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.
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