TC Energy (TRP) has reached a deal to sell the Portland Natural Gas Transmission System (PNGTS) for US$1.14B, moving the company closer to its $3B divestiture goal. East Daley’s asset model tracks with the 11X valuation on 2023 earnings claimed by TRP, though the multiple steps down in later years.
TRP announced the asset sale on March 4 to a partnership of BlackRock and Morgan Stanely Infrastructure Partners. The company claimed a 2023 EBITDA multiple of 11.0x on the transaction, in line with the 10.9x multiple calculated through the TRP Financial Blueprint. However, the forward 2024 EBITDA multiple steps down to 9.3x as our earnings forecast increases.
TC Energy (61.7%) and co-owner Énergir (38.3%) will split the proceeds from the sale, giving TRP pre-tax equity proceeds of C$740MM (US$545MM). TRP will use the cash to pay down existing debt and work toward its 2024 goal of C$3B in asset divestitures.
In previous coverage, East Daley noted TRP’s relatively high leverage after spending ballooned for several pipeline projects. The midstream company is selling assets and spinning off its liquids pipelines to raise funds and bring down leverage. Management expects the C$3B divestiture goal to be met through 2-4 transactions later this year.
The 2024 EBITDA multiple in the TRP Financial Blueprint is lower than the 2023 multiple due to a successful open season that added a 41 MMcf/d contract from New England Green Gas LLC for a 26-year term. In addition to this new contract, PNGTS has a ledger of long-term contracts that can be viewed through the “Pipeline Contract Dashboard” in East Daley’s Energy Data Studiohttps://www.eastdaley.com/gas-pipeline-customer-contracts. These contracts have an average remaining term of ~15 years.
Constraints in the New England market drive the value of capacity on PNGTS, as local distribution companies (LDCs) strive to fulfill demand and marketers see consistent arbitrage opportunities. The constraints in this market are shown by the strong premium at the Algonquin citygate, where gas traded for +$1.04/MMBtu over the Henry Hub in 2023. The forward curve estimates that Algonquin basis could expand to ~$2.00 in 2025-30.
The attractive basis premiums available at Algonquin have led marketers to break from normal behavior and sign 30-year contracts (see contract outlook in figure 2). EDA typically views marketers as risky contracting parties, but the persistent tightness of the New England market drastically reduces recontacting risk on PNGTS.
The willingness to contract for terms of 15 years and beyond is a testament to this asset’s strength, leaving EDA analysts surprised that the asset only transacted at a 9.3x multiple on 2024 EBITDA. The willingness to divest such a strong asset shows TRP’s commitment to achieve the C$3B divestment target and 4.75x leverage by the end of 2024. – Zach Krause Tickers: TRP.
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