TransCanada dropdowns to generate more shareholder value
The sale of TransCanada Corp.’ s remaining 30% interest in Bison Pipeline LLC to its master limited partnership, TC PipeLines LP, for US$215 million on Wednesday is the first step in delivering long-term value to core shareholders, says RBC Capital Markets analyst Robert Kwan.
“Although the size of the US$215 million drop-down is relatively small, we believe that the transaction has much greater implications for investor sentiment as it provides a tangible drop-down transaction (which can be showcased at the November Investor Day) with more, and larger, dropdowns signalled for the future,” he said in a note to clients, reiterating his outperform rating and $68 price target.
TransCanada also highlighted other pipeline assets that could be sold into the partnership, including the remaining 30% interest in GTN, the 44.5% and 61.7% interest in Iroquois and Portland, respectively, and the 100% and 53.6% respective interests in ANR and Great Lakes.
In total, TransCanada management said TC Pipelines has the capacity to complete dropdowns in excess of US$1-billion per year going forward.
Mr. Kwan, as a result, believes the Bison deal and future dropdowns should help bolster the company’s conservative payout ratio and dividend growth.
“We believe TransCanada’s core shareholders are supportive of an accelerated drop-down strategy that involves a ‘ conveyor belt’ style of steady dropdowns into TCP over the upcoming years and that improving the funding plan could help underpin a more linear payout of future growth (i.e., temporary increase in the payout ratio) supporting a roughly 10% increase in the dividend for 2015 (up from the 4% increase from prior years),” he said.