TransCanada Corp. on March 17 announced it entered into an agreement and plan of merger pursuant to which it will acquire Columbia Pipeline Group, Inc., a Houston, Texas-based company. TransCanada’s own massive natural gas business thus will link Columbia’s 15,000-mile network of interstate natural gas pipelines extending from New York to the Gulf of Mexico, with a significant presence in the Appalachia production basin. At the same time, TransCanada announced its plans to divest its 4.5GW portfolio of US Northeast Power assets and a minority interest in its Mexican natural gas pipeline business to help finance the acquisition.
Columbia’s interstate pipeline systems offer transportation, storage and related services to a variety of customers in the U.S. Northeast, Midwest, Mid-Atlantic and Gulf Coast regions. Its assets include Columbia Gas Transmission, which operates approximately 11,300 miles of pipelines and handles 286 Bcf of storage capacity in the Marcellus and Utica shale production areas alone, and Columbia Gulf Transmission, an approximate 3,300-mile pipeline system that extends from Appalachia to the Gulf Coast. According to its own posted information, Columbia Gas Transmission transports an average of 3 Bcf/d of natural gas through its own pipeline network and 92 compressor stations in 10 states. Columbia Transmission’s underground natural gas storage systems include 37 storage fields in four states with over 650 Bcf total capacity.
Among assets listed by the Columbia Group are Columbia Gas Transmission, Columbia Gulf Transmission, Crossroads Pipeline, Hardy Storage Co. Millennium Pipeline, Columbia Energy Ventures and Columbia Midstream Services LLC . On July 1, 2015, NiSource separated Columbia Pipeline Group into a standalone publicly traded company.
TransCanada operates a network of natural gas pipelines that extends more than 42,000 miles, tapping into most major gas supply basins in North America. TransCanada is one of the continent’s largest providers of gas storage and related services with 368 Bcf of storage capacity. TransCanada also owns or has interests in over 11,400 megawatts of power generation in Canada and the US. At present, TransCanada is developing one of North America’s largest liquids delivery systems.
Rumors and reports of the talks between the two companies began to circulate roughly a week before. As stock prices began to move, TransCanada on March 10 confirmed that “while we are in discussions regarding a potential transaction with a third party, no agreement has been reached and there is no assurance that these discussions will continue or that any transaction will be agreed upon.”
The acquisition is expected to close in the second half of 2016 subject to receipt of Columbia shareholder approval, along with certain regulatory and government approvals, including compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the satisfaction of customary closing conditions. Upon closing, Columbia will become an indirect wholly-owned subsidiary of TransCanada and will cease to be a publicly held corporation.
Under the terms of the all-cash deal, unanimously approved by the Boards of Directors of both companies, Columbia shareholders will receive US$25.50 per common share, an 11% premium based on Columbia’s closing stock price on the New York Stock Exchange of US$23.00 as of March 16, and a 32% premium to the volume-weighted average price over the last 30 days. This represents an aggregate transaction value of approximately US$13 billion including the assumption of approximately US$2.8 billion of debt.
“The acquisition represents a rare opportunity to invest in an extensive, competitively-positioned, growing network of regulated natural gas pipeline and storage assets in the Marcellus and Utica shale gas regions,” said Russ Girling, TransCanada’s president and chief executive officer. “The assets complement our existing North American footprint which together will create a 91,000-kilometre (57,000-mile) natural gas pipeline system connecting the most prolific supply basins to premium markets across the continent. At the same time, we will be well positioned to transport North America’s abundant natural gas supply to liquefied natural gas terminals for export to international markets.”
Among the expected benefits that TransCanada listed:
- Acquisition creates one of North America’s largest regulated natural gas transmission businesses “linking the continent’s most prolific natural gas supply basins to its most attractive markets”
- Results in a combined C$23 billion portfolio of secured, near-term growth projects
- Expected to be accretive to earnings per share in the first full year of ownership and thereafter as the combined $23 billion of near-term, commercially secured projects enter service
- Increases 2015 adjusted pro forma earnings (EBITDA) from regulated and long-term contracted assets to approximately 92%
- Planned “monetization of U.S. Northeast merchant power assets” will further enhance stability and predictability of consolidated revenue streams
- Supports and may augment 8-10% expected annual dividend growth through 2020
- Targeted annual cost, revenue and financing benefits of approximately US$250 million
Funding program designed to be consistent with current financial profileAccording to information posted by the two companies, Columbia is currently sponsoring US$5.6 billion of commercially secured projects that are subject to normal course regulatory and permitting processes. “They are underpinned by long-term contracts and expected to generate growth in earnings as they enter service. Under agreements with customers, additional growth is also anticipated from approximately US$1.7 billion of modernization initiatives to be implemented through 2021.”
“This transaction delivers tremendous value to our shareholders and places Columbia Pipeline Group within a leading energy platform that can maximize the value of our strategic positioning and deep inventory of transformational growth projects,” said Robert Skaggs, Jr., the Group’s chairman and chief executive officer.
Looking forward, TransCanada’s $13.5 billion portfolio of “near-term investment opportunities” together with Columbia’s $9.6 billion (US$7.3 billion) of projects, and approximately US$250 million of targeted annual cost, revenue and financing benefits, “are expected to deliver significant shareholder value over the coming years,” company officials promise. According to Girling, “These initiatives, underpinned by predictable and growing revenue streams, are expected to support and may augment our eight to 10 per cent expected annual dividend growth through 2020.”
TransCanada also “expects portfolio management to play an important role in the permanent financing of the acquisition through the planned monetization of U.S. Northeast merchant power assets and a minority interest in its Mexican natural gas pipeline business.”
Columbia projects listed for shareholders in early 2015
Moody’s. Moody’s Investors Service affirmed the A3 senior unsecured ratings for TransCanada Pipelines Ltd. and the Baa1 issuer rating for TCPL’s parent, TransCanada Corp. The rating outlooks for both companies are stable. “The transaction is a modest credit positive for TransCanada over the long-term horizon, because the business risk profile will improve thanks to the purchase of the low risk Columbia Pipeline Group and the sale of the higher risk generation assets,” said Gavin MacFarlane, Vice President and Senior Analyst. The acquisition financing plan includes the issuance of US$3.2 billion of equity combined with estimated asset sales of US$7.1 billion, and “we do not see any new debt. As a result, TransCanada has mitigated near-term downward pressure on the financial profile, even though structural subordination will increase.”
“The acquisition of CPG provides TransCanada with assets that connect the fastest growing basin in North America to attractive markets. It has a sizeable capital program with approximately US$7.3 billion of capital projects with relatively low levels of execution risk compared to other TransCanada projects. The capital expenditure profile provides visibility to growth in earnings and cash flow.
Moreover, Moody’s concludes, “The stable rating outlook reflects our expectation that TCPL will successfully execute on its acquisition of CPG and its asset divestitures to help finance the acquisition. In addition, we see a slow but steady improvement in the financial profile.”
 Columbia Pipeline Group, Inc. reported Adjusted EBITDA (non-GAAP) for the 12 months ended 12/31/15 of $685.5 million, compared with $601.0 million in 2014. Distributable cash flow (non-GAAP) for the year was $401.3 million.
 TransCanada announced, contemporaneous with Columbia merger disclosure, that it has entered into an agreement with a syndicate of underwriters led by RBC Capital Markets and TD Securities Inc. under which they have agreed to purchase from TransCanada and sell to the public 92.0 million Subscription Receipts at a price of $45.75 per Subscription Receipt for total gross proceeds of $4.209 billion. The Subscription Receipts will be offered to the public in Canada and the U.S. through the Underwriters or their affiliates. TransCanada has also granted the Underwriters an option to purchase up to an additional 4.6 million Subscription Receipts at a price of $45.75 per Subscription Receipt at any time up to 30 days after closing of the Offering. The closing date of the Offering is expected to be on or about 4/1/16. Proceeds from the Offering will be used to finance a portion of the purchase price for the announced acquisition of Columbia Pipeline Group, Inc. by subsidiaries of the Corporation’s wholly-owned subsidiary, TransCanada PipeLines Ltd.
 Wells Fargo Securities, LLC acted as exclusive financial advisor to TransCanada. Mayer Brown LLP, Blake, Cassels & Graydon LLP and Osler, Hoskin & Harcourt LLP were legal advisors to TransCanada. Goldman, Sachs & Co. acted as lead financial advisor and Lazard Frères & Co. LLC acted as financial advisor to Columbia. Sullivan & Cromwell LLP acted as legal counsel to Columbia.
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