The Long and Short
Columbia Pipelines prices with upside
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Columbia Pipelines Operating Company LLC (CPGX) was in the primary market along with its parent, Columbia Pipelines Holding Company LLC, to finance the repayment of intercompany loans associated with its partial sale to Global Infrastructure Partners (GIP). Despite strong interest in the deal, the debt issued by the Columbia entities should have potential to tighten roughly 15 bp to 20 bp based on spreads at peers.
CPGX operating company priced $4.6 billion across five tranches, with the holding company pricing $1.0 billion across two tranches. Both the operating and holding company debt will trade under the CPGX bond ticker. The books were more than 5.0x oversubscribed, leading managers to price the deal anywhere from 30 bp to 40 bp tighter from initial price talk, depending on the tranche. Despite the tighter pricing, the CPGX operating company bonds still priced at attractive levels relative to similarly rated peers (including its majority owner). With the deal providing for a more liquid capital structure and the ability to build a position in the credit across the curve, spreads should have roughly 15 bp to 20 bp of upside from pricing levels, given where peers trade.
Exhibit 1. MidStream BBB+ Curve
Source: Bloomberg TRACE; Santander US Capital Markets
Terms of the new structure
TC Energy (TRP) entered into a definitive agreement to monetize a 40% stake in its Columbia Gas Transmission and Columbia Gulf Transmission systems by creating a joint venture partnership with GIP. Under the terms of the transaction, Columbia Pipeline Group will contribute all of its equity interests in its wholly owned subsidiaries (Columbia Gas and Columbia Gulf) to the newly formed Columbia Pipelines Operating Company, LLC. The operating company will be directly held by the newly formed holding company, Columbia Pipelines Holding Company, LLC. The equity ownership structure will be split 60/40, with TRP maintaining the majority share (Exhibit 2). Proceeds from the transaction are expected to be $3.9 billion and the deal is expected to close in the fourth quarter of 2023.
Under the joint venture, TRP will continue to operate the systems, while both TRP and GIP will jointly invest in both the annual maintenance of the systems as well as any modernization or growth capital needs. Capital expenditures will be split as per the equity ownership. TRP and GIP will enter into a Limited Liability Company Agreement that will provide GIP with customary rights in line with its equity ownership.
Exhibit 2. Deal Structure
Source: TRP Presentation; Santander US Capital Markets
Debt, leverage and ratings breakdown
All of Columbia Pipeline Group’s equity interests in both Columbia Gas and Columbia Gulf constitute all of the assets of the joint venture (Exhibit 2). That said, the existing CPGX debt (CPGX 4.5% 2025 and CPGX 5.8% 2045 notes) will be assumed at the new operating company. Columbia Pipeline Operating will enter into a supplemental indenture to the existing notes, releasing Columbia Pipeline Group from its previous obligations. The $4.6 billion of new debt issued at the operating company will rank pari passu with the existing notes. All debt under the operating company umbrella will be rated ‘Baa1/BBB+’. The operating company will target leverage to support regulatory capitalization, but no definitive leverage ratio was provided. Moody’s has noted that they expect the operating company to target a debt/capitalization ratio of 35%.
The $1.0 billion of new holding company notes will reside at the holding company level along with a $1.0 billion unsecured revolving credit facility. The revolver is expected to be executed before the close of the transaction and is likely to have a three-year tenor. The holding company will target a debt/EBITDA ratio of 4.75x on a run-rate basis. Moody’s has notched the ratings at the holding company by one notch (‘BBB’) based on its view that the debt is structurally subordinated to the operating company. However, given that the operating company is the only source of cash flow to support the holding company debt, Moody’s believes the two entities are “closely linked” and has limited the ratings differential to one notch.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
