KeySpan, Gulf Canada Form Midstream Business

KeySpan Energy Development has agreed to acquire a 50% interest in Gulf Canada Resources' massive midstream gas business in western Canada for US$189 million and form a new partnership governing Gulf Midstream Services (GMS). The partnership will hold interests in 14 gas processing plants that handle 1.4 Bcf/d, of which the partnership's share is about 750 MMcf/d. It also will hold all of Gulf's western Canadian pipelines, storage, products facilities and gas and liquids marketing.

Included in the transaction is a plan by KeySpan to provide a three-year $100 million (US$65 million) loan at commercial terms that at Gulf's option can be repaid or exchanged by KeySpan for an additional 19.7% interest in GMS. KeySpan has also agreed to fund at Gulf's option up to $27.5 million (US$18 million) of Gulf's share of capital expenditures in GMS over the next three years in exchange for a preferential share of GMS's cash flow.

"Our investment will make an immediate contribution to earnings," said Robert B. Catell, CEO of KeySpan Energy, which is the parent of Brooklyn Union Gas. "We are buying into an ongoing business with opportunities for expansion. Our partnership with Gulf fits perfectly with our previously announced corporate strategy to actively participate in the management and growth of strategic assets in the supply basins of Canada and the Gulf of Mexico. The gas supply in these two regions supports the growing Northeast gas market. Our existing investments with Canadian partners, including the Iroquois pipeline, in which we have a 20% interest, and the Taylor gas processing plant in British Columbia, have resulted in substantial increases in earnings for our shareholders."

Jim Bertram, President of GMS, said the western Canadian assets are "on the verge of dramatic growth. By combining Gulf's assets, people and marketing experience with KeySpan's resources, knowledge of gas transportation and end user markets, and shared commitment to aggressively expand the midstream business, we are forming a powerful alliance."

According to Bertram, one of GMS' fist orders of business will be to improve throughput performance, "Only 65 percent of the 750 MMcf/d is being used now. I think GMS will be able to improve upon that number by somewhere around 15%." He expects the cash flow of this midstream business to be between C$40 and $50 million a year. Bertram also said expanding the number of plants in the area is on the agenda, but said it was too early to get specific.

Gulf employees previously assigned to Gulf's Midstream Services division will become employees of GMS and will carry out the day-to-day operation and management, yet both companies will be represented equally on the partnership's management committee. With no regulatory issues on the table, sources within KeySpan Energy expect the deal to be closed by the end of the month.

Based in Calgary, Gulf Canada Resources announced a 3Q98 loss of C$1.05/share versus C$0.67 in 3Q97 and year-to-date loss of $1.39 EPS versus $0.68 in the same period last year. These losses represent asset write-downs the company sustained due to low oil prices. The sale of 50% of GMS is a continuation of Gulf's strategy to sell non-essential assets to repay debts that this write-down incurred. Earlier this year, Gulf sold their North Sea assets to Kerr Mcgee Corp. for C$590 million. With this latest move, the company has sold C$1.2 billion in assets this year.

John Norris

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