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TC Energy (TRP) to Vend Columbia Midstream Group for $1.28B

Zacks Equity Research

In a bid to ramp up core pipeline growth projects, TC Energy Corporation TRP is set to jettison Columbia Midstream Group to UGI Energy Services — a subsidiary of UGI Corporation UGI — for $1.28 billion (C$1.7 billion). Notably, Columbia Midstream Group owns five natural gas pipeline assets,with a transportation capacity of 2,675,000 million British Thermal units per day. The assets to be sold will not include Columbia Energy Ventures and Columbia Gas Transmission network of interstate pipelines in the Appalachian Basin. Subject to satisfactory closing conditions and regulatory approvals, the deal is set for closure in third-quarter 2019.

Deal Benefits for UGI Energy

The latest deal, which is in sync with UGI Energy’s goals to invest in natural gas assets, positions it as a significant midstream operator in the Marcellus and Utica regions of Appalachia region. It provides the firm with an opportunity to invest an additional $300-$500 million over the next five years. In addition to bolstering the UGI Services midstream portfolio, the deal provides the company access to both wet gas gathering and processing, and offers several financial as well as commercial synergies. The transaction is expected to boost earnings in fiscal 2021and support the company’s dividend growth of 4%.

Divestment in Sync With TC Energy’s Goals

TC Energy is currently focusing on divesting assets to raise cash for repaying a huge debt burden and fund growth projects. In May, the company inked a deal to jettison a 85% stake in the Northern Courier Pipeline to Canadian Pension Fund for C$1.05 billion. While the company will close the sale of the Northern Courier Pipeline in third-quarter 2019, it completed the sale of the Coolidge Generating Station in Arizona to Salt River Project Agriculture Improvement and Power District in May. The divestment of Coolidge, Northern Courier and Columbia Midstream is likely to fetch the company approximately C$3.4 billion.

The latest deal with UGI Energy advances TC Energy’s efforts to offload non-core assets for raising funds to pay for key pipelines like Keystone XL and other growth projects across North America.

Markedly, its portfolio includes around C$30 billion of accretive growth projects to be placed into service through 2023. Of this, around C$7 billion worth of projects are expected to be completed by the end of the year. In addition to C$30 billion of near-term growth initiatives, the firm is also advancing C$20 billion of additional medium-to-longer-term projects. Massive capital expenditure spending has raised financing concerns among investors, particularly because it carries an elevated leverage ratio of around 55%. In this regard, the company’s efforts to monetize non-core pipelines to fund its ambitious capital program bode well.

The strong inventory of near-to-medium-term growth projects should support TC Energy’s continued earnings and cash flow improvement. The firm delivered the 6th consecutive earnings beat in first-quarter 2019, driven by strong project execution. The company’s remarkable dividend record boosts investors’ sentiments. The energy infrastructure operator, which has been handsomely rewarding its shareholders, had increased dividends in each of the last 19 years. Considering the low-risk operational profile and predictable cash flows, the Zacks Rank #2 (Buy) firm’s stated dividend growth commitment of 8-10% annually through 2021 should be achievable.

Other Stocks to Consider

Investors interested in the midstream energy space can also consider Plain Group Holdings, LP PAGP and Enbridge Inc ENB. While Plains Group sports a Zacks Rank #1 (Strong Buy), Enbridge carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Plains Group managed to beat estimates in three out of the trailing four quarters, with average positive earnings surprise of 62.68%.

Enbridge delivered average positive earnings surprise of 18.46% in the preceding four quarters.

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