CPGX - Columbia Pipeline Group

[BG2008]

CPGX is a recent spinoff from NiSource and trades at $24 or roughly 15x 2016 EV/EBITDA multiple which typically will cause me to vomit as a value investor.  However, CPGX is a phenomenal business that makes Hedge Fund manager compensation look like chump change.  CPGX is the same as KMI pre-merger, WMB, and ETE.  I think CPGX is better than the others due to its large organic project backlog, the fact that it has not hit its high threshold which will result in "hockey stick" effect in casfhlow.  Hence the 15x EV/EBITDA multiple isn't really 15x in a traditional sense.  In addition, its asset footprint overlay the Marcellus and Utica region where the lowest cost natural gas production takes place.  90% of the company's revenue is currently fixed fee and the customers are currently Local Distribution Companies (utilities).  Customers of new projects will be Range Resources and other Marcellus shale producers who desperately need takeaway capacity.  Low oil prices may force some of KMI's customers to go bankrupt.  But I believe that the Marcellus shale will continue to drill in order to supply increase nat gas consumption domestic and upcoming exports via the LNG terminals.  The implied dividend yield for CPGX is currently $0.50 per share or 2.06%. However, the coverage ratio is 2x as the cashflow is re-invested in the organic projects.  Hence, the real dividend yield is 4.1% with an anticipated "hockey stick" in 2018.  One of the key risk is that KMI, ETE, or others actually wind up acquiring CPGX before they can build out the pipelines.  The purpose of this thread is to invite differing opinions and see if I overlooked certain risk. 

 

IMHO, CPGX is a compounder for the next decade.  CPGX is what is generally known as a high/hyper growth C-Corp General Partner.  CPGX OpCo is where all the physical assets reside including pipeline, gathering and process, and storage assets.  CPGX directly owns 84.3% of OpCo.  CPPL, the MLP, owns 15.7% of OpCo.  However, CPGX also owns 46.5% of the MLP units outstanding.  Hence, CPGX directly and indirectly own 91.6% of OpCo.  CPGX also owns 100% of the Incentive Distribution Rights or IDRs.  CPPL is what is commonly referred to as a “drop down” MLP.  From 2016-2018, CPGX will sell percentage interest in OpCO to CPPL raising $4 billion of financing via issuances of MLP units.  It is expected that the public will own 35-45% of OpCo by 2018.  For our analysis.

 

- CPGX OpCo will grow their EBITDA by 20% organically per year through 2020

- CPGX will pay an annualized dividend of $0.50 in 2015 growing 15% per year through 2020

- Initial CPGX dividend coverage will be 2.0x and company will retain cashflow to reinvest in high return organic projects

- CPPL, the affiliated MLP and financing vehicle will pay an annual dividend of $0.67 per share growing 20% per year through 2020

- CPGX will reach the high split (50/50) of the incentive distribution rights during 2018 creating a "going up the mountain" or "hockey stick" effect on CPGX cashflow

 

CPGX OpCo will accomplish the 20% EBITDA growth by investing $8.5 billion of growth capital expenditure projects from 2015 to 2020.  Management has guided that CPGX will build projects at a 5-7x EBITDA.  This implies incremental EBITDA growth of $1,215 million by 2020 if we assume the more conservative 7x EBITDA build multiple.   

 

CPGX will finance the growth

-      By selling OpCo interest to CPPL and have CPPl raise $4.0 billion by issuing MLP units

- Raising $1.7 billion of incremental debt in CPPL, CPGX, and CPGX OpCo

- Generating $4.7 billion of operating cashflow in CPGX OpCo

 

As C-Corp General Partner and MLP, CPGX and CPPL have most of the following characteristics coveted by MLP investors:

 

- Visible, above average multi-year distribution growth potential

- High return organic growth projects

- Dropdown acquisitions

- Low risk cash flow profile and high distribution growth potential

- Take or Pay Contracts

- High degree of fee-based margin

- High/”hyper” growth MLPs, C-Corp GPs

- Trading liquidity, debt leverage and distribution coverage

 

 

 

 

 

 

 

 

CPG_Presentation.pdf

CPG_Presentation.pdf

[shhughes1116]

Interesting idea, but I am not sure why this would be a better idea relative to WMB or ETE.

 

For instance, annualized dividend on WMB is currently $2.56 (5%).  They have guided to 10-15% dividend growth through 2020, their assets are basin-agnostic, and they have a potential M&A kicker that may sweeten the return.  ETE currently has a $1.06 (3.91%) distribution, and has been growing the distribution at a 15%-20% clip.  They are already in the high-splits with ETP (not sure about SXL and SUN), and their IDR subsidies to ETP will roll-off in the next couple of years.  They also have the LNG Export Co that will likely be dropped down as a new MLP within the ETP family in the next five years.  Energy Transfer's assets are also basin-agnostic.

 

I see a higher current yield with WMB and ETE, a similar forecasted CAGR with the dividend/distribution relative to CPGX, and a better asset mix with WMB and ETE (predominantly interstate, basin-agnostic assets).  Assuming these things continue to be valued on dividend/distribution yield + expected dividend/distribution CAGR, I think you will have a better total return with WMB or ETE over the next decade.     

[HJ]

Interesting idea, but I am not sure why this would be a better idea relative to WMB or ETE.

 

For instance, annualized dividend on WMB is currently $2.56 (5%).  They have guided to 10-15% dividend growth through 2020, their assets are basin-agnostic, and they have a potential M&A kicker that may sweeten the return.  ETE currently has a $1.06 (3.91%) distribution, and has been growing the distribution at a 15%-20% clip.  They are already in the high-splits with ETP (not sure about SXL and SUN), and their IDR subsidies to ETP will roll-off in the next couple of years.  They also have the LNG Export Co that will likely be dropped down as a new MLP within the ETP family in the next five years.  Energy Transfer's assets are also basin-agnostic.

 

I see a higher current yield with WMB and ETE, a similar forecasted CAGR with the dividend/distribution relative to CPGX, and a better asset mix with WMB and ETE (predominantly interstate, basin-agnostic assets).  Assuming these things continue to be valued on dividend/distribution yield + expected dividend/distribution CAGR, I think you will have a better total return with WMB or ETE over the next decade.   

 

I think the question is do you want to be "basin agnostic" or heavy exposure to Marcellus and Utica.  One potential precedent to look at is arguably MarkWest, which was just taken out by Marathon Petroleum.  MarkWest assets are probably more upstream compared with Columbia given its utility heritage from Nisource.  Upstream being somewhat of a dirty word these days for MLP's.

 

Organic growth project relative to current asset base is clearly larger with Columbia vs. their larger competitors.

 

One thing that bothers me a little when looking at the big entities like Enterprise, Energy Transfer, KMI, etc. is that it's difficult to evaluate their individual assets.  How do you know you don't have a Boardwalk situation lying somewhere in there among all the assets that they own? With the build out of energy infrastructure, certain legacy assets must be losing out.  When you are as big as those guys, I have to imagine there are some legacy assets in there that are not doing that well, or being threatened by the new pipelines coming on line. 

 

The other thing, of course, is just the MLP business model itself.  It's a capital intensive business, yet you need to pay out tons of distribution all along the way, just so you can issue tons of equity. 

 

I like the fact that Nisource CEO and CFO all chose to be part of Columbia rather than staying with legacy Nisource.   

[shhughes1116]

I think the question is do you want to be "basin agnostic" or heavy exposure to Marcellus and Utica.  One potential precedent to look at is arguably MarkWest, which was just taken out by Marathon Petroleum.  MarkWest assets are probably more upstream compared with Columbia given its utility heritage from Nisource.  Upstream being somewhat of a dirty word these days for MLP's.

 

Agreed, one could look at it positively as a way to focus on a single productive basis.  If any, the Marcellus would probably be the one basin to focus on for NG. 

 

 

One thing that bothers me a little when looking at the big entities like Enterprise, Energy Transfer, KMI, etc. is that it's difficult to evaluate their individual assets.  How do you know you don't have a Boardwalk situation lying somewhere in there among all the assets that they own? With the build out of energy infrastructure, certain legacy assets must be losing out.  When you are as big as those guys, I have to imagine there are some legacy assets in there that are not doing that well, or being threatened by the new pipelines coming on line. 

 

Agreed, it takes a little while to get comfortable with a specific MLP's assets.  For WMB/WPZ, it was fairly easy given their primary assets are the Transco and the Northwest interstate lines.  From the reading that I have done, these are premier assets that can not expand quickly enough to satisfy the demand side from industrials and utilities pulling gas out of the system.  The picture got a little more complicated with the addition of Access Midstream, which has some gathering assets - I am generally not fond of gathering assets. 

 

For the Energy Transfer family, there are a few more moving parts.  However, I think the complexity of the Energy Transfer family is why it is mis-priced right now (IMHO) and thus is a good thing if one can take the time to dig down into each of the assets.

 

But yes you are right, you always have to be worried about a blow-up like Boardwalk.  In that case, they had a lot of take-or-pay contracts rolling over at the same time for their Texas Gas Transmission Line.  Their Texas Gas Transmission line was taking NG from the gulf area to the Northeast (sort of like bringing wood to the forest...), not exactly a high-demand asset given the NG production in the Marcellus and the Utica.  In this regard, I do think you have to dig down into the individual pipeline level if you are going to invest an any pipeline companies.

 

The other thing, of course, is just the MLP business model itself.  It's a capital intensive business, yet you need to pay out tons of distribution all along the way, just so you can issue tons of equity. 

 

Yeah, this is a good point.  It seems like the market has priced the MLP model as broken.  Given Kinder's consolidation and Williams' attempted consolidation into a C-Corp, that may be the case.

 

I like the fact that Nisource CEO and CFO all chose to be part of Columbia rather than staying with legacy Nisource.   

 

Yeah, definitely a positive. 

 

Ultimately I think this company is a prime acquisition candidate.  It is the right size to move the needle for another MLP, it would give another MLP a nice footprint on the supply side in the Marcellus/Utica, and a nice footprint on the demand side with CGPX's assets in the Hudson River Valley and WV/VA.  Probably a nice fit for Magellan Midstream if MMP wanted to diversity in location and product-mix.         

 

BG2008, did you go long CPGX after your write-up?  And out of curiosity, how did you size the position? 

 

 

[HJ]

For the Energy Transfer family, there are a few more moving parts.  However, I think the complexity of the Energy Transfer family is why it is mis-priced right now (IMHO) and thus is a good thing if one can take the time to dig down into each of the assets.

 

Care to elaborate a bit more?  ETP does look to have an outsized dividend yield, but historically I have not really been a believer that the market isn't pricing some corporate complexity well, especially for a large cap company like ETP.  The market may well be pricing some scenario like KMI merging with KMP, and hitting the MLP holder with a heavy tax bill.  How does one handicap that risk vs. MLP market recovering to be a viable capital market for ETP to raise equity capital again?

 

 

[BG2008]

Yes, I own a sizable position in CPGX via the NiSource spinoff.  The position was hedged with puts prior to the spinoff till October.  I intend to own an unhedged position in CPGX post Oct. 

 

I think CPGX is cheaper than the others due to the fact that CPGX has not hit its high threshold in the affiliated MLP.  This is a bit a of a hidden growth/ramp.  If you examine the pre-separation conference call, you will note that the analysts consistently talked about "going up the mountain" style of cashflow increase in 2018.  Per my crude model, I believe that as CPGX sells additional % in the CPGX OpCo to the MLP, there will be more shares issued.  The accretion on a per share basis at the MLP won't happen till 2018.  Once the threshold is hit, 50% of incremental cashflow goes to CPGX.  That's why on the most recent call, management has basically said that if capital markets are closed, they will likely issue MLP units before issuing shares in CPGX to finance future growth. 

 

If you examine the headlines closely, it doesn't says that CPGX EBITDA will grow 20% a year.  It says CPGX OpCO will grow EBITDA 20% a year.  Depending on the price that MLP units are issued, I believe that CPGX dividend will actually grow much faster than 15% a year with a hockey stick effect during 2018.  Management confirmed this "going up a mountain" dividend growth in 2018-2020 when the analysts start badgering them about it.  I'm still working on my model and it looks like we'll get over $3 per share of dividend for CPGX in 2020 during the fast growth phase of the projects.  So the CPGX dividend growth rate is really 25% rather than the 15% rate that was publicly stated.  The $3 per share in 2020 would imply a 12.5% dividend yield in 2020, nonetheless.  Given how most C-Corp GPs are valued, that will likely imply a price that is 250% of where it trades at today. 

 

Now the entire management team also took their RSU in NiSource and converted the whole RSU into CPGX RSU.  As such, I believe the management team were sandbagging the future backlog of projects.  On the most recent call, they added new projects to the backlog.  The company had already revised their 5 year projections from 15% to 20% at the OpCo over the course of a couple months back in June.   

 

 

[shhughes1116]

For the Energy Transfer family, there are a few more moving parts.  However, I think the complexity of the Energy Transfer family is why it is mis-priced right now (IMHO) and thus is a good thing if one can take the time to dig down into each of the assets.

 

Care to elaborate a bit more?

 

Sure, take a look at the November 2014 investor presentation (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTYxNjIzfENoaWxkSUQ9MjY2MzUzfFR5cGU9MQ==&t=1), specifically Slide 52.  That gives a pretty good idea of the complexity of the relationships between ETP and SXL/SUN/Lake Charles LNG/Regency/Philadelphia Energy Solutions.  On the other side of the coin, there has always been some complexity between ETP and ETE.  For a long time, ETE has owned a substantial  number of ETP units with different rights, and has periodically given IDR subsidies to ETP in exchange for various transactions.  Over the past year the Energy Transfer has streamlined the relationship between different MLP's in the family by dropping down various units and exchanging various interests.  This is making it a little bit easier to estimate current and future cash flows.

 

[shhughes1116]

ETP does look to have an outsized dividend yield, but historically I have not really been a believer that the market isn't pricing some corporate complexity well, especially for a large cap company like ETP.  The market may well be pricing some scenario like KMI merging with KMP, and hitting the MLP holder with a heavy tax bill.  How does one handicap that risk vs. MLP market recovering to be a viable capital market for ETP to raise equity capital again?

 

I suppose the market could be pricing in a KMI-KMP type merger.  Keep in mind though that two of the more successful MLP's (MMP and EPD) bought out their GP, and one of the conditions for ETE's take-over of WMB/WPZ was that they did not commence with WMB's take-over of WPZ.  I think Kelcy Warren intends to continue with the GP/LP structure for at least a while longer.  If/when they need to raise equity to build something, I suspect they will do so under SXL.   

[HJ]

With the MLP's getting sold off quite a bit recently, how do you all feel about the cost of capital to issue CPPL units?  With the Opco already levered, and the company needing to defend their investment grade balance sheet, there's a decent amount of equity financing that needs to get done over the next couple of years.  In hindsight it's quite impressive they sold $1 billion of it earlier in the year.

[BG2008]

CPPL valuation is very much on top of my mind.  Trading down from $27 to $16 certainly doesn't help.  It's not just a matter of price, it's also a matter of market's appetite for secondary offerings.  Just came back from a MLP conference in Dallas.  Most of the presenters believe that the MLP space is being over sold and they pointed some metrics where when the MLP yield spread is 4-5% over the 10 year treasury, there has historically been a 30% re-rate in the next 12 months.  Although, I do want to add that they may have added upstream MLP dividend yields to that mix.  Upstream is considered garbage and posers for the mistream MLPs and frankly the midstream guys talk crap about upstream during the whole conference.  During 2008/2009, the MLP yield spread was 2-3 standard deviation over the 10 year treasury. So there is more downside if the market goes even crazier.  To be intellectually honest, from 2009 to 2015, the US experienced one of the most rapid growth in hydrocarbon production.  Coupled with QE, this was a perfect storm for MLP and MLP general partnerships.  We do need to take that into consideration. 

 

On the flip side, CPPL trading at $16 is still a 4.17% yield and the coverage ratio is under 1.1x.  Any equity raise will be done at <20x DCF.  The company can build at 5-7x EV/EBITDA.  Combine this with a cost of debt of less than 5%, any project that they can finance is still extremely accretive.  There are real value that gets created.  I still need to figure out how to convert 4.17% dividend into a EV/EBITDA multiple.  In the meantime, I'm rooting for CPGX to trade close to $15 (yes, I know wishful thinking).  If it ever gets there, it would be extremely interesting to own CPGX outright/unhedged.  I think nat gas has certain dynamics that are different than oil.  It's the biggest feedstock into nitrogen fertilizers, split the CH4 into hydrogen and make fertilizers with it.  Coal is converting into Nat gas on the power generation side.  In addition, there are plenty of LNG demand coming on.  Although, the current oil price may muddy the economics of LNG terminals.  During the conference, one of the presenters estimated that the LNG, chemical, and power gen demand increase will represent 60% of the current nat gas production in the US from 2015 to 2020.

 

I'm still working on my CPGX model and trying to figure out the step up in DCF from 2015 to 2020 given the new CPPL price. 

 

   

[shhughes1116]

I am on my mobile device so please excuse any mispellinging and grammatical errors.

 

I was thinking about the general sell-off in MLP's over the last 6 months or so.  As you noted in your post, I think the proliferation of upstream MLP's has muddled the situation somewhat, because there was a corresponding increase in MLP-oriented ETF's and closed end funds.  As the upstream MLPs have floundered (rightfully so, I tend to think of their business model as a Ponzi Scheme), folks have been fleeing the ETFs and closed end funds, causing selling pressure on all MLP's, including those of the mid stream variety.

 

I don't view the sellout, in and of itself, as an issue.  Although the cost of equity capital certainly has increased, many of the established players did just fine in the late 90's and early 00's when yields were similarly high and the cost of debt was higher than it is today. I just think the nature of their growth will shift from new greenfield projects to consolidation of midstream MLP's.  In this sense, the players that generate substantial cash flow above and beyond what they need to cover their distribution should be in the driver's seat as consolidators.

 

In that regard, CPGX will probably be in a good spot with the extra cash flow they generate beyond what is needed to cover their distribution.  Although the rate of distribution growth may slow, I think they will do alright by being able to fund capex and potentially acquisitions out of free cash flow.  That will put them in a pretty strong position five years from now IMHO.

 

[BG2008]

I don't think CPGX's ability to cover its distribution is really an issue as they have a large organic pipeline that they can grow into.  The observations about other more mature players, i.e. KMI, ETE etc are correct in that they will switch from organic growth to consolidators.  I think an investment in CPGX's offers potentially two very interesting outcomes. 

 

1) They get bought out by a KMI, ETE, etc during July 2017 after their two year spinoff period is up.  KMI and ETE have the lowest cost of capital in the business and they can easily afford to absorb a player like CPGX with its pipeline of organic projects. 

 

2) CPGX continues to grow organic via CPPL issuance, debt issuances, and operating cashflow.  In a way, I wish CPGX will coninue on this path for the next 10 years and I get to realize a price in that is 4-10x of where it trades at today (depending on the amount of greenfield projects in the Marcellus and Utica).  Again, I really need to plug in a $16 CPPL price rather than the $23 that I had earlier. 

 

Shhughes1116, have you been investing in the MLP space for a long time?  I'm surprised that the MLPs did well in the late 90s and 00s when rates were higher.  During the conference, most of the presenters mentioned that oil prices and perception of energy rather than rates is what creates downward pressure on MLPs.  I would imagine that the historical low interest rates pushes people into MLPs.  Could you elaborate on why rates "maybe" isn't as important as I think.

[shhughes1116]

I don't think CPGX's ability to cover its distribution is really an issue as they have a large organic pipeline that they can grow into.  The observations about other more mature players, i.e. KMI, ETE etc are correct in that they will switch from organic growth to consolidators.  I think an investment in CPGX's offers potentially two very interesting outcomes. 

 

Sorry if I was misunderstood.  I am not implying CPGX will have trouble covering its distribution.  On the contrary, I think their investment presentation lays out a decent plan where they will spend most of their cash flow on their backlog of projects.  This will put them in a strong position relative to others that must access expensive equity capital and/or may have trouble accessing debt markets.  This will also give them some flexibility going forward to be a consolidator, albeit on a different scale than KMI, EPD, ETP, and MMP (i.e. smaller bolt-on acquisitions if they so choose).  Many of the smallish E&P's have been monetizing their stakes in gathering systems and header lines to improve their balance sheet.  E&P's generally prefer to sell these assets to midstream companies rather than an E&P competitor, so their may be some opportunities in the Marcellus and Utica to buy midstream assets from a distressed seller.   

 

Shhughes1116, have you been investing in the MLP space for a long time?  I'm surprised that the MLPs did well in the late 90s and 00s when rates were higher.  During the conference, most of the presenters mentioned that oil prices and perception of energy rather than rates is what creates downward pressure on MLPs.  I would imagine that the historical low interest rates pushes people into MLPs.  Could you elaborate on why rates "maybe" isn't as important as I think.

 

Yes, been interested in the midstream space for a long-time.  Part of that interest is pragmatic.  My profession bars me from investing in companies that derive 10% of their revenues, or 10% of their income, from drugs, medical devices, biotech, food products (processed and unprocessed) and food additives, tobacco products, so my circle of competence for investing has to lie elsewhere.

 

I think the original downdraft in energy prices was primarily caused by the concern about rising interest rates and the concern and falling energy prices. 

- I think the interest rate risk is overblown for MLP's that can grow distributions.  MLP's have performed alright when interest rates were higher, and when interest rates were rising.  Moreover, MLP's are not bonds, but investors seem to miss that fact amidst the hysteria of rising rates.  However, it is rational to expect that if/when low interest rates drive folks into MLP's, the prospect of rising interest rates will cause many of the same investors to abandon ship.  I think we are seeing that.     

-  I don't disagree with their assessment that energy prices impact perception on midstream.  I think many investors are stuck on first level thinking (i.e. falling energy prices mean less liquid moving through pipes means less money for midstream companies).  That is true to an extent, but the second level thinking is more important (i.e. cheaper NG and oil prices drive increased demand over time for NG and oil which will drive more liquid through the pipes in the long-term which will ultimately drive midstream earnings higher in the long-term).     

 

To a lesser extent, I think folks are now worried about the recent Williams-Chesapeake transaction.  People seem to think that take-or-pay contracts are etched in stone like the 10 commandments.  That is not true now, and it has never been true.  There is always re-contracting risk in the midstream business.  In the case of Williams and Chesapeake, both companies will win - Chesapeake will pay a little less per mbtu for NG that moves through WMB pipes, and in return Chesapeake will dedicate more acreage and NG to WMB pipes.  What ultimately matters is the quality of the midstream assets - if the pipe is going somewhere useful (i.e. a demand center like a natural gas power plant or large urban area), the midstream operator will always be in a strong negotiating position.         

[HJ]

I'm surprised that the MLPs did well in the late 90s and 00s when rates were higher.  During the conference, most of the presenters mentioned that oil prices and perception of energy rather than rates is what creates downward pressure on MLPs.  I would imagine that the historical low interest rates pushes people into MLPs.  Could you elaborate on why rates "maybe" isn't as important as I think.

 

The power market went through very big changes through deregulation during that period of time.  Merchant energy business model was all the rage.  Companies like Calpine, Dynergy built lots of electricity generation capacity to be powdered by natural gas.  GE was riding high building all the turbines.  It also gave rise to a very volatile natural gas market, and associated need to transport natural gas, which is mostly a regional commodity.  Mitchell Energy, today absorbed into Devon, started fracking the Barnett Shale in that period of time.  The whole thing came to a screeching halt with the California electricity crisis and later the Enron bankruptcy in the early 2000's. 

 

Ultimately demand driven volume is needed to fill all the pipelines that have been built.  Without that, new pipelines end up competing with old, and some of the older pipes end up not getting sufficient level of contract renewal.  The most suspect demand here is LNG, with chemical/fertilizer and power generation demand growth seemingly on fairly solid footing.  I've read speculations that argue US sourced LNG is the cheapest to "lay up" for international LNG buyers.  With LNG priced off oil most places of the world, it's not outlandish to speculate on a less robust growth than expected a year ago.

[Spekulatius]

CPGX will be a great business as long as CPPL cost of capital remains low (a 4.2% distribution yield for CPPL is very low nowadays). If CPPL cost of capital goes up, the growth rate for CPGX will slow down and then a 2.2% distribution yield is way to low. I think I would rather invest in something like KMI at a 6% yield right now, full well understanding that the growth rate will be lower, because with a 6% dividend yield, not much growth is needed to justify an investment.

[BG2008]

CPGX will be a great business as long as CPPL cost of capital remains low (a 4.2% distribution yield for CPPL is very low nowadays). If CPPL cost of capital goes up, the growth rate for CPGX will slow down and then a 2.2% distribution yield is way to low. I think I would rather invest in something like KMI at a 6% yield right now, full well understanding that the growth rate will be lower, because with a 6% dividend yield, not much growth is needed to justify and investment.

 

I think that's exactly why the opportunity exist. CPGX is purposely withholding its distribution.  KMI has a 1.02x coverage ratio for its distribution while CPGX has a 2.0x coverage ratio.  The implied dividend yield is actually closer to 4.4%.  If you mentioned this, then it's likely that the rest of the market is thinking along the same line.  In addition, KMI has already reached its high threshold.  Well, it's merged into its MLP.  This implies that KMI has much lower growth forward. 

 

The comparison is really between KMI at 6% and much less growth plus pipes in ranges outside of the Marcellus Versus CPGX with exposure to the Marcellus at 4.4% growth with a large backlog of projects.  CPGX is reinvesting its excess cashflow back into the business.  CPGX will have a hockey stick on cashflow in 2018, which KMI will not experience in the future.  When you factor all of this in, you should take CPGX over KMI. 

[Spekulatius]

I understand the hockey stick effect with IDR's once CPPL reaches the high spits well. I do think that most MLP's trade on distribution yield rather than the distributable cash flow yield (with the exception of EPD, which has its own following) and CPGX. Just does not look good with s 2.2% yield currently.

Also, withholding some of their cash flow (~$150M if I calculated that correctly) is not going to get them very far, given the scope of their projects.

I am on the fence on this, on the one hand, I like their growth potential, in the other hand, the risk to the growth (besides the execution risk) due to the NG price locations have increased quite a bit and I think that is what Mr. Market is discounting.

[BG2008]

I understand the hockey stick effect with IDR's once CPPL reaches the high spits well. I do think that most MLP's trade on distribution yield rather than the distributable cash flow yield (with the exception of EPD, which has its own following) and CPGX. Just does not look good with s 2.2% yield currently.

Also, withholding some of their cash flow (~$150M if I calculated that correctly) is not going to get them very far, given the scope of their projects.

I am on the fence on this, on the one hand, I like their growth potential, in the other hand, the risk to the growth (besides the execution risk) due to the NG price locations have increased quite a bit and I think that is what Mr. Market is discounting.

 

Can you talk a bit about the risk related to the NG price locations?  The price of CPGX is less important as the price of CPPL which can dictate how accretive their drop down projects are.  I'm okay with CPGX lingering at a low price until 2018. 

[Spekulatius]

Can you talk a bit about the risk related to the NG price locations?  The price of CPGX is less important as the price of CPPL which can dictate how accretive their drop down projects are.  I'm okay with CPGX lingering at a low price until 2018.

 

The risk is that volume growth in the Marcellus stalls due to low NG prices and less pipes are necessary.

[PullTheTrigger]

 

 

IMHO, CPGX is a compounder for the next decade.  CPGX is what is generally known as a high/hyper growth C-Corp General Partner.  CPGX OpCo is where all the physical assets reside including pipeline, gathering and process, and storage assets.  CPGX directly owns 84.3% of OpCo.  CPPL, the MLP, owns 15.7% of OpCo.  However, CPGX also owns 46.5% of the MLP units outstanding.  Hence, CPGX directly and indirectly own 91.6% of OpCo.  CPGX also owns 100% of the Incentive Distribution Rights or IDRs.  CPPL is what is commonly referred to as a “drop down” MLP.  From 2016-2018, CPGX will sell percentage interest in OpCO to CPPL raising $4 billion of financing via issuances of MLP units.  It is expected that the public will own 35-45% of OpCo by 2018.  For our analysis.

 

Does anyone have any good primers to read about "drop down MLP" or a quick explanation? I'm not following how CPPL trading down is affecting this thesis. I'll start googling in the meantime, but I'd thought it doesn't hurt to ask.

 

 

[BG2008]

 

 

IMHO, CPGX is a compounder for the next decade.  CPGX is what is generally known as a high/hyper growth C-Corp General Partner.  CPGX OpCo is where all the physical assets reside including pipeline, gathering and process, and storage assets.  CPGX directly owns 84.3% of OpCo.  CPPL, the MLP, owns 15.7% of OpCo.  However, CPGX also owns 46.5% of the MLP units outstanding.  Hence, CPGX directly and indirectly own 91.6% of OpCo.  CPGX also owns 100% of the Incentive Distribution Rights or IDRs.  CPPL is what is commonly referred to as a “drop down” MLP.  From 2016-2018, CPGX will sell percentage interest in OpCO to CPPL raising $4 billion of financing via issuances of MLP units.  It is expected that the public will own 35-45% of OpCo by 2018.  For our analysis.

 

Have fun with this, http://www.mlpassociation.org/resources/mlp-presentations/

 

http://www.mlpassociation.org/wp-content/uploads/2015/08/MLP-101-MLPA.pdf

 

 

Does anyone have any good primers to read about "drop down MLP" or a quick explanation? I'm not following how CPPL trading down is affecting this thesis. I'll start googling in the meantime, but I'd thought it doesn't hurt to ask.

[BG2008]

Can you talk a bit about the risk related to the NG price locations?  The price of CPGX is less important as the price of CPPL which can dictate how accretive their drop down projects are.  I'm okay with CPGX lingering at a low price until 2018.

 

The risk is that volume growth in the Marcellus stalls due to low NG prices and less pipes are necessary.

 

Love to hear your thoughts on that risk and how your handicap that. 

[Guest wellmont]

this is interesting but not clear where you are in this. in the first post I guess you pitched it as a buy at $24 or maybe I am reading into it?  a few posts down you then say it would be "extremely interesting" to own it "unhedged" at $15. could you clarify a bit on where exactly do you think it should be bought for folks like us? thanks. btw have you compared this to tallgrass gp? thanks again...

[BG2008]

this is interesting but not clear where you are in this. in the first post I guess you pitched it as a buy at $24 or maybe I am reading into it?  a few posts down you then say it would be "extremely interesting" to own it "unhedged" at $15. could you clarify a bit on where exactly do you think it should be bought for folks like us? thanks. btw have you compared this to tallgrass gp? thanks again...

 

Sure, I was completely hedged at $24 via my previous trade structure.  So, in essence I had no exposure at $24.  I was throwing the idea out there as an interesting one to solicit feedback, bear thesis etc.  At $19, I started buying CPGX and have a small starter position.  I'm rooting for it to get to $15, if it ever does, didn't really think it would actually happen.  But at $15, I think I would own a sizable position.  But as the shares trade down, I'll scale into my position.  Trying to accumulate shares and take advantage of a falling knife at the same time. 

[Guest wellmont]

thanks for the clarification.