TC Energy offers to acquire US natural gas pipeline MLP in simplification move

Houston — Canada's TC Energy offered Oct. 5 to absorb the master limited partnership that owns some of its affiliated US natural gas pipelines.

The move is the latest effort at corporate simplification in the midstream sector designed to make it cheaper to fund new growth projects.

The $1.48 billion acquisition of the about 76% of the outstanding shares of TC PipeLines that TC Energy does not already own would put the MLP fully under TC Energy's umbrella if completed. The offer price implies a value of $1.95 billion for the entire MLP, a 5.4% premium over TC PipeLines' market value at close of trading Oct. 2.

After the announcement, heavy trading in TC PipeLines pushed company shares above the offer's implied value for the company, to about $2.1 billion, suggesting that TC Energy may have to boost its offer to satisfy investors.

A TC Energy subsidiary is the general partner of TC PipeLines, which owns, operates or holds stakes in gas pipelines that serve the US West, Midwest and Northeast and interconnect with TC Energy's larger natural gas pipeline network.

The assets, which include Portland Natural Gas Transmission System in New England, Great Lakes Gas Transmission in the Midwest, Bison pipeline in Wyoming, and Gas Transmission Northwest in the Pacific Northwest, provide an outlet for gas produced in key North American supply basins, including the Western Canada Sedimentary Basin.

In recent years, commodity price and interest rate uncertainty has made some energy infrastructure companies organized as master limited partnerships less attractive in part because of IDRs, which affect how cash is divided between general and limited partners. The breakdown can increase cost of capital, making it more expensive for the operator to use equity to invest in new pipelines. A tax policy change by US regulators in 2018 also affected MLPs.

A wave of North American midstream companies have announced corporate simplification transactions over the last two years, including moves by general partners to acquire complete control of their MLP's through share purchases.

Among the companies that have made similar moves: Energy Transfer, operator of the Rover gas pipeline serving the US Northeast and Midwest, and Canadian pipeline operator Enbridge, which acquired Houston-based Spectra Energy in 2017. Oneok and EQT Midstream Partners are other midstream operators that have announced MLP simplification transactions, while Enterprise Products Partners, a major operator of US pipelines and natural gas processing facilities, said in December 2019 it was actively considering whether to ditch its MLP structure.

Under TC Energy's offer, which it described as non-binding, TC PipeLines' common unitholders would receive 0.650 common shares of TC Energy for each issued and outstanding publicly-held TC PipeLines' shares that it doesn't already own. The offer is subject to conditions, including negotiation of a definitive agreement between the two parties and approval by TC PipeLines' shareholders.