15 Questions Answered Following TransCanada's Purchase Of Columbia Pipeline

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The $13 billion acquisition of Columbia Pipeline Group Inc
CPGX
is highly strategic for TransCanada Corporation (USA)
TRP
as it diversifies basin exposure and expand the footprint to Marcellus/Utica where it has limited presence, according to a note from BMO Capital Markets. "We believe TRP's motivation for the CPGX acquisition reflects the limited near-term growth prospects in oil pipelines as well as B.C. LNG gas export. Commodity exposure is also expected to positively decrease to 2% vs. 10%," analyst Ben Pham wrote in a note to clients. "While we expect the acquisition to be largely neutral to our 2017 estimate (vs. management's expectation for accretion), it is less dilutive than expected, and more importantly, the deal should be materially accretive to 2018 (+4%) and 2019 (+10%). For distributable cash flow, we do not expect the deal to be accretive until 2019." The brokerage has answered 15 questions related to the merger: 1. What's the latest? "We believe the acquisition of CPGX is astute and well timed. While pipeline/midstream peers are facing limited medium-term growth opportunities, lengthy project delays, and credit rating scrutiny, TRP continues to enhance its near- and medium-term growth trajectory while maintaining a unique A-rated balance sheet." 2. What is CPGX, anyway? "The Columbia Pipeline Group assets include three FERC-regulated pipelines. The assets are well positioned in the growing Marcellus and Utica shales within the Appalachian Basin, while also serving key U.S. markets in the Northeast, Midwest, MidAtlantic, and Gulf Coast." 3. What are the acquisition financing needs? "The transaction is currently supported by a US$10.3 billion fully committed bridge loan. As a result, TRP does not plan to add any additional leverage other than CPGX's US$2.75 billion of debt (about 20 percent of total acquisition EV)." 4. What are the strategic benefits? "We believe the Columbia Pipeline acquisition is highly strategic for TRP: not only would it diversify basin exposure, it also provides access to CPGX's robust contracted growth backlog that should nicely support or enhance TRP's 8–10 percent dividend growth guidance through 2020. The potential CPGX transaction in particular would also mitigate TRP's potential cash flow downside." 5. Did TRP pay a full price for CPGX? "In short, yes. While the acquisition metrics are rich and above precedent transactions, it reflects the significant future growth potential of CPGX and the strategic benefits of the deal." 6. What does the business profile look like pro forma? "The acquisition positively benefits TRP's business profile. First, it further diversifies the business. Second, it increases TRP's exposure to natural gas infrastructure, which is the company's core business." 7. What are the expected assets divestitures worth? "We believe the power portfolio could fetch close to US$4.3 billion while Mexico gas could sell for at least US$2 billion assuming a sale of 49%." 8. Is the transaction accretive? "While we still expect the CPGX acquisition to be largely neutral to our 2017 estimate, it is less dilutive than expected and, more importantly, the deal should be materially accretive to 2018 (+4%) and 2019 (+10%)." 9. Will TRP/CPGX deal cross the finish line? "We do not expect material regulatory hurdles to arise as there is not material geographic overlap and we do not see significant anti-competitive concerns." 10. Is the A credit rating at risk? "Assuming no additional debt is added other than the assumed CPGX debt and the asset proceeds come in line with management expectations, we expect DBRS and Moody's to ultimately affirm their respective ratings. However, we expect potential pressure to the S&P rating." 11. What are the key risks to be aware of? "Aside from credit rating risk along with deal execution (CPGX as well as asset sales), we believe the other wrinkle to the deal is an increase in counterparty risk (i.e., high proportion of non-investment grade counterparties)." 12. What does TRP do with the MLPs? "With the CPGX acquisition, TRP will inherit a second MLP Columbia Pipeline Partners (CPPL-NYSE; not rated) while maintaining its longstanding MLP TC Pipelines (TCP-NYSE; not rated). Further, we would not be surprised to see TRP ultimately merge the two entities by late decade." 13. What are your thoughts on the valuation? "We now believe the valuation will positively re-rate sooner, particularly upon CPGX deal close and asset sales. At a forward 2017E P/E multiple of 17x (vs. ENB at ~21x) and a FCF yield of 10% (vs. broader coverage at 9%), we see attractive risk/reward in the TRP shares." 14. So what are we doing with our estimates and target price? "Our 2016E EPS estimate is increased to $2.60 (vs. $2.49). We have increased our target price to $59 (vs. $58)." 15. Is TRP still one of your best ideas? "Yes. We see the Columbia Pipeline acquisition as positive for the company. Our analysis suggests that it adds significant long-term shareholder and is highly strategic. Further, the acquisition should assist or augment TRP's 8–10% dividend growth targets through 2020E." The brokerage reiterated its Outperform rating on TRP shares. Shares of TransCanada were down 0.5 percent at $37.96.
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