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2016-03-22 19:00:00

TRANSCANADA DEAL: $13 BLN

TRANSCANADA DEAL: $13 BLN

TransCanada, which had hoped to build the controversial Keystone XL oil pipeline, has found another path to growth in the US by agreeing an all-cash $13bn deal to buy Columbia Pipeline Group, a gas transmission company.

The deal will give Calgary-based TransCanada a strategic position in the Marcellus and Utica shales of Pennsylvania, Ohio and West Virginia, the most promising regions in the US for gas production growth.

Columbia has a set of growth projects worth $5.6bn under way in the US, where TransCanada previously had only limited scope for expansion.

The offer values Columbia's equity at about $10.2bn, and TransCanada will also be taking on about $2.8bn in debt, to give an enterprise value of about $13bn.

Buying Columbia will raise the proportion of Transcanada's earnings that are governed by regulators, from 57 per cent to 62 per cent.

It is following several other North American utility companies that have done deals in recent years to increase their dependence on regulated operations, which generally have more stable revenues and profits.

The combined group will be one of the largest regulated gas transmission companies in North America, with almost 57,000 miles of pipelines.

The deal offers $25.50 in cash for every Columbia share, a premium of about 30 per cent above the price before news that the two companies were in talks emerged last week.

Russ Girling, Transcanada's chief executive, said the deal represented "a rare opportunity" to invest in regulated natural gas pipelines and storage assets in the Marcellus and Utica shale regions.

TransCanada has already financed part of the purchase price with a $4.2bn sale of subscription receipts, which can be converted into TransCanada shares when the deal closes. Until then, holders of the receipts will be paid dividends the same as shareholders.

They were sold in a bought deal at a price of C$45.75 each to RBC Capital Markets and TD Securities, which will then sell them to the public. The price paid by the banks represents a discount of about 7 per cent to the TransCanada closing share price of C$49.42 on Thursday evening.

TransCanada also plans to sell its five power generation facilities in the north-eastern US, including the large Ravenswood gas and oil-fired plant in New York City, and its minority stake in gas pipelines in Mexico.

The plunge in oil and gas prices since the summer of 2014 has damaged many pipeline companies. Even though they are less affected than the oil and gas producers, they may still bear some commodity price risk, and if low prices deter production growth then the pipeline businesses will also have less opportunity to expand.

That is less of a concern in the Marcellus and Utica shales, however, because they are among the lowest-cost sources of production in the US.

The Utica has been booming, despite the price slump, and its gas output has risen 30 per cent over the past year.

The deal, which is expected to close by the end of the year, will end a brief period of independence for Columbia, which was spun out of the utility NiSource only last year.

Bankers at Lazard, which advised Columbia, said in a statement that the takeover "further highlights the potential for separation transactions to create significant value for the separated entities".

ft.com

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