Major natural gas pipeline deal for TransCanada

Key stock TransCanada Corp. is acquiring U.S.-based Columbia Pipeline Group. This gives TransCanada many benefits, including access to liquefied natural gas terminals on the U.S. Gulf Coast. Acquire TransCanada as it acquires Columbia.

Calgary-based Key stock TransCanada Corp. (TSX─TRP) has agreed to pay US$13 billion to acquire U.S.-based Columbia Pipeline Group (NYSE─CPGX). The directors of both companies support the proposed transaction. TransCanada remains a buy for long-term share price gains as well as attractive and growing dividends.

Columbia owns 18,000 kilometres of natural gas pipelines and 286 billion cubic feet of storage capacity. These operate in the Marcellus and Utica shale production areas. Columbia also owns a 5,400-kilometre pipeline system that links Appalachia to the U.S. Gulf Coast.

Growing profits support rising dividends

TransCanada president and chief executive officer Russ Girling said, “The assets complement our existing North American footprint which together will create a 91,000 kilometer natural gas pipeline system connecting the most prolific supply basins to premium markets across the continent. At the same time, we will be well positioned to transport North America’s abundant natural gas supply to liquefied natural gas terminals for export to international markets.” The Europeans, in particular, are likely to want to cut their dependence upon gas imports from Russia. And access to liquefied natural gas terminals is something that some Canadian producers need.

Together, TransCanada and Columbia have a $23 billion portfolio of safe projects. This will increase TransCanada’s earnings into the next decade. Mr. Girling said that these growing earnings “are expected to support and may augment our eight to 10 per cent expected annual dividend growth through 2020.” Keep in mind, too, that TransCanada expects to reap cost, revenue and financing benefits of US$250 million a year.

We expect Columbia’s shareholders to tender to TransCanada’s offer of US$25.50 a share. That’s because this is 32 per cent above Columbia’s stock market price in the 30 days before the offer was unveiled. TransCanada has already taken steps to finance the all-cash acquisition.

How TransCanada will pay

TransCanada Corp. needs to come up with US$13 billion to complete the acquisition. Here’s how it plans to pay:

■ TransCanada has sold subscription receipts that will turn into 96.6 million common shares. Since the receipts were sold at a price of C$45.75 each, the issue will raise gross proceeds of more than C$4.419 billion.

■ TransCanada plans to sell its merchant power assets in the U.S. Northeast.

■ TransCanada will assume Columbia’s debt of US$2.8 billion.

■ TransCanada will borrow the balance.

The greater amount of share capital is likely to keep its net debt-to-equity ratio fairly stable. The company writes that the “Funding program [is] designed to be consistent with [the] current financial profile.”

TransCanada expects the acquisition to close in the second half of 2016. It expects the transaction to add to its 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.”


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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