Northern Border Banks on Midwestern Gas to 'Really Blossom'
Northern Border Partners L.P. says it's moving quickly to scoop
up Midwestern Gas Transmission from El Paso Corp. because it
believes the pipeline is destined to become strategically more
important as an outlet for western Canadian gas and eventually
Alaskan gas, as well as a key supplier for gas-fired power
generation plants in the Midwest.
"The time has come to see this thing [Midwestern] really blossom
as a commercial activity," said Robert Hill, vice president of
marketing and business development for Northern Border Pipeline,
which is 70% owned by the partnership. "We have definitely a lot of
aspirations and many deals that I can't discuss.....that are in
The market served by Midwestern "is replete with a number of
power plant opportunities, other large end-use opportunities, even
some converted coal-fired generation plants..... And, of course,
we're also anxious to make sure we continue taking good care of
existing LDCs along the Midwestern system," said Northern Border
CEO Bill Cordes.
Cordes and Hill touted Midwestern's future potential during a
teleconference with analysts last Tuesday that was called to
discuss the partnership's pending acquisition of the pipeline from
El Paso. Northern Border Partners' announced last week that it had
entered into a definitive agreement to buy Midwestern from El Paso.
El Paso was ordered by the Federal Trade Commission to sell the
pipeline asset as a condition to its merger with Coastal Corp.,
which was completed last month.
Cordes said Northern Border Partners expects to pay about $100
million for Midwestern, making it the company's fourth acquisition
in just over 18 months. "We expect to fund this acquisition
initially with debt, but we would expect to replace about half of
that debt" in the near term, he told analysts.
Northern Border Partners hopes to close the transaction in mid
to late April after obtaining final clearance from the FTC. The
acquisition will be immediately accretive to earnings, adding 7-10
cents per share on a cash flow basis for the partnership, Cordes
said. Midwestern will contribute $12-$13 million to earnings before
interest, taxes and depreciation and amortization (EBITDA).
With its tie-ins with Alliance Pipeline and Northern Border,
Midwestern "will help to extend the availability of Canadian gas
South and East," Cordes said. "...[W]e also think the
transportation opportunities on the system will grow as Alaskan gas
hits that area later this decade."
The 350-mile, 30-inch diameter Midwestern pipeline extends from
Portland, TN, to Joliet, IL, where it connects with the 1,214-mile
Northern Border system and Alliance. The pipeline, which operates
bi-directionally, has a forward-haul capacity (northward to
Chicago) of 650 MMcf/d, and a backhaul capacity in the range of
350-650 MMcf/d. Midwestern's primary market is the growing Joliet
hub near Chicago, and its secondary markets are in Kentucky,
southern Illinois and Indiana.
"We are taking ownership of Midwestern at a time when they do
have a significant quantity of forward-haul capacity under
contract," noted Hill. He estimated that about 600 MMcf/d of the
pipe's forward-haul capacity currently is committed due to the
number of new peaking and base-load facilities that have popped up
in Midwestern's market area. "We've had about 405 MMcf/d of recent
activity [added] on the commercial side" to Midwestern's system in
the last couple of years, he said.
Hill conceded that a number of the contracts are of a "mid-term
life" nature, and are expected to expire around 2003. But the
pipeline plans to aggressively pursue renewals. "We have certainly
factored in our expectations [for] renewal and believe the pipe
will remain substantially full at or above" the 600 MMcf level.
In the short term, "we do intend to concentrate on really
working hard at the value-added services.....things like park and
ride services [and] backhauls," Cordes said. "We expect the
inclusion of Midwestern into our pipeline family as being a good
opportunity for market access for the existing customers on
Midwestern as well as [the] existing customers on Northern Border
Pipeline." The two pipelines share some of the same major customers
--- Peoples Gas Light & Coke, Nicor and Nipsco.
The "synegistic value [of] Northern Border and Midwestern...in
terms of developing a high-pressure header system in the Joliet
area, I think, is going to create a lot of new value for both
pipelines," he noted.
Assuming the Midwestern transaction goes through, executives of
Northern Border Partners said the company will have already
eclipsed its targeted acquisition budget for 2001. ".....[W]e said
our target was $200 million, so we've almost tripled that already."
But they assured analysts that the partnership has sufficient
resources to continue to watch out for "good acquisition targets,"
as well as develop the assets that have been acquired. But the
partnership warned analysts not to expect an acquisition of this
magnitude anytime soon.
Northern Plains Natural Gas Co., a general partner in Northern
Border, will operate the Midwestern system after the sale is
completed, Cordes said. He noted that 21 experienced field
employees will be transferred to Northern Plains as part of the
deal. The general office functions of Midwestern will be absorbed
into the Omaha, NE, headquarter offices of Northern Border.