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Derivatives

Pipeline Co. Plans I-Rate Swap

Colonial Pipeline, an interstate transporter of energy products with USD1.2 billion in total debt, is planning to enter an interest rate swap to convert part of an outstanding fixed-rate bond into a variable-rate liability. Craig Nunez, treasurer in Alpharetta, Ga., said the company is looking to take the USD50 million piece of fixed-rate it has remaining from a USD150 million note issue due in 2007 and convert the principal into a floater.

The impetus for the swap, follows Colonial's 30-year USD185 million bond issue last month. A portion of this latest offering--USD60 million--is being used to pay off floating-rate commercial paper, and Nunez said the company wants to enter a swap for a similar amount to keep up its levels of floating-rate debt. It will convert the outstanding five-year paper into a floater because it is shorter term and the company is concerned about hedge accounting and does not want to enter any long-term swaps.

The outstanding five-year paper was priced with a 7.45% coupon and Nunez said Colonial would look to receive this and pay the current market rate of 350 basis points over six-month LIBOR. "Our philosophy is to be interest-rate neutral," he said.

However, Nunez added the company is conservative when it comes to playing with rates and stressed its main priority is liquidity and not interest-rate management. After the expected swap, fixed-rate will account for about 80% of total debt. Colonial will select counterparties from among its bank group as a reward for other business, Nunez said, declining to elaborate.

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