TransCanada Corp. is paying a hefty premium for a bigger slice of the U.S. shale gas boom that has wreaked havoc with its once-dominant west-to-east transport business.
TransCanada late on Thursday billed its $10.2-billion (U.S.) deal for Columbia Pipeline Group Inc. as a rare opportunity to acquire an expanding portfolio of pipeline and storage assets in two of North America's fastest-growing shale gas plays.
The deal, if approved, would add 18,000 kilometres of pipelines to TransCanada's already formidable transmission network, connecting the prolific Marcellus and Utica supply basins in the U.S. Northeast to markets across the continent. A 5,400-kilometre line extends to the Gulf Coast.
It underlines the dramatic shift that has upended North American natural gas markets and decimated TransCanada's traditional long-haul gas shipments, once a pillar of its sprawling transport franchise.
For years, the company built its business around delivering gas from remote deposits in Western Canada to eastern markets via its cross-Canada Mainline system. It also backed plans to pipe Arctic gas south, from as far as the Mackenzie Delta and Alaska's North Slope.
Now, the northern deposits are on ice, and TransCanada has applied to convert some of its Mainline network to carry oil, under its $15.7-billion (Canadian) Energy East proposal, to make up for lost revenue. Last year, it sold its stake in a gas export project in Alaska, ending a decades-long effort to tap the northern reserves.
"They were holding out for Alaska and Mackenzie gas to fill their pipe, and they resisted this for the longest time," said Edward Kallio, an independent energy adviser in Calgary.
"Now they've come on board and they've recognized that the fundamentals really drive where the pipes are going to go, and where they're going to thrive. Better late to the party than never."
It's a startling reversal. Natural gas production in Western Canada has dropped by about 20 per cent to 13.5 billion cubic feet a day in a little more than 15 years, while Canadian exports to the U.S. have been cut in half.
TransCanada on Thursday pegged production in the Marcellus region at around 20 billion cubic feet a day, up from five billion as recently as 2010. It is expected to climb north of 30 billion by 2020, chief executive officer Russ Girling said.
"A lot of that gas is effectively competing with both Texas and Alberta," said Dirk Lever, an analyst at AltaCorp Capital Inc., who said Columbia's assets are a natural fit with TransCanada. "And if they didn't buy it, somebody else would have bought it and they would have never had the opportunity," he added.
For TransCanada, the deal holds potential for low-key expansions in its traditional gas transport business that has been largely eclipsed by high-profile battles over Keystone XL, which Washington scuppered last year. The acquisition also includes the assumption of $2.8-billion (U.S.) in Columbia debt.
On Thursday, TransCanada chief financial officer Don Marchand said Columbia's expanding portfolio includes $7.3-billion worth of commercially secured projects that are expected to be up and running by 2018.
"The majority of these projects are within existing infrastructure corridors, are more cost competitive, and are expected by management to have less execution risk than comparable greenfield projects," he said.
The combined entity would have $23-billion (Canadian) of near-term projects underpinned by long-term contracts or regulated cost-of-service revenue. That supports, and could increase, TransCanada's target of 8- to 10-per-cent dividend growth a year through 2020, the company said.
TransCanada said it expects the deal, which requires U.S. government approval, to close in the second half of the year. However, there is some risk that it gets caught in the U.S. election cycle following the saga over Keystone XL, said Laura Lau, a senior portfolio manager at Brompton Funds in Toronto.
"It is gas as opposed to oil, so that helps," she said. "And it is a friendly deal, but I wouldn't say the political risk is zero."
With a file from reporter Kelly Cryderman in Calgary