CPGX - Columbia Pipeline Group

[shhughes1116]

So I continued to think about this idea the last couple of weeks, particularly in light of the midstream sell-off. 

 

As I noted in my initial post, I don't think this is a bad idea...I think over the next five years it will do reasonably well.  However, everything is relative in investing, and relatively speaking, I still think there are better opportunities in the midstream environment.  If your bull thesis for CPGX is that they will rapidly grow over the next five years and are leveraged to the most promising natural gas basin in the United States, then I would offer up Dominion Midstream (DM) as a better alternative on both points. 

 

First, Dominion Midstream has forecast ~22% distribution growth through 2020, so a bit higher than the forecast rate of CPGX.  DM just closed on a transaction for ~25% of the Iroquois Gas Transmission System, which serves the demand side of things for the area just north of New York City.  This transaction, which involved the private placement of 8.6 million units with the sellers of the pipeline stake (with a 1-year lock-up period) provides the cash flow necessary for 22% distribution growth next year.  No additional debt funding or equity issuance is necessary through the end of 2016.

 

Second, Dominion exerts a huge demand pull on natural gas in the Ohio, Maryland, Virginia, North Carolina, and South Carolina areas through residential transmission and power plant transmission.  Having your general partner (Dominion Power) gobble up huge quantities of natural gas gives the limited partnership (Dominion Midstream) a lot of leverage when securing NG for its pipes from the Marcellus and Utica shales.

 

Third, Dominion Midstream provides a way for you to directly play the Marcellus Shale and Utica Shale.  Dominion is the joint venture partner for BlueRacer Midstream.  Although not as big of a presence as CPGX/CPPL, BlueRacer Midstream already has a gathering/processing/midstream presence in the Marcellus and Utica.  This presence is being built out further, and will be dropped down into Dominion Midstream in 2017. 

 

Fourth, Dominion Power is going to exert an even greater pull on NG from the Marcellus/Utica basins when they open up the Cove Point liquefaction facility in MD.  Cove Point will be able to export 1.8 bcf per day of NG.  The equity for this facility will be dropped down into DM, but I can't remember if it is some of the equity or all of the equity.  Anyways, the 1.8 bcf/d is already contracted for 20 years (50% to a Japanese consortium, and 50% to an Indian company). 

 

Fifth, Dominion Midstream estimates that 2020 EBITDA will be ~$875million, with a $2.30/share distribution.  If this was the terminal point of the growth trajectory, then I would expect the yield to rise from 2.7% (currently) to a higher yield to reflect slowing growth.  However, at 2020, Dominion will still have eligible drop-down assets that generate $1.9 billion EBITDA per year.  Therefore the runway for distribution growth @ Dominion Midstream continues beyond 2020.

 

Sixth, the estimates for distribution growth do not factor in M&A or organic growth projects initiated by Dominion Midstream.  Current distribution growth estimates are based on existing Dominion assets that will be dropped down.  Thus, there may be a little bit of upside to the current distribution growth projections.

 

Just my two cents.  Again, I don't think that CPGX is a bad idea.  I just think there are a few midstream companies out there that will have a greater total return over the next five and ten years. 

 

           

[BG2008]

So I continued to think about this idea the last couple of weeks, particularly in light of the midstream sell-off. 

 

As I noted in my initial post, I don't think this is a bad idea...I think over the next five years it will do reasonably well.  However, everything is relative in investing, and relatively speaking, I still think there are better opportunities in the midstream environment.  If your bull thesis for CPGX is that they will rapidly grow over the next five years and are leveraged to the most promising natural gas basin in the United States, then I would offer up Dominion Midstream (DM) as a better alternative on both points. 

 

First, Dominion Midstream has forecast ~22% distribution growth through 2020, so a bit higher than the forecast rate of CPGX.  DM just closed on a transaction for ~25% of the Iroquois Gas Transmission System, which serves the demand side of things for the area just north of New York City.  This transaction, which involved the private placement of 8.6 million units with the sellers of the pipeline stake (with a 1-year lock-up period) provides the cash flow necessary for 22% distribution growth next year.  No additional debt funding or equity issuance is necessary through the end of 2016.

 

Second, Dominion exerts a huge demand pull on natural gas in the Ohio, Maryland, Virginia, North Carolina, and South Carolina areas through residential transmission and power plant transmission.  Having your general partner (Dominion Power) gobble up huge quantities of natural gas gives the limited partnership (Dominion Midstream) a lot of leverage when securing NG for its pipes from the Marcellus and Utica shales.

 

Third, Dominion Midstream provides a way for you to directly play the Marcellus Shale and Utica Shale.  Dominion is the joint venture partner for BlueRacer Midstream.  Although not as big of a presence as CPGX/CPPL, BlueRacer Midstream already has a gathering/processing/midstream presence in the Marcellus and Utica.  This presence is being built out further, and will be dropped down into Dominion Midstream in 2017. 

 

Fourth, Dominion Power is going to exert an even greater pull on NG from the Marcellus/Utica basins when they open up the Cove Point liquefaction facility in MD.  Cove Point will be able to export 1.8 bcf per day of NG.  The equity for this facility will be dropped down into DM, but I can't remember if it is some of the equity or all of the equity.  Anyways, the 1.8 bcf/d is already contracted for 20 years (50% to a Japanese consortium, and 50% to an Indian company). 

 

Fifth, Dominion Midstream estimates that 2020 EBITDA will be ~$875million, with a $2.30/share distribution.  If this was the terminal point of the growth trajectory, then I would expect the yield to rise from 2.7% (currently) to a higher yield to reflect slowing growth.  However, at 2020, Dominion will still have eligible drop-down assets that generate $1.9 billion EBITDA per year.  Therefore the runway for distribution growth @ Dominion Midstream continues beyond 2020.

 

Sixth, the estimates for distribution growth do not factor in M&A or organic growth projects initiated by Dominion Midstream.  Current distribution growth estimates are based on existing Dominion assets that will be dropped down.  Thus, there may be a little bit of upside to the current distribution growth projections.

 

Just my two cents.  Again, I don't think that CPGX is a bad idea.  I just think there are a few midstream companies out there that will have a greater total return over the next five and ten years. 

 

         

 

Shhughes,

 

Thanks for sharing this one.  I will have to look at this one in detail.  Given the selloff in the market, it may not be a bad idea to buy a basket of GPs.  One of the reasons why I have honed in CPGX is that ~90% of the revenue comes from utility customers.  As a matter of fact, the NiSource utility company is now a large customer of CPGX.  While the market sold off and there were fear of contract renegotiations and producer credit ratings etc, I felt pretty comfortable knowing that as of today CPGX's revenue streams are primarily from utilities.  As the company build out the pipes, it will move to 50% utility and 50% producer.  In short, the overall customer credit rating will likely deteriorate over time, versus today.  But it gives me a level of comfort that I was not able to obtain with others. 

 

I will look at Dominion closely, thanks for sharing.   

[Spekulatius]

Hmm, CPGX raises more capital - I am surprised that they are not using CPPL as a vehicle to raise capital, as CPPL is still trading at a very low yield. Having CPGX raising capital negates the thesis to invest in this, imo:

http://www.sec.gov/Archives/edgar/data/1629995/000119312515392142/d38403d424b5.htm

[BG2008]

I'm pretty sure that management wanted to use CPPL as a capital raising vehicle.  I suspect that they went with CPGX because the MLP market in general is no longer functioning. Big picture, I wish they had used CPPL, but using CPGX is a necessity in this market.  Now, let's examine the effect of issuing CPGX at $17.50.  They are issue equity at roughly 11-12x 2016 EV/EBITDA multiple.  Companies typically use 50/50 equity/debt financing to pay for projects.  Assuming cost of debt between 5-6%.  The WACC would be roughly ~7%ish.  The projects that they build are done at 5-7x EV/EBITDA.  When the MLP market is healthy, which may take a long time, they can drop the pipelines into the MLP at 12x EV/EBITDA.  I think it's quite accretive.

 

I don't think CPGX had the original upside/trajectory.  But if they spend $3billion via this round of equity/debt raising and they can create $2-3 billion of value, then I don't mind the equity raise.  This is probably why the deal got upsized today from an initial of 50mm shares to 71mm shares.  The over allotment will probably be exercised at 15%.  So the total equity should be $1.428 billion.  The is probably why the shares are currently trading at $19.48 despite a massive equity raise in sector that is getting killed.  KMI is down 8% today and ETE is down 6% today and CPGX is up 2% despite a massive equity raise.  I think this is quite positive.  There is a quite a bit of reflectivity in investing in REITs, MLPs, etc.  Positive feedbacks by the capital market is quite important. 

[BG2008]

TransCanada Corp is in talks to buy Columbia Pipeline Group Inc, the Wall Street Journal reported, citing people familiar with the matter.

 

The deal could be announced in coming weeks and could be valued at well over $10 billion, the Journal reported.

 

Anyone know of any more details

[BG2008]

TransCanada Corp (TRP.TO), the company behind the controversial Keystone XL oil pipeline project, is in talks to buy U.S. natural gas pipeline operator Columbia Pipeline Group Inc (CPGX.N), two people familiar with the matter told Reuters.

 

The two companies have so far failed to agree on a price, and a deal remains uncertain, one of the sources said.

 

TransCanada said in a statement it was in discussions with a third party for a potential transaction, but no agreement had been reached.

 

The Wall Street Journal, which first reported talks between the two companies on Thursday, said the deal could be valued at more than $10 billion.

 

Columbia Pipeline Group had a market value of about $8 billion as of Wednesday's close and long-term debt of $2.75 billion as of Dec. 31.

 

Details of the possible deal, including the role of Columbia Pipeline Partners LP (CPPL.N), could not be learned, the Journal said, citing sources. Columbia Pipeline Group owns the general partner of Columbia Pipeline Partners LP.

 

Houston-based Columbia Pipeline Group declined to comment.

 

Shares of Columbia Pipeline Group were up 16.6 percent at $23.03 after being halted briefly.

 

TransCanada's shares were down 3.2 percent at C$47.65, while its U.S.-listed stock (TRP.N) was down 4 percent at $35.62. Both stocks were halted earlier.

 

"TransCanada always seems to do well investing in its core business, which is gas pipelines," said Steven Paget, an analyst at FirstEnergy Capital in Calgary.

 

"The Marcellus is a growing basin and the Columbia system looks a lot like the NGTL system that TransCanada operates in western Canada."

 

Columbia Pipeline Group owns and operates about 15,000 miles of natural gas pipelines, connecting the U.S. Gulf Coast to the Midwest, Mid-Atlantic and Northeast United States.

 

TransCanada's Chief Operating Officer Alex Pourbaix said in February that the company was "going to look for transactions that are accretive."

 

The company suffered a major blow in November when U.S. President Barack Obama blocked the cross-border Keystone XL pipeline in a victory for environmentalists who campaigned against the project for more than seven years.

 

TransCanada's proposed Energy East oil pipeline also faced a setback this month, when the Quebec government filed a motion for an injunction to ensure that the pipeline complied with the province's environmental laws.

[BG2008]

Rumor confirmed, deal for $25.20 per share in cash.  The feeling is mixed here. It's great to get taken out at 26% above the year end 2015 price.  But I was partly hoping to hold onto CPGX for 5-10 years as a compounder. 

 

http://business.financialpost.com/news/energy/transcanada-corp-to-acquire-columbia-pipeline-group-in-us13-billion-deal?__lsa=8353-394c