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

Included in the transaction is a plan by KeySpan to provide athree-year $100 million (US$65 million) loan at commercial termsthat at Gulf’s option can be repaid or exchanged by KeySpan for anadditional 19.7% interest in GMS. KeySpan has also agreed to fundat Gulf’s option up to $27.5 million (US$18 million) of Gulf’sshare of capital expenditures in GMS over the next three years inexchange for a preferential share of GMS’s cash flow.

“Our investment will make an immediate contribution toearnings,” said Robert B. Catell, CEO of KeySpan Energy, which isthe parent of Brooklyn Union Gas. “We are buying into an ongoingbusiness with opportunities for expansion. Our partnership withGulf fits perfectly with our previously announced corporatestrategy to actively participate in the management and growth ofstrategic assets in the supply basins of Canada and the Gulf ofMexico. The gas supply in these two regions supports the growingNortheast gas market. Our existing investments with Canadianpartners, 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 ourshareholders.”

Jim Bertram, President of GMS, said the western Canadian assetsare “on the verge of dramatic growth. By combining Gulf’s assets,people and marketing experience with KeySpan’s resources, knowledgeof gas transportation and end user markets, and shared commitmentto aggressively expand the midstream business, we are forming apowerful alliance.”

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

Gulf employees previously assigned to Gulf’s Midstream Servicesdivision will become employees of GMS and will carry out theday-to-day operation and management, yet both companies will berepresented equally on the partnership’s management committee. Withno regulatory issues on the table, sources within KeySpan Energyexpect the deal to be closed by the end of the month.

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

John Norris

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