Calgary-based TransCanada Corp. late Thursday said it agreed to pay $13 billion to buy Columbia Pipeline Group Inc. (CPG) in a deal that would connect some of the most prolific natural gas supply basins in North America.
CPG, headquartered in Houston, operates a 15,000-mile network of interstate gas pipelines that extends from New York to the Gulf of Mexico, including in the gas-rich Appalachian Basin.
The tie-up, rumored to be in the works last week, would result in a combined $23 billion portfolio of near-term growth projects for TransCanada, while the sale of some U.S. merchant power assets in the Northeast would further enhance the “stability and predictability” of the consolidated revenue stream.
“The acquisition represents a rare opportunity to invest in an extensive, competitively positioned, growing network of regulated natural gas pipeline and storage assets in the Marcellus and Utica shale gas regions," TransCanada CEO Russ Girling said. "The assets complement our existing North American footprint, which together will create a 91,000-kilometer (57,000-mile) 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."
Under the terms of the all-cash deal, unanimously approved by both boards, CPG shareholders would receive $25.50/share, an 11% premium based on its closing stock price on the New York Stock Exchange of $23.00 as of March 16, and a 32% premium to the volume-weighted average price over the last 30 days.
The transaction value is $13 billion, including assumption of $2.8 billion in debt. The transaction is subject to CPG shareholder approval and regulatory approvals.
CPG owns one of the largest gas pipeline systems in the United States, including Columbia Gas Transmission, which operates 11,300 miles of pipe and 286 Bcf of storage capacity in the Northeast. It also owns Columbia Gulf Transmission, a 3,300-mile pipeline system that extends from Appalachia to the Gulf Coast.
The company also is advancing $5.6 billion of projects, which are underpinned by long-term contracts and expected to generate growth in earnings as they enter service. Under agreements with customers, additional growth is also anticipated from $1.7 billion of modernization initiatives to be implemented through 2021.
"This transaction delivers tremendous value to our shareholders and places Columbia Pipeline Group within a leading energy platform that can maximize the value of our strategic positioning and deep inventory of transformational growth projects," said CPG CEO Robert C. Skaggs.
TransCanada expects the acquisition, net of associated financing and portfolio management, to be accretive to earnings per share in the first full year of ownership.
"With a combined portfolio of $23 billion in near-term projects secured by cost of service regulation or long-term contracts, we are well positioned to generate significant growth in earnings into the next decade," Girling said. "These initiatives, underpinned by predictable and growing revenue streams, are expected to support and may augment our 8-10% expected annual dividend growth through 2020."
TransCanada expects portfolio management to play an important role in the permanent financing of the acquisition through the planned monetization of U.S. Northeast merchant power assets and a minority interest in its Mexican natural gas pipeline business. Proceeds from asset sales, along with new common equity proportionate to the size of the transaction, are expected to comprise the required funding while maintaining the company's financial strength and flexibility.
As an interim measure, TransCanada has bridge term loan credit facilities in place for up to $10.3 billion with a syndicate of lenders. Future growth is expected to be funded in a manner consistent with the company's current financial profile.
"TransCanada intends to fund the acquisition and our significant future growth program in a manner that maintains our strong financial position," Girling said. "This will provide us with the financial capacity and flexibility required to prudently execute an industry-leading portfolio of attractive growth opportunities through all parts of the economic cycle and pay a strong and growing dividend to our shareholders."
The acquisition is expected to close in the second half of the year. Once completed, CPG would become an indirect subsidiary of TransCanada and cease to be a publicly held corporation.