Energy Income Partners, LLC Comments on TC PipeLines, LP Supplemental Disclosures to the Merger Proxy Statement/Prospectus, Maintains Its Intent to Vote Against Proposed Merger with TC Energy Corporation
Mar 05, 2021 3:38 PM ET
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Energy Income Partners ("EIP") sent a supplemental letter to the Board of Directors of the general partner of TC PipeLines, LP supporting its objections to and its intent to vote AGAINST the proposal to approve and adopt the Merger Agreement with TC Energy Corporation . EIP is the largest non–affiliated unitholder of TCP, owning more than 10% of the units outstanding and has maintained a position in the company for nearly 15 years.
A copy of EIP's letter is below. A full copy of EIP's initial letter sent to the Board on last Friday, including supporting analysis of its objections is available on EIP's website, www.eipinvestments.com.
Members of the Board of Directors
TC PipeLines, GP, Inc., as the general partner of TC PipeLines, LP
700 Louisiana Street, Suite 1300
Houston, Texas 77002
Re: TCP/TRP Merger Proposal Vote
Ladies and Gentlemen:
On Friday, February 19, 2021 Energy Income Partners, LLC ("EIP") sent a letter to the TCP Board containing an analysis of the TC PipeLines LP ("TCP") / TC Energy Corporation ("TRP") merger proxy statement/prospectus, dated January 26, 2021 ("Merger Proxy"), including elements of the Partnership Fairness Opinion issued by the financial advisor ("Evercore"). In that letter, we advised you of our decision to vote against the merger. The letter also contained EIP's view that there were material deficiencies in the information considered by, provided to, and relied upon by the Conflicts Committee in their decision to accept this offer.
After EIP's letter on Friday to the TCP Board, EIP has more thoroughly reviewed TCP's Form 8-K filing with the U.S. Securities and Exchange Commission, dated February 17, 2021, which contained supplemental disclosures to the Merger Proxy in response to litigation surrounding the merger. Incorporating these additional disclosures into our prior analysis, EIP's view remains unchanged. Accordingly, we are advising you that if the meeting is held without further considerations and with the terms of the merger unchanged, we will vote against the merger. In fact, we believe critical questions remain that LP investors need answers to, such as:
- The Merger Proxy contains what appears to us to be a disturbing and unusual fact pattern wherein the two members of the Conflicts Committee negotiated for separate and additional Indemnification Agreements while concurrently negotiating the exchange ratio and other aspects of the Merger Agreement on behalf of TCP unitholders. Why did the Conflicts Committee negotiate for legal protections during this process over and above what was historically deemed necessary?
- The Proxy firm ISS took the rare approach of issuing a "cautionary support FOR" the merger as evidenced by their flagging the merger vote as "deserving attention due to contentious issues or controversy". We view this as an important and notable distinction for TCP's unitholders. In fact, yesterday, ISS reiterated their "cautionary" qualifier to their recommendation citing EIP's letter from last Friday, February 19, 2021. Why was this caveat left out of TCP's recent press releases to the public citing ISS' "FOR" recommendation?
- As mentioned in our prior letter, EIP believes Evercore's precedent transaction analysis is deeply flawed. Even using Evercore's analysis, the additional disclosures in the 8-K provide a mean/median EV/EBITDA transaction multiple on precedent transactions of approximately 10x. This is 10% higher than the proposed merger valuation multiple that equates to a 20% higher per unit equity price than the current offer. Why did the Conflicts Committee accept an exchange offer that was 20% below that suggested by the data cited by their financial advisor Evercore?
- Evercore's reliance of the valuation measure EV/EBITDA for asset sale transactions to justify TRP's offer for TCP is problematic.
- EV/EBITDA ignores the payments to the general partner in the form of GP incentive distribution rights ("IDRs") and so depresses the multiple. Why weren't these multiples adjusted higher accordingly? Yesterday, Kinder Morgan announced the partial sale of 25% of Natural Gas Pipeline of America (NGPL) at 11.2x EBITDA. NGPL is highly comparable to TCP assets and has no incentive payments to general partners.
- EV/EBITDA ignores taxes and incentives to general partners which are paid by equity holders just as interest payments on debt and capital to sustain the business. What matters to equity holders is earnings per share. Isn't this why long-term investors such as Warren Buffet and Charlie Munger have repeatedly derided EBITDA as a poor/misleading earnings measure? Why wasn't a thorough valuation analysis of after-tax earnings to unitholders given the same consideration as EV/EBITDA?
- The treatment of taxes paid by unitholders in Evercore's analysis highlighted in the 8-K was, in our view, biased and incomplete. Evercore has reduced the value of TCP units by personal taxes paid by those unitholders but ignored both the dividend tax and the 15% Canadian withholding tax TCP unitholders would pay as TRP shareholders following the merger. Why wasn't an apples-for-apples type of valuation exercise conducted or relied upon?
Considering the above items raised around the adequacy of the merger consideration and fairness of the process, EIP strongly believes the Conflicts Committee was not fully informed in their decision to approve the merger. Accordingly, EIP requests that the GP Board postpone the upcoming Merger Vote so that the Conflicts Committee can re-convene to consider the additional information that we and others have provided. Further, it is EIP's view that the Conflicts Committee must either 1) re-open the merger negotiations to obtain a fair and reasonable valuation for TCP LP unitholders or 2) rescind their previous decision of recommendation to the GP Board approving the Merger; thereby rescinding "Special Approval" of the Merger Agreement.
While EIP does not currently object in principle to the Board's determination to pursue a merger, we believe that terms of the proposed merger are unfair to unitholders. EIP's intention remains to vote "AGAINST" the proposed merger of TCP and TC Energy ("TRP") based upon our view that TRP's offer of 0.70 common shares of TRP for each unit of TCP is inadequate and grossly undervalues TCP's assets and existing organic growth opportunities.
If you have any questions please contact Nandita Hogan, our Chief Compliance Officer, at (203) 349-8232.
CEO and co-founder, Energy Income Partners, LLC
Based in Westport, Connecticut, EIP is an asset manager founded in 2003 that focuses specifically on energy infrastructure. EIP's seven-member investment team collectively has significant experience in the energy, pipeline, and utility industries. As of January 31, 2021, EIP has $3.9 billion of assets under management.
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