TransCanada Corp. has agreed to sell its North Baja pipeline in the U.S. southwestern states to partner TC PipeLines LP for US$395 million in cash and stock, increasing its stake in the partnership to 42.6 per cent.
The Calgary-based pipeline company said Wednesday it will receive about US$200 million in cash plus 6.4 million units of TC PipeLines. It will remain operator of the 130-kilometre natural gas pipeline, which runs from southwestern Arizona to the California-Mexico border and connects with a natural gas pipeline system in Mexico.
TransCanada is this country's largest natural gas shipper, carrying Western Canadian gas from Alberta and British Columbia to markets in Eastern Canada and the United States. TC Pipelines is a major pipeline operator in the United States.
As part of the deal, the TC PipeLines partnership is also amending incentive distribution rights held by the operating partner to eliminate the 50 per cent distribution threshold and reset the rights to two per cent with a maximum incentive distribution of 25 per cent.
'We are in the midst of a large capital program that will create significant long-term value for our shareholders and the proceeds from the sale of North Baja will be redeployed to help fund our growth initiatives," TransCanada president and CEO Hal Kvisle said in a statement.
"The sale of North Baja, the restructuring of the incentive distribution rights and the increased ownership of TransCanada all position the partnership to potentially play a greater role in the financing of TransCanada's $19 billion capital program."
Calgary-based TransCanada is involved in several major new projects to expand its transmission system including the Keystone oil pipeline, the North Central Corridor expansion and three large-scale, gas-fired power plants that will be completed and placed into service over the next four years. It also recently won a contract to build, own and operate a US$320-million pipeline that will run from an LNG terminal on Mexico's Pacific coast to the city of Guadalajara.
TransCanada acquired the North Baja pipeline system, which has a capacity of 600 million cubic feet per day, in 2004.
"The North Baja natural gas pipeline is a high quality asset offering supply diversity and long term contracts, stable earnings and solid cash flow," Mark Zimmerman, president of TC PipeLines said in a conference call with analysts.
"We believe this will better position the partnership to pursue acquisitions and expansion projects in the future to reduce our costs of capital," he added. "Looking into the future the North Baja system is strategically located to capture additional opportunities related to power generation growth in both Mexico and the United States and LNG imports."
In trading on the TSX, TransCanada shares rose 68 cents to $31.96, a gain of 2.2 per cent. On the Nasdaq market, TC Pipelines rose $1.20 to US$31.75 or 3.9 per cent.
"Basically they're helping to finance their large, capital programs while containing control of Baja," said analyst Bob Hastings from CanAccord Adams.
"It looks like a good move to me. It will eliminate some of the equity overhang that people wondered they'd have to do in 2010 or beyond," he added.
TC PipeLines has interests in more than 5,760 kilometres of federally regulated U.S. interstate natural gas pipelines, 46.45 per cent of the Great Lakes Gas Transmission system, 50 per cent of Northern Border Pipeline, and 100 per cent of Tuscarora Gas Transmission Co.
Besides its pipelines businesses, TransCanada is also involved in power generation, gas storage and projects related to oil pipelines and LNG plants. TransCanada's network of wholly owned pipelines extends more than 59,000 kilometres, tapping into virtually all major gas supply basins in North America.
TransCanada also owns, or has interests in, more than 10,900 megawatts of power generation in Canada and the United States.
