Investor meeting from CIBCWe attended institutional investor meetings with senior management (President and CEO Franois Poirier and EVP & CFO Sean O’Donnell) on May 28 and 29.
The main discussion points were on key strategic priorities, including enhancing the balance sheet and financial flexibility, project execution and maximizing current operations. We expect the related South Bow spinoff shareholder vote to pass based on shareholder sentiment. We note improving investor sentiment with respect to secular growth in natural gas demand and the nuclear industry, a positive for the new TC Energy after the spinoff.
We maintain our Neutral rating and $56 discounted cash flow (DCF)-based price target.
Key Points
Asset Sales Update: Management expects that the sale of a minority interest in Mexican gas pipeline assets to the CFE will close imminently, generating proceeds in the ~US$340MM range. Additionally, the sale of a ~$1B stake in NGTL is in discussion and it is hoped will be announced by the end of June. Despite the slippage risk in reaching consensus with the Indigenous groups, the deal is likely to have a short close as no regulatory approval is needed. Management also highlighted its asset sale options, including processes under way in the U.S. The company may overshoot its 2024 asset sale target, which would help reduce 2025 leverage, as we currently expect it to be slightly above the 4.75x target in 2025, although below that level in 2026 due to full-year contributions from assets placed into service in 2025.
South Bow Spinoff: We expect that the spinoff vote on June 4 will pass, as investors have likely either become more comfortable with South Bow or exited their positions. The Liquids Pipeline business has potential upside from volumes in the excess capacity from Cushing to USGC, which could add $100MM-$200MM in EBITDA. South Bow could also benefit from recontracting tolls at market rates upon expiry in eight years, adding up to $300MM of potential upside to EBITDA. It has approvals to pursue market rates from both the Canada Energy Regulator (CER) and the Federal Energy Regulatory Commission (FERC). Keystone’s toll, low transit time, and segregated products speak to its quality and competitive position, which would help with recontracting in the future. Furthermore, the Blackrod project could reduce South Bow’s leverage to 4.5x pro forma 2026.
Deleveraging Progress And Other Targets: Management placed strong focus on keeping to the lower end of the $6B-$7B net capex range in order to help with deleveraging. The company is also targeting a long-term EPS payout ratio of 75%, similar to a utility-like structure. TRP’s EPS payout ratio is 89% in our 2024 forecasts, which is already in a position of strength and compares favourably to industry peers.