Fortis Inc. said Monday it agreed to acquire Terasen Inc. from a subsidiary of Kinder Morgan Inc. for C$3.7 billion, including the assumption of approximately C$2.3 billion of debt.
Terasen (formerly BC Gas Inc.) is a holding company headquartered in Vancouver, BC, involved in natural gas distribution and petroleum transportation. The purchase does not include the petroleum transportation assets of Kinder Morgan Canada (formerly Terasen Pipelines), which are composed primarily of refined product and crude oil pipelines. Kinder Morgan acquired Terasen in November 2005 for US$5.6 billion (see Daily GPI, Nov. 17, 2005).
Following the acquisition, Fortis will be the largest investor-owned utility in gas and electric distribution in Canada with regulated electricity distribution utilities in five Canadian provinces and three Caribbean countries and regulated gas distribution utilities in British Columbia.
The gas distribution business, Terasen Gas, is one of the largest gas distribution utilities in Canada. Terasen Gas is the principal gas distribution utility in British Columbia, serving approximately 900,000, or 95% of the gas customers in the province. Terasen Gas owns and operates 44,100 kilometers (27,400 miles) of distribution pipelines and 4,300 kilometers (2,670 miles) of transmission pipelines. Its service territory includes the populous lower mainland, Vancouver Island and the southern interior of the province. As of Sept. 30, Terasen Gas had an aggregate of C$3.6 billion of assets, an aggregate rate base approaching C$3 billion and approximately 1,200 employees. The company is regulated by the British Columbia Utilities Commission.
“These are high-quality utility assets located in a region with strong economic growth,” said Fortis CEO Stan Marshall. “Through our FortisBC electric utility operations, we are very familiar with the regulatory environment and energy markets in British Columbia. Our expansion into the natural gas distribution business adds a third business segment and doubles the regulated rate base of Fortis to approximately C$6 billion. The acquisition is expected to be immediately accretive to earnings per common share.”
Following the acquisition, the customer base of Fortis Inc. will almost double to approximately 1.9 million. Total assets of Fortis will increase by approximately 94% to C$8.9 billion and regulated utility assets will comprise approximately 92% of total assets. Approximately 93% of these regulated assets will be located in Canada. Terasen Gas accounts for approximately 83% of the assets being purchased. The remaining utilities are Terasen Gas (Vancouver Island) Inc. and Terasen Gas (Whistler) Inc. The unsecured long-term debt of Terasen Gas Inc. is rated ‘A’ by DBRS and ‘A3’ by Moody’s.
“Terasen Gas is a well run utility, which will give Fortis a platform for further growth in the natural gas distribution business,” said Marshall. “It will complement our electric utilities, providing value for our customers and shareholders. Terasen Gas will remain autonomous in the Fortis model.”
Terasen Gas will significantly increase the earnings of Fortis from regulated utilities. The service territory of Terasen Gas is experiencing strong economic growth and includes substantially all of the service territory of FortisBC Inc.
The purchase price represents approximately 1.2 times the approved rate base of Terasen Gas for 2007. Similar to the electric distribution utilities of Fortis, Terasen Gas operates under principally cost-of-service rates. Terasen Gas has a gas distribution franchise with a diversified, mature, principally residential customer base. The acquisition is expected to improve the risk profile of Fortis by providing it with a more economically diverse portfolio of assets.
In August the British Columbia Utilities Commission has agreed to open a portion of the province’s residential natural gas market to competition, allowing homeowners to sign long-term fixed price contracts for natural gas with companies other than Terasen Gas (see Daily GPI, Aug. 17, 2006). The company filed its unbundling proposal with regulators in April (see Daily GPI, April 20, 2006).
In 2004 Fortis acquired all of the issued and outstanding shares of FortisBC Inc. [formerly, Aquila Networks Canada (British Columbia) Ltd.] and FortisAlberta Inc. [formerly, Aquila Networks Canada (Alberta) Ltd.] and has integrated these utilities into the Fortis Group.
Closing of the Terasen acquisition is expected in mid-2007 following regulatory and other approvals. Fortis has obtained commitments from Canadian Imperial Bank of Commerce to provide financing. CIBC World Markets Inc. acted as financial advisor to Fortis.
Fortis is principally a diversified, international electric utility holding company with assets exceeding C$5.4 billion and annual revenues of approximately C$1.5 billion. Fortis has holdings in regulated electric distribution utilities in Alberta, British Columbia, Newfoundland, Ontario, Prince Edward Island, Belize, Grand Cayman and the Turks and Caicos Islands. It has nonregulated generation operations in Belize, Ontario, Newfoundland, British Columbia and upper New York State. Fortis also has investments in real estate and hotels through its wholly owned nonutility subsidiary.
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