PrefBlog

TransCanada Corporation has announced:

• •Acquisition creates one of North America’s largest regulated natural gas transmission businesses linking the continent’s most prolific natural gas supply basins to its most attractive markets
• •Results in a combined $23 billion portfolio of secured, near-term growth projects
• •Expected to be accretive to earnings per share in the first full year of ownership and thereafter as the combined $23 billion of near-term, commercially secured projects enter service
• •Increases 2015 adjusted pro forma EBITDA from regulated and long-term contracted assets to approximately 92 per cent
• •Planned monetization of U.S. Northeast merchant power assets will further enhance stability and predictability of consolidated revenue streams
• •Supports and may augment eight to 10 per cent expected annual dividend growth through 2020
• •Funding program designed to be consistent with current financial profile
• •Targeted annual cost, revenue and financing benefits of approximately US$250 million

TransCanada Corporation (TSX:TRP) (NYSE:TRP) (TransCanada) today announced it has entered into an agreement and plan of merger pursuant to which it will acquire Columbia Pipeline Group, Inc. (NYSE:CPGX or Columbia), a Houston, Texas-based company that operates an approximate 24,000-kilometre (km) (15,000-mile) network of interstate natural gas pipelines extending from New York to the Gulf of Mexico, with a significant presence in the Appalachia production basin.

They later announced:

that it has entered into an agreement with a syndicate of underwriters (the Underwriters) led by RBC Capital Markets and TD Securities Inc. under which they have agreed to purchase from TransCanada and sell to the public 92.0 million Subscription Receipts at a price of $45.75 per Subscription Receipt for total gross proceeds of $4.209 billion (the Offering). The Subscription Receipts will be offered to the public in Canada and the United States through the Underwriters or their affiliates. TransCanada has also granted the Underwriters an option to purchase up to an additional 4.6 million Subscription Receipts at a price of $45.75 per Subscription Receipt at any time up to 30 days after closing of the Offering.

The Offering is subject to the receipt of all necessary regulatory and stock exchange approvals. The closing date of the Offering (the Offering Closing Date) is expected to be on or about April 1, 2016.

Proceeds from the Offering will be used to finance a portion of the purchase price for the previously announced acquisition (the Acquisition) of Columbia Pipeline Group, Inc. (NYSE: CPGX) (Columbia) by subsidiaries of the Corporation’s wholly-owned subsidiary, TransCanada PipeLines Limited (TCPL).

Rebecca Penty and Jim Polson of Bloomberg point out:

TransCanada already gets the bulk of its revenue, 48 percent in 2015, from gas shipping. Including its Mainline pipeline system that crosses Canada, the company fully owns 35,200 miles of gas lines and has stakes 6,700 more miles, supplying about 20 percent of North America’s heating and power-plant fuel, according to its website. It’s also one of the continent’s biggest providers of gas storage, with 368 billion cubic feet of capacity.

TransCanada has been seeking to grow its presence in the U.S. gas market as production rises from Appalachia fields. Vast supplies of cheap gas from the Marcellus and Utica shale plays are pushing western Canadian volumes out of their traditional markets, as U.S. producers seek new buyers for their fuel north of the border. TransCanada, in turn, has been soliciting commercial support for the potential reversal of its Iroquois pipeline, which has been sending western Canadian gas supplies to the Eastern U.S. for more than two decades.

Jeffrey Jones of the Globe observes:

[TransCanada chief executive officer] Mr. [Russ] Girling said adding Columbia’s operations will create a 91,000-km natural-gas-pipeline system connecting the most prolific supply basins to markets across the continent. It will also be positioned to feed liquefied natural gas terminals for export.

Following all this, DBRS announced that it:

has today placed TransCanada Corporation’s (TCC or the Company) Preferred Shares – Cumulative rating Under Review with Developing Implications. DBRS has also placed the Issuer Rating, Unsecured Debentures & Notes, Junior Subordinated Notes and Commercial Paper ratings of TransCanada PipeLines Limited, the Medium Term-Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. as well as the Issuer Rating and Senior Unsecured Bonds rating of Trans Québec & Maritimes Pipeline Inc. Under Review with Developing Implications.
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Based on its preliminary review, DBRS believes that the Acquisition, combined with the proposed asset sales noted above, is neutral with respect to TCC’s overall business risk profile. DBRS notes that the Acquisition provides increased diversification to TCC’s business, which DBRS views as moderately positive; however, CPG’s weak counterparty risk profile, which includes a large percentage of non-investment grade shippers, is moderately negative to TCC’s business risk profile. CPG has USD 5.6 billion of commercially secured growth projects currently in the regulatory and permitting processes and is implementing modernization initiatives of approximately USD 1.7 billion through 2021. TCC stated that it expects to fund CPG’s future growth in a manner that is consistent with the Company’s current financial profile; however, DBRS notes the increased near- to medium-term capital intensity and increased risks inherent in a combined growth project portfolio of CAD 23 billion between CPG and TCC. The sale of U.S. Northeast power assets would reduce TCC’s exposure to the merchant power business, which DBRS views as moderately positive from a business risk perspective while the potential sale of a minority interest in TCC’s Mexican natural gas pipeline business is viewed as neutral.

With respect to financial risk profile, DBRS expects initial pressure on TCC’s credit metrics as a result of the assumption of CPG’s existing debt and the potential for a time lag between closing of the Acquisition and TCC’s planned asset sales, partly offset by issuance of meaningful common equity. Execution risk associated with generating expected proceeds from the proposed asset sales is also present. TCC has indicated that it intends to fund the combined large medium-term capital expenditure commitments of both TCC and CPG “in a manner consistent with the Company’s current financial profile.”

TransCanada has many preferred share issues outstanding: TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F, TRP.PR.G, TRP.PR.H and TRP.PR.I.

Update, 2016-3-18: Outlook Negative from S&P:

• •TransCanada Corp. has announced the acquisition of Columbia Pipeline Group Inc. for approximately US$13 billion.
• •We expect the company to finance the all-cash transaction with equity issuance and the monetization of U.S. power and Mexico natural gas assets.
• •As a result, we are revising our outlook on TransCanada and subsidiary TransCanada PipeLines Ltd. to negative from stable.
• •The outlook revision reflects our view of the financing risks associated with the transaction, particularly using asset sales to fund the purchase.
• •We are also affirming our ratings on the companies, including our ‘A-‘ long-term corporate credit rating on both.

TORONTO (Standard & Poor’s) March 18, 2016–Standard & Poor’s Ratings Services today said it revised its outlook on TransCanada Corp. (TCC) and subsidiary TransCanada PipeLines Ltd. to negative from stable. At the same time, Standard
& Poor’s affirmed its ratings on the companies, including its ‘A-‘ long-term corporate credit rating on both.
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The negative outlook reflects our view of the execution risk inherent in the acquisition, with a significant part of the financing coming from proceeds of the proposed asset sales. While the company has a bridge facility for the whole purchase price, which significantly reduces the financing risk, we believe there is execution risk in whether TCC will receive the expected proceeds from the proposed asset sales.

We would lower the ratings if our forecast adjusted funds from operations (AFFO)-to-debt falls below a weighted average of 18%. This could result from asset sales proceeds being significantly lower than forecast and the company meeting the shortfall with long-term debt; or higher debt to finance the 2016-2018 capital programs; or lower-than-forecast cash flows in 2016 and 2017. In addition, cost overruns on planned major projects could weaken metrics and trigger a downgrade.

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