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 negotiation."

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 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.

Susan Parker

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