Australia-based investment group Babcock and Brown Ltd. (BBI) is leading a consortium to buy the majority stake in MidCon, which owns the Natural Gas Pipeline Company of America (NGPL), in a $7.6 billion transaction.

With more than 10,000 miles of wholly and jointly owned interstate pipelines, NGPL's system moves natural gas from major U.S. and Canadian producing areas to Midwest markets and other pipelines serving North America. NGPL's system traverses 10 central U.S. states, supplying about 61% of the gas delivered to Chicago and northern Indiana.

"This provides BBI with an attractive entry point into the U.S. gas distribution market through an interest in a strategic, sizable and critical pipeline asset," said BBI CEO Jeff Kendrew. "The transaction also enables BBI to establish a relationship with a premier U.S. pipeline operator, Knight Inc." Privately held Knight was formerly Kinder Morgan Inc. (see NGI, June 4).

The deal is expected to close early next year, and once it's completed, the Babcock consortium will own 80% of MidCon, while Knight will retain a 20% stake and operate the pipeline by long-term contract. The consortium consists of BBI (71%), Canada's Public Sector Pension Investment Board (20%), and The Netherlands Dutch Pension Fund (9%). NGPL Pipe Co. will merge with, and into, MidCon when the transaction closes. The acquisition does not require any state or federal regulatory approvals, according to BBI.

Standard & Poor's (S&P) and Fitch Ratings both assigned a "BBB-" credit rating to MidCon and its affiliates, including NGPL.

"The ratings on MidCon reflect its consolidated credit profile, which is characterized by the excellent business risk profile of its NGPL asset, and an aggressive consolidated financial profile," S&P analysts wrote. "Standard & Poor's views the predictable cash flows generated from the natural gas pipelines (about 45% of total margin) and storage assets (approximately 20% of total margin) as crucial elements underpinning MidCon's investment-grade ratings. The considerably offsetting factors are the amount of debt intended to be issued and a high dividend payout policy, which will pressure financial metrics and lead to an overall aggressive financial policy."

Fitch Ratings analysts wrote, "As one of the largest interstate pipeline systems in the U.S., NGPL boasts favorable rate structures with a high percentage of fixed-fee long-term contracts and attractive organic expansion opportunities. Substantially all of its pipeline capacity is committed under contracts ranging from one to five years and the average contract length has increased to 3.4 years. Consequently, MidCon is in a position to continue to generate consistent, sustainable cash flow. In addition, MidCon's business risk profile is enhanced by its access to diverse and resource-rich supply areas and deliverability access to high demand areas within its service territories."

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