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Columbia Pipeline Group's Growth Plans Face Hard Questions Amid Downturn

With its first quarter as a public company behind it, Columbia Pipeline Group Inc. (CPGX) continued pressing ahead with billions of dollars of midstream investments, but those plans were met with skepticism on Tuesday as financial analysts expressed concerns about how that growth would be funded.

CPGX and its midstream affiliate, Columbia Pipeline Partners LP (CPPL), both turned in a strong third quarter. CPGX spun-off CPPL ahead of splitting from NiSource Inc. into a separately traded public company on July 1, which set the stage for billions of dollars in midstream investments, primarily in the Northeast (see Shale DailyFeb. 9). The company has touted its plans for more than a dozen liquified natural gas (LNG), midstream and interstate pipeline expansion/newbuild projects that are expected to cost more than $13 billion in the next five years (see Daily GPI, May 14).

"Despite recent volatility in the financial markets, our outlook remains unchanged," said CPGX CEO Robert Skaggs. "Specifically, delivering 20% annual distribution growth [at CPPL] through 2020, a compelling investment proposition by any measure."

CPPL owns a 14.6% interest in CPGX assets. But a huge growth profile at both companies has investors on edge. On Tuesday's third quarter earnings call, serious questions were raised about how CPGX plans to fund its growth and that of CPPL's over the next five years.

They noted financing could be hard to come by given the undulation in equity markets. Slowing economic growth overseas, a strong U.S. dollar and a slump in the energy space has sent waves through the broader market. Several analysts peppered CPGX management with questions about near-term credit, how that might affect the master limited partnership (MLP) and what it might mean for leverage on the balance sheet going forward.

"I think your tone has changed a little on this call, where you guys have been a little more forthcoming about potentially using CPGX equity. With the MLP, you guys are reiterating the expectation for 20% growth," said one analyst on the call. "To me, this says a dropdown is definitely coming, despite the volatility in the market. And if I'm to go by prior guidance, [CPPL] would need $1 billion in equity in 2016. I'm under the impression that the public is not really willing to absorb this amount.

"Are you thinking the parent raises equity at its level and it backstops the $1 billion that the MLP would have to do?" the analyst asked.

"We have flexibility, we have latitude and we have optionality. And you know better than I that the [market] situation is very dynamic," Skaggs responded. "So, we continue to evaluate all of our options -- all of our alternatives -- they are many. Having said that, we continue to believe in CPPL. We believe, all things being equal, that is the most attractive vehicle for raising equity over the long-term and we intend to be supportive of that vehicle."

CFO Stephen Smith said CPGX had $1.8 billion in liquidity at the end of the third quarter, while CPPL had a $500 million credit facility on which $20 million has been drawn. President Glen Kettering noted that the company continued to execute on growth during the third quarter, saying the plans are "underpinned by long-term, fixed-fee take-or-pay type contracts with our customers."

On the MLP side, investors have grown wary of the structure throughout the year, selling off their stakes and raising questions about how the downturn in oil and gas prices could weaken the space (see Daily GPIOct. 22). With oil's fall and persistently low natural gas prices, concerns have emerged about midstream MLP's ability to grow. Revenue has in some cases been threatened by a lack of committed volumes; commodity price risk is built into certain contracts and high expenses and counterparty credit risks appear to have investors shaken.

CPPL has underperformed the broader MLP sector. While it debuted in a record initial public offering earlier this year, the stock has since hit a low of $11.24/unit. It was up 4% around $15/unit on Tuesday, but it has averaged a yield of roughly 4.56%, underperforming some of the space's stronger names with yields of more than 8% and unit prices well above $30. Given its market performance, analysts asked management if it might be time to slow its growth plans as investors don't appear to be rewarding them.

Skaggs said it was early in the company's "game plan" and added that "we think our model will work and we think we can support the growth." He said there is no long-term plan to add leverage to the balance sheet and said CPGX could drop down assets to CPPL next year.

"The bottom line is we are going to have to use equity over the next several years to support this wave of growth," he said. "...We have to show the credit rating agencies what our track record is, how we're deploying capital and that we're delivering on time and on budget, and that we can sustain our metrics," he added of the company's long history and its new role as a public company.

CPGX has hit the ground running since its split with NiSource. During the third quarter, it placed into service its East Side Expansion, a $300 million project to provide 312 MMcf/d of additional capacity for the Marcellus Shale in addition to starting up the first phase of a Southwest Pennsylvania gathering system

Its largest project, Mountaineer XPress, has been accepted into FERC's pre-filing process. The pipeline would provide 2.7 Bcf/d of firm transportation on the Columbia Gas Transmission (TCO) system. CPGX also received its Federal Energy Regulatory Commission certificate to begin construction on the Cameron Access project, which would enhance the Columbia Gulf pipeline system to provide the Northeast with direct access to Sempra Energy's Cameron LNG export facility on the Louisiana coast.

The company's revenue rose slightly to $320.9 million during the quarter, up from $318 million in the year-ago period. It reported net income of $74.8 million (20 cents/share), compared to $53.6 million (17 cents/share) at the same time last year. CPPL reported net income of $22 million (22 cents/unit), versus $16.3 million (17 cents/unit) in 2Q2015 -- its first full quarter of operations.

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