Morningstar | Raising Our TC Energy FVE on Recent Asset Sales
TC Energy entered into an agreement to sell its Columbia Gas Midstream subsidiary to UGI Energy Services for $1.275 billion (CAD 1.7 billion). The transaction is expected to close during the third quarter. The midstream assets operate four natural gas gathering systems along with interests in gathering, processing, and liquids assets in the Appalachian Basin.We think this is a smart move for TC Energy, which received a good price for the assets. The Columbia midstream assets generated CAD 129 million for the trailing 12 months, which implies a 13 times EBITDA multiple. Combined with the majority sale of the Northern Courier pipeline, TC Energy will receive CAD 2.9 billion in proceeds to use to fund its attractive Keystone XL and Coastal GasLink pipeline projects. We also expect net debt/EBITDA to decrease to nearly 5 times by the end of the year from over 6 times in 2018.
We are increasing our fair value estimate to $54 (CAD 71) per share from $52 (CAD 70) to reflect the positive impact of the deal. The stock is up over 30% so far in 2019, outperforming peers and the general market by a wide margin. We think most of the upside has been realized by the market this year, leaving modest 9% upside in this 3-star name. However, the stock is yielding 4.6% at current levels, and we expect TC Energy to increase its dividend 8%-10% annually over the next five years. We are maintaining our narrow moat rating.
For a detailed look into Canadian crude market and pipeline trends, please refer to our January Energy Observer, "Pipeline Expansions Are Canada's Lifelines."
For a deeper dive into TC Energy, formerly known as TransCanada, see our April 2018 Select report, "What the Market Is Missing on Keystone's Impact on TransCanada."
TransCanada is an energy company. Co. operates three business segments: natural gas pipeline, which transports natural gas across Canada, the U.S. and Mexico, and has regulated natural gas storage facilities in Michigan with a total capacity of 250 billion cubic ft.; liquids pipelines, which consists of wholly-owned and operated crude oil pipeline systems that connects Alberta and U.S. crude oil supplies to U.S. refining markets, as well as connecting U.S. crude oil supplies from the Cushing, OK hub to refining markets in the U.S Gulf Coast; and energy, which includes a portfolio of power generation assets in Canada and the U.S., and unregulated natural gas storage assets in Alberta.
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