On June 4, TC Energy (TRP) shareholders voted in favor of spinning off the company’s Liquids Pipelines segment into South Bow Corp. South Bow will consist of the Keystone, Marketlink, White Spruce, and Grand Rapids pipeline systems. The spinoff will be effective between late 3Q24 and early 4Q24.
South Bow will be saddled with C$7.9B in long-term debt (C$1.5B in hybrids and C6.4B in senior notes) compared to C$3.8B in shareholder equity, bringing total capitalization to C$11.6B. TRP estimates the initial leverage ratio to be 5.0x; management intends to reduce leverage by 0.25-0.50x over the next three years with a long-term target of 4.0x.
In the TRP Financial Blueprint, East Daley Analytics currently forecasts the South Bow assets to make C$1,544MM in 2024 EBITDA (see figure). Our estimate would place South Bow’s leverage ratio at 5.1x, slightly higher than management’s expectations. EDA forecasts South Bow EBITDA will grow at a 4% CAGR from 2024-28. The growth is driven by 3% CAGR in Keystone EBITDA, plus an estimated C$42MM in annual EBITDA from the Blackrod project.
Keystone generates stable earnings from 8-year contracts for 94% of the pipeline’s ~620 Mb/d of capacity. Despite these contracts, Keystone has had reliability issues in the past, most recently an ~14 Mbbl leak in December 2022. Without the cushion of TRP’s natural gas assets, future operational issues may cause volatility to earnings.
South Bow’s second-largest asset is the 750 Mb/d Marketlink Pipeline connecting the Cushing hub to Gulf Coast markets. Marketlink has been a drag on earnings, as a narrow spread between WTI and Magellan East Houston (MEH) prices has discouraged nominations. The asset’s long-term performance will be determined by the South Bow marketing team’s ability to fill capacity in competition with Seaway Pipeline.
EDA will release an independent South Bow model once the transaction is finalized. The complete financial outlook for the South Bow assets as well as TC Energy can be found in EDA’s Financial Blueprints. – Zach Krause and Gage Dwan Tickers: TRP.
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