While quite a few hurdles stand in the way of completion, TransCanada Pipelines successful purchase of Gas Transmission Northwest Corp. (GTN) from National Energy & Gas Transmission (NEGT) for US$1.703 billion, including US$500 million of assumed debt, would give the Canadian pipeline giant a massive new direct link to markets in the Pacific Northwest, California and Nevada.

GTN, formerly Pacific Gas Transmission, includes more than 1,350 miles of pipeline extending from a point near Kingsgate, British Columbia, on the BC-Idaho border, to a point near Malin, OR, on the Oregon-California border. GTN also operates the recently built 80-mile North Baja Pipeline system, which links the Southwest gas grid from a point near Ehrenberg, AZ, to markets in Baja California Norte, Mexico.

The sale of the North Baja pipeline, however, is subject to a right of first refusal by another company. And the sale of GTN first must make it through a bankruptcy court-mandated auction process, followed by court and regulatory approvals. According to GTN, it previously received expressions of interest from nine other bidders who could be part of the auction.

GTN itself is not in bankruptcy, but its parent company, NEGT, a subsidiary of PG&E Corp., has been since July 2003. The parent company suffered from weak operating cash flows relative to debt levels, along with strained liquidity, caused in large part by low merchant wholesale power prices.

The companies expect final bankruptcy court approval of the GTN sale within 75 days. As part of the agreement, TransCanada is being granted certain protections, subject to court approval, most notably a break fee and expense reimbursement if another bid is accepted. TransCanada also retains the right to amend its offer should NEGT receive an offer that is superior to its existing agreement with TransCanada. The agreement also contemplates bankruptcy court approval of the NEGT plan of reorganization.

GTN would give TransCanada 2.59 Bcf/d of transportation capacity to Pacific markets downstream of its BC System. The company said the purchase would be accretive to earnings to earnings and cash flow but provided no additional details.

TransCanada said it would finance the acquisition with existing lines of credit and equity, but it also may sell off other assets to pay for the pipelines. It has C$1.5 billion of committed credit lines, and C$1.35 billion and US$650 million of debt and/or equity issuance capacity under its Canadian and U.S. shelf prospectuses, respectively.

It would be TransCanada’s biggest purchase since its C$14 billion ($11 billion) takeover of Nova Corp. in 1998, but would follow several other recent deals that expanded its interest in pipelines to the U.S. Northeast. In December, TransCanada increased its ownership interest in Portland Natural Gas Transmission (PNGTS) to about 62% from 43% by purchasing a stake from El Paso Corp. for US$82 million including US$50 million of assumed debt. Last month, plans were announced to expand its system in Ontario to accommodate volumes to supply the proposed Millennium pipeline via Empire State in New York.

Meanwhile, after the proposed transaction was announced last week, Moody’s Investors Service placed GTN’s B2 senior unsecured ratings under review for possible upgrade. TransCanada PipeLines Ltd. holds an A2 senior unsecured rating.

“NEGT’s bankruptcy proceedings — the court-sanctioned auction process and the approval of the NEGT plan of reorganization — lend uncertainties, including whether another bidder will prevail in the auction, what the final sale price will be, and if and when the requisite approvals will be granted,” Moody’s noted. “The conclusion of the review will depend on the timing of these processes, which are expected to extend into this summer at the earliest.”

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