area make such a deal "conceivable."
"While not trying to comment on the validity of such speculation, given feedback from industry and financial sources close to the situation, we thought it at least prudent to look at a potential ANR sale scenario, and the possible numbers involved," Kirst said in a research note. "When you get asked over a weekend haircut from a person sitting next to you [who] is a mid-level financial controller at a local Houston energy company, it's time to run the numbers.
"Speculation aside, there are reasons why EP could conceivably seek to divest ANR," he said, noting that Continental Connector, which El Paso shelved a month ago, would have revived ANR flow volumes by bringing in up to 1 Bcf/d of supply from the Midcontinent, West and East Texas and potentially the Rockies (see Daily GPI, Oct. 6).
El Paso launched Continental Connector in that fall of 2005 as a $1-2 billion system that would link its Rocky Mountain region pipelines -- Wyoming Interstate, Colorado Interstate Gas and Cheyenne Plains -- with its eastern pipelines -- ANR, Tennessee Gas and Southern Natural. The project was designed initially to span about 1,000 miles with 42-inch diameter pipe, delivering Rocky Mountain production as well as supply from the Midcontinent and North and East Texas to eastern and midwestern markets (see Daily GPI, Oct. 5, 2005). However, by last spring it became clear that the project would take a different shape than originally anticipated.
Rockies producers ended up looking for space on the competing 1.8 Bcf/d Rockies Express system. More interest was seen from the Midcontinent and the Barnett Shale in Texas. But numerous other projects were being planned to tap the Barnett Shale's growing supply and bring it to the Perryville Hub in Louisiana. CenterPoint Energy Gas Transmission's plan to deliver 1.24 Bcf/d of gas from Texas to Perryville was approved by FERC last month (see Daily GPI, Oct. 4), and other projects have been planned by Gulf South, Texas Gas, Crosstex, Energy Transfer and Kinder Morgan.
In addition, Duke Energy partnered with CenterPoint to propose the Midcontinent Connector, which would deliver 1.75 Bcf/d of gas from Texas and Oklahoma to Pittsburgh, PA (see Daily GPI, June 2). With all the competition, El Paso ended up without the commitments required to move forward on Continental Connector.
"We doubt it is coincidence that the timing of this presumed auction comes fast on the heels of this project's recent demise," said Kirst. "Continental Connector was going to be a big supply driver into the rest of EP's eastern pipes and ANR would have been a major beneficiary, perhaps more so than we originally gave credit.
"Moreover, this was the project that was going to hard link EP's western and eastern pipeline grid. Without it, maybe El Paso is rethinking the necessity of maintaining a truly nationwide grid if some of the operation synergies once anticipated are no longer expected to come to fruition."
ANR also has been facing stiff competition from Guardian Pipeline and others. Guardian recently filed an application with FERC for an extension deeper into ANR's Wisconsin market area. The project calls for Guardian to extend its system by 106 miles from its current terminus near Ixonia in northwestern Jefferson County, WI, to Green Bay, as well as add two compressor stations and six meter stations. The proposed expansion will result in an additional 537,200 Dth/d of gas transmission capacity to serve the state of Wisconsin. Service is lated for late 2008 (see Daily GPI, Oct. 25). ANR has been the sole pipeline provider in much of eastern Wisconsin for many years.
The 10,600-miles pipeline has a design capacity to deliver up to 6.4 Bcf/d of gas and has connections to more than 20 gas storage fields with 200 Bcf of working gas capacity. The pipeline brings gas to the Midwest from Gulf Coast, Midcontinent and Southwest producing basins through its western and eastern mainlines, which cross 15 states.
Kirst said that in the opinion of CreditSuisse's Canadian analyst, Dominique Barker, "such assets could be particularly interesting to two Canadian pipeline concerns, Enbridge and TransCanada..."
He noted that ANR is a "low-growth highly competitive pipeline that has to significantly discount its rates to remain competitive (as does every pipe between the Gulf Coast and Midwest). Given added basis differential uncertainty from the construction of Rockies Express, it may be arguably one of EP's least attractive pipeline assets."
Kirst said ANR, along with Great Lakes, in which TransCanada has a 50% stake, accounts for only about 20% of the earnings from El Paso's pipeline group and has only 10% of the "growth backlog. Divesting this drag could bump the pipeline group's 4-6% average annual [earnings before interest, taxes, depreciation and amortization (EBITDA)] growth forecast by 50-100 basis points.
"We're still in a good pipeline [merger and acquisitions] market relative to history," Kirst said, "and EP can use its extensive net operation loss carry forwards to shield capital gains." He noted that Transwestern, which faces significant long-term basis risk, was recently sold for 9.4 times EBITDA to Energy Transfer Partners (see Daily GPI, Sept. 18).
Assuming a 9.5 times EBITDA multiple in a potential sale, Kirst estimates, El Paso would get net after-tax proceeds of $2.7 billion from a sale of ANR, plus the elimination of $740 million in on-balance-sheet debt. He said his "base-case scenario does get close to the $4.1 billion purchase price that has been part of the market speculation on the sale recently.
If the sale does take place, Kirst said it would have slight earnings dilution of about 2 cents/share but would be a positive for the company's pipeline group EBITDA. He also said it would have a positive impact on El Paso's balance sheet, which could lead to a credit ratings increase and better position the company for any opportunistic transactions that might arise in the future.
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