TransCanada Corp. CEO Hal Kvisle stressed the stability of existing Western Canadian gas production and the promise of new supply from the Mackenzie Delta and Alaska in announcing the completion of its purchase of Gas Transmission Northwest Corp. (GTNC) from National Energy & Gas Transmission Inc. (NEGT) for US$1.7 billion, including US$500 million of assumed debt.
Meanwhile, credit ratings agencies sharply raised their ratings for GTNC, which was purchase when NEGT, the former PG&E National Energy Group, emerged from Chapter 11 bankruptcy proceedings.
The principal assets of GTNC are Gas Transmission Northwest (GTN), which extends from TransCanada’s pipeline assets in British Columbia to the California border at Malin, OR, and North Baja Pipeline, an 80-mile system that currently transports gas to Baja California Norte from a point near Ehrenberg, AZ. It crosses the U.S.-Mexico border near Ogilby, CA. TransCanada expects that gas flows on North Baja eventually could be reversed because of the liquefied natural gas import terminals planned in Baja California.
“This acquisition is an excellent strategic fit for TransCanada,” said Kvisle. “The GTN pipeline is essentially an extension of TransCanada’s existing B.C. and Foothills pipeline systems, while North Baja is a solidly contracted pipeline that is also well positioned for future growth. In addition to the pipeline assets, we are acquiring a team of experts who will continue to provide safe, reliable service to GTN and North Baja customers.”
Kvisle said that TransCanada has a long-term commitment to serve the Pacific Northwest and California markets. Although the company has not planned a mainline expansion on the GTN system, it said recently in announcing third quarter earnings that laterals to power plants and other customers could be built depending on market commitments.
“The Western Canadian Sedimentary Basin represents a large and stable supply of natural gas and over the past few years we have expanded our pipeline systems to better serve the Pacific Northwest and California,” Kvisle said. “We’re also well-positioned to transport frontier supplies from the Mackenzie Delta and Alaska to these markets.”
TransCanada completed the GTN acquisition using cash resources on hand and the issuance of notes payable. It expects the purchase to be accretive to earnings and cash flow immediately.
Standard & Poor’s Ratings Services raised GTNC’s ratings five notches from a “CC” to “A-,” reflecting its new standing as a wholly owned part of TransCanada. However, S&P designated the pipeline’s outlook as “negative,” reflecting TransCanada’s own similar outlook and what the rating agency called “an above-average business profile and a somewhat weak financial profile.”
S&P said the negative outlook is tied to TransCanada, and to the extent that the Canadian pipeline’s outlook changes, GTN’s ratings may be affected. “The credit rating on GTN is capped by the consolidated credit strength of TransCanada (A-, Negative),” S&P said in its analysis. “The rating on GTN will be capped by the rating on TransCanada because S&P generally takes the view that a weaker parent can siphon assets from a subsidiary during periods of financial distress or burden the subsidiary with liabilities.”
S&P cited an ongoing arbitration GTN has over a tolling arrangement that went sour in which there is an $83 million difference between the pipeline’s proposed settlement and what the other party wants, noting that TransCanada is supposed to put a portion of its purchase price into an escrow account equal to the “full face amount of the outstanding guarantees” as a way of protecting GTN bondholders from the outstanding claim. Otherwise, S&P’s only other concern cited dealt with GTN’s deals that involved noninvestment-grade entities, such as Sierra Pacific Resources and Avista Corp.
On the plus side, S&P noted that GTN has a “solid competitive position” in its western markets, supplying about 30% of California’s natural gas supplies as the only transporter of Canadian supplies into the state. “GTN operates at almost 100% reliability and consistently maintains a greater than 99% load factor,” S&P said. “Internal cash generation comfortably covers the capital budget and working capital needs.”
Moody’s Investors Service upgraded the senior unsecured ratings of GTN to A2 from Ba1 with a stable outlook, which brings GTN’s ratings on par with those of its new sister companies TCPL and NOVA, “as we expect funds to flow freely among GTN and its new affiliates in a centralized cash management pool,” Moody’s said. “GTN’s credit will neither be enhanced by any guarantees from TRP, nor will it be protected by any explicit ringfencing. Nevertheless, our ratings anticipate that TRP will maintain GTN as a self-financing entity for regulatory purposes and the strength of its balance sheet. Divergence from this expectation will cause us to reassess our ratings.”
GTN has a 30% market share in California. Moody’s noted that it does have customer concentration risk in Pacific Gas and Electric Co., which makes up about one fifth of its transportation revenues, “but the related recontracting risk has been deferred for another year with the recent annual extension of its contract through Oct. 31, 2006,” Moody’s said. “Long-term firm capacity is nearly fully subscribed (95%), while the average remaining contract length (10 years) is above the industry norms.”
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