El Paso Corp. on Friday sold its prized ANR Pipeline Co., Michigan storage assets and its 50% interest in Great Lakes Gas Transmission to TransCanada Corp. and TC PipeLines LP for $4.135 billion, which includes $744 million in debt. The sale, rumored after El Paso’s proposed Continental Connector pipeline project fell through, is expected to close early next year.

In a separate transaction, TC PipeLines will acquire 46.45% of Great Lakes from El Paso for $962 million, including $212 million of assumed debt. TransCanada is the general partner and a common unitholder (13.4%) of TC PipeLines.

Besides the gas systems, TransCanada also will be gaining the strength and expertise of the close to 1,000 employees who work for ANR, headquartered in Houston, and Great Lakes, headquartered in Troy, MI.

“With the acquisition of ANR, TransCanada’s wholly owned natural gas pipeline network will extend more than 59,000 kilometers [36,660 miles] and offer our customers unparalleled connections from traditional and emerging supply basins to growing North American markets,” said TransCanada CEO Hal Kvisle. “By acquiring more than 230 billion cubic feet of natural gas storage capacity, TransCanada will have interests in approximately 360 billion cubic feet of storage capacity, making it one of North America’s largest gas storage operators.”

ANR operates one of the largest interstate natural gas pipeline systems in the United States, providing transportation, storage, and various capacity-related services to a variety of customers in both the U.S. and Canada. The system consists of 10,500 miles (17,000 kilometers) of pipeline with a peak-day capacity of 6.8 Bcf/d. It transports natural gas from producing fields in Louisiana, Oklahoma, Texas and the Gulf of Mexico to markets in Wisconsin, Michigan, Illinois, Ohio and Indiana. The pipeline system also connects with several other pipelines providing customers with access to diverse sources of supply from Western Canada and the Rocky Mountain region and access to a variety of end-user markets in the midwestern and northeastern United States.

ANR also owns and operates several underground natural gas storage facilities in Michigan with a total capacity of 230 Bcf. Its facilities offer customers a high level of service flexibility allowing them to meet peak-day delivery requirements and to capture the value resulting from changing supply and demand dynamics. As part of the acquisition TransCanada will also obtain certain gas supplies contained within production and storage reservoirs in Michigan.

Great Lakes owns and operates a 2,115 mile (3,400 kilometer) interstate natural gas pipeline system with a design capacity of 2.5 Bcf/d. Extending from the Minnesota-Manitoba border at Emerson to the Michigan-Ontario border at St. Clair, Great Lakes provides a direct link between Western Canada’s abundant natural gas basin and major industrial and market centers in Minnesota, Wisconsin, Michigan and eastern Canada. With the acquisition of an additional 3.55% interest in Great Lakes, TransCanada will directly own 53.55% of Great Lakes. Its TC Pipelines will own the rest, effectively giving TransCanada another west-to-east line that takes a more southern route, paralleling much of its Canadian mainline. TransCanada will become the operator of Great Lakes, which is currently operated by a company jointly owned by affiliates of El Paso and TransCanada.

Kvisle said the acquisition “represents a unique opportunity to invest in regulated natural gas pipeline and storage assets that are a strong fit with our existing North American footprint. They are high quality assets that will strengthen our position as a leader in the North American gas transmission business and deliver significant value to our shareholders. They will also complement our growing portfolio of energy infrastructure assets that include significant power generation and gas storage operations, as well as proposed liquefied natural gas terminals and crude oil pipelines.”

El Paso expects its after-tax cash proceeds to be roughly $3.3 billion and expects to have $1 billion of tax loss carryovers remaining after the close.

“The sale of ANR Pipeline, our Michigan storage assets and our interest in Great Lakes is a transformational event for El Paso,” said CEO Doug Foshee. “Coupled with the restructuring efforts over the last three years, this transaction immediately elevates our credit statistics to a level that is at or very near an investment grade level, one of our primary long-term objectives. We also preserve our earnings outlook and our position as North America’s largest interstate natural gas pipeline franchise with approximately 43,000 miles of pipelines.”

In a note to clients Friday, Credit Suisse energy analysts Carl Kirst and Stuart Weinman enthusiastically supported El Paso’s sale.

“No, we’re not being sarcastic about the holiday weekend — EP is smartly taking advantage of some of the highest pipeline multiples we have seen in our nearly 15 years, and this looks like a great deal to us,” they wrote. For El Paso, the transaction provides a “balance sheet boost,” which “is in a large part what this transaction is about.” The analysts said the “momentum and positive psychology” could push El Paso’s share price up on a short-term basis, with the stock settling at around $16/share.

Kirst and several of his peers had suggested ANR might be sold after El Paso’s plan to build the Continental Connector pipeline was shelved (see Daily GPI, Nov. 7; Nov. 3; Oct. 6). The proposed $1.2 billion pipeline system, which was announced in the fall of 2005, would have linked El Paso’s Rocky Mountain region pipes — Wyoming Interstate, Colorado Interstate Gas and Cheyenne Plains — with its eastern pipelines — ANR, Tennessee Gas and Southern Natural — and initially spanned about 1,000 miles with 42-inch diameter pipe. However, by last spring it became clear that the project would take a different shape than originally anticipated.

Rockies producers ended up looking for space on the competing 1.8 Bcf/d Rockies Express system, put together by Kinder Morgan Energy Partners, Sempra and ConocoPhillips. El Paso’s proposal to pipe Midcontinent and the Barnett Shale gas in Texas through the system also was overwhelmed by projects planned by a plethora of pipeline operators, including Gulf South, Texas Gas, Crosstex, Energy Transfer, Enterprise Products Partners and Kinder Morgan, among others. El Paso ended up without the commitments required to move the Continental Connector project forward.

TransCanada will finance the purchase with components of incremental debt and “a significant amount of new equity.” The transaction is expected to be accretive to earnings and cash flow in the first full year of ownership.

“We look forward to welcoming the experienced, expert people of ANR and Great Lakes,” said Kvisle. “They have a long history of safe, reliable operations combined with strong stakeholder relationships. TransCanada shares these values and will place a high priority on ensuring an orderly transition for employees and customers. Combined with our existing operations, we will create an even more efficient gas transmission and storage network capable of providing flexible, value-added services to our customers.”

When the acquisition closes, TransCanada’s portfolio of energy infrastructure assets will include the following:

TransCanada has its fingers in a lot of projects, both oil and gas. It recently announced the development of the Keystone Oil Pipeline project to transport crude oil from Alberta to refining centers in the U.S. Midwest (see Daily GPI, Dec. 15), and it is advancing two proposed liquefied natural gas terminals (see Daily GPI, Sept. 26). Kvisle told NGI in September the company also wants to be a leader in helping move the proposed Alaska gasline forward (see Daily GPI, Sept. 25).

For El Paso, the transaction is expected to result in the following:

Over the past three years, El Paso has successfully sold noncore assets and narrowed its focus to its two core businesses: interstate natural gas pipelines and exploration and production (E&P). The company said its opportunities for natural gas infrastructure development remain “excellent.”

“The pipeline group has more than $2 billion of committed projects in various stages of development and is pursuing others,” the company said in a statement. “El Paso’s pipelines will become more competitive as this transaction will reduce their cost of capital. The E&P business will continue with a balanced drilling program in its onshore, Texas Gulf Coast, Gulf of Mexico and international regions. Both core businesses will benefit from El Paso’s improved financial flexibility as the company will be much better equipped to respond to new opportunities.”

Moody’s Investors Service and Standard & Poor’s Ratings Services both called the move positive for El Paso. Moody’s in affirming El Paso’s debt ratings as “positive,” noted the company plans to apply the net proceeds toward debt reduction, “so that the related interest cost savings will offset the loss of earnings from ANR.” It said El Paso’s ratings “could be upgraded if the benefits of debt reduction and the stabilization of the company outweigh the ongoing weak performance of its E&P segment.”

El Paso will provide more details on its 2007 plan at its annual analyst meeting on Feb. 21. El Paso still owns an extensive pipeline network, including Tennessee Gas Pipeline, El Paso Natural Gas, Southern Natural Gas, Colorado Interstate Gas, Wyoming Interstate, Mojave Pipeline and Cheyenne Plains Gas Pipeline, totalling about 49,000 miles of pipe. It has a part ownership in Florida Gas Transmission, San Fernando Pipeline and Samalayuca Pipeline.

Goldman Sachs & Co. acted as the financial adviser to El Paso on this transaction. Andrews Kurth LLP acted as legal counsel. Lazard Freres & Co. LLC and Citigroup Corporate and Investment Banking served as financial advisers to TransCanada, and Mayer, Brown, Rowe and Maw LLP and Hogan, Hartson served as legal advisers.

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