TC Energy Corp., formerly known as TransCanada Corp., is selling an 85-per-cent stake in its Northern Courier pipeline to a Canadian pension fund, after two credit-rating agencies downgraded the company’s debt and one flagged slow progress on asset sales.
TC is unloading its majority stake in the recently built Northern Courier pipeline to Alberta Investment Management Corp. (AIMCo) for total proceeds of $1.15-billion. AIMCo is the largest pension fund in Alberta, with $104-billion in assets under management. Northern Courier moves crude between the Fort Hills oil sands operation and a terminal owned by Suncor Energy.
The sale follows two downgrades of TC’s debt by separate agencies in the span of one year. In April, Moody’s Investors Service downgraded its rating to Baa2 from Baa1, and in May, 2018, Standard & Poor’s downgraded TC’s credit rating to BBB+ from A-. Both agencies worried about the company’s balance sheet because TC has plans to spend $36-billion on system upgrades and new pipelines, particularly on its natural gas network within Alberta, yet its debt already amounted to more than five times its earnings before interest, taxes, depreciation and amortization (EBITDA).
In April, Moody’s said that TC could improve its leverage metrics through asset sales, but added, "these have not materialized and are subject to some execution risks.” A month later, TC is unloading a majority stake to raise $1.15-billion. Asked about the timing, TC spokesperson Terry Cunha wrote in an e-mail that the Northern Courier announcement was unrelated to the debt downgrade.
TC’s shares climbed 1.5 per cent Tuesday, closing at a record high of $66.66. Since the start of the year, the stock has jumped 36.7 per cent, reflecting divergent views between credit-rating agencies and equity investors.
When explaining its downgrade, Moody’s noted that it expects TC’s debt burden to hover around five times EBITDA through 2020, and also cautioned that the company has had some trouble with its capital spending program, including some cost overruns.
Equity investors, meanwhile, have favoured defensive, dividend-paying stocks this year as bond yields tumble amid the growing trade war between China and the United States. On Tuesday, the 10-year U.S. Treasury yield fell to 2.26 per cent, its lowest level since September, 2017.
Because there is so much momentum trading, rival pipeline companies have also seen their share prices surge. Since the start of the year Keyera’s shares have jumped 30.2 per cent and Enbridge Inc.'s stock has popped 20 per cent.
At the same time, the number of U.S. pipeline operators is shrinking. Many American midstream companies, as they are known, adopted a structure known as the master limited partnership (MLP), in order to lower their tax burden. But like Canadian income trusts before them, MLPs are becoming obsolete, owing to tax reform in the U.S., as well as investor requests for simpler corporate structures.
A number of U.S. pipeline companies had also overextended their balance sheets, causing them to go belly up or to merge to shore up their finances.
These trends have "caused dedicated MLP investors to broaden their universe to be more inclusive of Canadian midstream stocks, in addition to those in the U.S.,” Hinds Howard, a portfolio manager at CBRE Clarion, wrote in an e-mail. The Alerian MLP Index, made up solely of MLPs, is up 11.3 per cent since the start of the year, while the Alerian Midstream Energy Index, which includes all North American midstream companies, has climbed 17.8 per cent over the same period.
Mr. Howard also believes that equity investors aren’t as fussed about TC’s leverage because Enbridge was recently in a similar boat and also endured downgrades, but sold assets to shore up its balance sheet.
“The high level of interest from private investors for midstream assets provides investor comfort in TC’s plan to divest assets at attractive prices to fund de-leveraging,” he wrote.
Analysts estimate that TC has a $2.2-billion funding gap to fill to meet its capital spending plans. After recently selling its Coolidge generating station and now the Northern Courier stake, it has raised $1.75-billion in 2019.
Other assets that analysts have suggested could be sold include some Eastern Canada power plants and the Columbia Midstream pipeline unit.
Stay up to date on all our Streetwise stories. We have a Streetwise newsletter, covering mergers and acquisitions, plus financial services news. It is sent Tuesday to Saturday morning. Sign up today.