Northern Border Partners L.P. says it’s moving quickly to scoopup Midwestern Gas Transmission from El Paso Corp. because itbelieves the pipeline is destined to become strategically moreimportant as an outlet for western Canadian gas and eventuallyAlaskan gas, as well as a key supplier for gas-fired powergeneration plants in the Midwest.
“The time has come to see this thing [Midwestern] really blossomas a commercial activity,” said Robert Hill, vice president ofmarketing and business development for Northern Border Pipeline,which is 70% owned by the partnership. “We have definitely a lot ofaspirations and many deals that I can’t discuss…..that are innegotiation.”
The market served by Midwestern “is replete with a number ofpower plant opportunities, other large end-use opportunities, evensome converted coal-fired generation plants….. And, of course,we’re also anxious to make sure we continue taking good care ofexisting LDCs along the Midwestern system,” said Northern BorderCEO Bill Cordes.
Cordes and Hill touted Midwestern’s future potential during ateleconference with analysts last Tuesday that was called todiscuss the partnership’s pending acquisition of the pipeline fromEl Paso. Northern Border Partners’ announced last week that it hadentered into a definitive agreement to buy Midwestern from El Paso.El Paso was ordered by the Federal Trade Commission to sell thepipeline asset as a condition to its merger with Coastal Corp.,which was completed last month.
Cordes said Northern Border Partners expects to pay about $100million for Midwestern, making it the company’s fourth acquisitionin just over 18 months. “We expect to fund this acquisitioninitially with debt, but we would expect to replace about half ofthat debt” in the near term, he told analysts.
Northern Border Partners hopes to close the transaction in midto late April after obtaining final clearance from the FTC. Theacquisition will be immediately accretive to earnings, adding 7-10cents per share on a cash flow basis for the partnership, Cordessaid. Midwestern will contribute $12-$13 million to earnings beforeinterest, 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 gasSouth and East,” Cordes said. “…[W]e also think thetransportation opportunities on the system will grow as Alaskan gashits that area later this decade.”
The 350-mile, 30-inch diameter Midwestern pipeline extends fromPortland, TN, to Joliet, IL, where it connects with the 1,214-mileNorthern Border system and Alliance. The pipeline, which operatesbi-directionally, has a forward-haul capacity (northward toChicago) of 650 MMcf/d, and a backhaul capacity in the range of350-650 MMcf/d. Midwestern’s primary market is the growing Joliethub near Chicago, and its secondary markets are in Kentucky,southern Illinois and Indiana.
“We are taking ownership of Midwestern at a time when they dohave a significant quantity of forward-haul capacity undercontract,” noted Hill. He estimated that about 600 MMcf/d of thepipe’s forward-haul capacity currently is committed due to thenumber of new peaking and base-load facilities that have popped upin Midwestern’s market area. “We’ve had about 405 MMcf/d of recentactivity [added] on the commercial side” to Midwestern’s system inthe last couple of years, he said.
Hill conceded that a number of the contracts are of a “mid-termlife” nature, and are expected to expire around 2003. But thepipeline plans to aggressively pursue renewals. “We have certainlyfactored in our expectations [for] renewal and believe the pipewill remain substantially full at or above” the 600 MMcf level.
In the short term, “we do intend to concentrate on reallyworking hard at the value-added services…..things like park andride services [and] backhauls,” Cordes said. “We expect theinclusion of Midwestern into our pipeline family as being a goodopportunity for market access for the existing customers onMidwestern as well as [the] existing customers on Northern BorderPipeline.” 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…interms of developing a high-pressure header system in the Jolietarea, I think, is going to create a lot of new value for bothpipelines,” he noted.
Assuming the Midwestern transaction goes through, executives ofNorthern Border Partners said the company will have alreadyeclipsed its targeted acquisition budget for 2001. “…..[W]e saidour target was $200 million, so we’ve almost tripled that already.”But they assured analysts that the partnership has sufficientresources to continue to watch out for “good acquisition targets,”as well as develop the assets that have been acquired.But thepartnership warned analysts not to expect an acquisition of thismagnitude anytime soon.
Northern Plains Natural Gas Co., a general partner in NorthernBorder, will operate the Midwestern system after the sale iscompleted, Cordes said. He noted that 21 experienced fieldemployees will be transferred to Northern Plains as part of thedeal. The general office functions of Midwestern will be absorbedinto the Omaha, NE, headquarter offices of Northern Border.
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