PrefBlog

Hot on the heels of yesterday’s downgrade, TC Energy has announced:

that its Board of Directors has approved plans for TC Energy to separate into two independent, investment-grade, publicly listed companies through the spinoff of TC Energy’s Liquids Pipelines business (the Transaction). The decision comes as a result of a two-year strategic review and is anticipated to be completed on a tax-free basis in the second half of 2024.

The spinoff will unlock shareholder value by providing both companies with the flexibility to pursue their own growth objectives through disciplined capital allocation, enhancing efficiencies and driving operational excellence. Once completed, the spinoff will result in two high-quality, focused energy industry leaders that are committed to providing safe and reliable service to their customers and the communities in which they operate.

TC Energy post-Transaction: A diversified, industry-leading natural gas and energy solutions company, uniquely positioned to meet growing industry and consumer demand for reliable, lower-carbon energy, by leveraging complementary business sets.
Liquids Pipelines Company: A critical infrastructure company with highly strategic assets that connect resilient and secure supply to the highest demand markets, while delivering incremental growth and value creation opportunities.
…
TC Energy intends that the initial combined dividends of the two companies will be equivalent to TC Energy’s annual dividend immediately prior to the completion of the Transaction, and that over time the combined value of the two companies’ dividends is expected to remain consistent. Dividends will be at the discretion of the respective boards of directors of each company following the Transaction.

Management intends to capitalize the Liquids Pipelines Company with a financial structure that aligns with its asset base, business model and growth plans. Following the Transaction, management anticipates that TC Energy will retain its current credit ratings and that the Liquids Pipelines Company will have investment-grade credit ratings. TC Energy plans to transition an approximately proportionate share of its long-term debt to the Liquids Pipelines Company on a cost-effective basis.

Transaction details, approvals and business continuity
Under the proposed Transaction, TC Energy shareholders will retain their current ownership in TC Energy’s common shares (TRP: TSX, TRP: NYSE) and receive a pro-rata allocation of common shares in the new Liquids Pipelines Company. The Transaction is expected to be tax-free for TC Energy’s Canadian and U.S. shareholders. The determination of the number of common shares in the new Liquids Pipelines Company to be distributed to TC Energy shareholders will be determined prior to the closing of the proposed transaction.

TC Energy expects to seek shareholder approval of the Transaction at a meeting of shareholders in mid-2024. The Transaction will be implemented through a court-approved plan of arrangement under the Canada Business Corporations Act. In addition to TC Energy shareholder and court approvals, the Transaction is subject to receipt of favourable tax rulings from Canadian and U.S. tax authorities, receipt of necessary regulatory approvals and satisfaction of other customary closing conditions. TC Energy expects that the Transaction will be completed in the second half of 2024.

TC Energy will ensure business continuity and reliable services to its valued customers throughout the separation. A separation management office will be established guiding the successful coordination and governance including the development of a separation agreement and a transition service agreement between the two entities once the Transaction is complete.

For additional detail on the Transaction, investor presentation materials and more, please visit our website at www.tcenergy.com/liquids-spinoff.

There can be no assurance that the Transaction will ultimately occur or, if it does occur, what its structure, terms or timing will be.

As noted in the release, the company has created a spinoff information page; this includes a slide deck that projects Debt / EBITDA of 4.75x for TC Energy commencing by the end of 2024 and an initial 5.0x for the liquids business. Assuming there has been no jiggery-pokery with the EBITDA calculations, this implies that debt will be redistributed more or less proportionately to EBITDA.

I have no information regarding what will happen to the preferreds. Most likely is that they will stay with TC Energy (by far the larger of the two companies going forward), but who knows?

Affected issues are: TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F, TRP.PR.G, TRP.PR.H and TRP.PR.I.

Update, 2023-7-28: DBRS states:

DBRS Limited (DBRS Morningstar) notes that TC Energy Corporation (TC Energy or the Company) has announced the spinoff of its liquids pipelines business into a separate listed company with an expected closing date in H2 2024. TC Energy expects the liquids pipeline company to be capitalized with approximately $8.0 billion of senior and junior subordinated debt, the proceeds of which will be used to repay debt at the Company. The transaction is subject to favourable tax rulings from Canadian and U.S. tax authorities, the receipt of necessary regulatory approvals, and shareholder approval.

DBRS Morningstar does not expect the spinoff to have an impact on the Company’s ratings. The spinoff has a modestly negative impact on TC Energy’s business risk profile because of the loss of diversification. Nevertheless, DBRS Morningstar foresees the Company’s business risk profile post spinoff remaining strong, underpinned by regulated/contracted cash flows, strong supply and demand fundamentals at its natural gas pipelines and power businesses, and an asset base that is still very diversified despite the spinoff. DBRS Morningstar also believes that the negative impact on the financial risk profile from the loss of cash flow from the spinoff will be more than offset by the reduction in debt. The spinoff also lowers TC Energy’s dividend payouts by approximately 14%. DBRS Morningstar’s upgrade and downgrade thresholds (as noted in its press release dated July 25, 2023) remain unchanged.

S&P states:

S&P Global Ratings said that TC Energy Corp.’s (BBB+/Negative/–) recently announced spinoff of its liquids business via a spinout to its existing shareholders does not affect its rating on the company. We view the proposed spinoff as being leverage neutral for the company’s credit measures.

The transaction is anticipated to close in the second half of 2024. This transaction is part of a broader asset-divestiture program that the company has undertaken and which we have built into our current ratings and outlook on the company.

Although the spinoff of the liquids business does, on balance, slightly weaken the business risk, overall, we believe that TC’s business risk remains excellent, as per our criteria. While the liquids business provided highly stable cash flows with largely take-or-pay contracts, the remaining gas pipeline transmission and power assets are also highly contracted and benefit from rate regulation.

We continue to expect the company will achieve credit metrics of 5.0x on a debt-to-EBITDA basis for 2023 and 4.7x for 2024. See our research update published July 24, 2023.

DBRS has announced that it:

DBRS Limited (DBRS Morningstar) downgraded the ratings of TC Energy Corporation (TCC or the Company) and TransCanada PipeLines Limited (TCPL; TCC’s wholly owned subsidiary) as follows:
— TCC’s Preferred Shares – Cumulative rating to Pfd-3 (high) from Pfd-2 (low)
— TCPL’s Issuer Rating to BBB (high) from A (low)
— TCPL’s Unsecured Debentures & Notes rating to BBB (high) from A (low)
— TCPL’s Junior Subordinated Notes rating to BBB (low) from BBB
— TCPL’s Commercial Paper rating to R-2 (high) from R-1 (low)

Concurrently, DBRS Morningstar downgraded the Medium-Term Notes & Unsecured Debentures rating of Nova Gas Transmission Limited (NGTL) and the Issuer Rating of Trans Québec & Maritimes Pipeline Inc. (TQM) to BBB (high) from A (low). The ratings of NGTL and TQM are aligned with the ratings of TCPL based on the assumption of implicit support. All trends are Stable. DBRS Morningstar also removed the ratings from Under Review with Negative Implications, where they were placed on February 3, 2023, following the updated and materially higher cost estimate from the Company for the Coastal GasLink Project with a potential for additional increases. DBRS Morningstar considered the development to be credit negative as the costs were materially higher than DBRS Morningstar’s previous expectation and will have to be fully borne by TCC through the construction period. At the time, DBRS Morningstar expected to resolve the Under Review with Negative Implications status after having more certainty on the Company’s funding plan and the scope of the asset divestiture program.

DBRS Morningstar believes the agreement to monetize a 40% interest in TCC’s Columbia Gas Transmission, LLC and Columbia Gulf Transmission, LLC (collectively, Columbia Assets) systems for total expected cash proceeds of $5.2 billion (USD 3.9 billion) significantly bridges the funding gap in 2023. Nevertheless, the rating downgrades reflect DBRS Morningstar’s expectation that the Company’s financial risk profile will no longer be supportive of an A (low) rating. In addition, the ratings are also negatively affected by (1) the expected increase in structural subordination after the sale of the Columbia Assets as TCC intends to recapitalize the Columbia Assets with additional debt; (2) cash flow leakage because of the increase in minority interest at the Columbia Assets; and (3) the execution risks associated with the elevated capital program planned for 2023 and 2024.

TCC’s business risk profile continues to be strong and is underpinned by predominantly regulated and contracted cash flow (95% of the 2023 estimated comparable EBITDA), strong supply and demand fundamentals at its natural gas pipelines and power assets and a diversified asset base. The impact of the sale of the Columbia Assets on TCC’s business risk profile is not material, and DBRS Morningstar expects the negative impact, if any, of additional capital rotation transactions on the Company’s business risk profile will be modest. DBRS Morningstar also expects TCC to maintain its net economic exposure in Mexico to approximately 10% of total consolidated comparable EBITDA.

While the sale of the Columbia Assets aids in deleveraging, TCC’s financial risk profile will still be weaker relative to its financial risk profile when its ratings were last confirmed in June 2022. DBRS Morningstar expects the Company’s EBITDA and cash flow to grow annually in the 5% range over the next three years. However, given the large capital program ($30 billion between 2023 and 2026) and significant dividends, DBRS Morningstar expects the Company to generate material free cash flow (cash flow after capital expenditures and dividends) deficits in 2023 and 2024, which will likely have to be funded with debt and proceeds from capital rotation. As a result, factoring in the proceeds of the sale of TCC’s stake in the Columbia Assets in 2023, DBRS Morningstar expects the Company’s lease-adjusted debt-to-cash flow ratio (last 12 months ended Q1 2023: 11.9%) to average around 12% in 2023 and 2024. DBRS Morningstar believes the Company has adequate additional levers available, including an extensive portfolio of contracted assets with stable cash flows, that could be monetized to deleverage further and potentially improve the Company’s financial risk profile.

DBRS Morningstar could consider a positive rating action if the Company (1) maintains a cash flow-to-debt ratio of 15% or more, (2) successfully navigates its elevated capital program through 2024 with no notable additional project delays or cost overruns and pursues a capital expenditure program in the $6 billion to $7 billion range thereafter, and (3) has no material changes in its business risk profile. Conversely, TCC’s ratings could be subject to a negative rating action if (1) the cash flow-to-debt ratio declines below the 11% level for an extended period of time or (2) there are significant delays or cost overruns at its key projects.

Yesterday, S&P announced that it had affirmed TRP at P-2(low) with a Negative Outlook:

• TC Energy Corp. (TC) recently announced the sale of a 40% interest in the Columbia Gas Transmission LLC and Columbia Gulf Transmission LLC systems for proceeds of approximately C$5.2 billion.
• TC previously indicated that it is committed to asset sales to help fund its capital program and the increased cost of Coastal GasLink Project, and to reduce leverage. The announced sale helps to partially achieve this goal.
• As a result, S&P Global Ratings affirmed all ratings, including its ‘BBB+’ issuer credit rating on TC, based on projected credit metrics that are forecast to be 5.0x in 2023 and 4.7x in 2024.
• The negative outlook indicates the uncertainty regarding the timing and amount of further asset sales, which the company has committed to in order to ensure that it can achieve a debt-to-EBITDA ratio of not greater than 4.75x on a consistent basis.

S&P Global Ratings today took the rating actions listed above.

Sale of partial interest helps to reduce leverage. TC has stated its commitment to funding its capital plan and deleveraging in part through asset sales. Given the ambitious capital plan that TC is pursuing, asset sales are the foundation of it achieving its stated objective of reducing debt to EBITDA to 4.75x or lower. The sale of the Columbia gas assets is a first step toward achieving this goal. Given the anticipated proceeds of approximately C$5.2 billion, we anticipate that debt to EBITDA will be about 5.0x in 2023. In addition, we forecast further asset sales in 2024 and beyond, which will bring credit metrics to approximately 4.7x.

Although historically we have considered financial metrics on a funds from operations (FFO)-to-debt basis, we believe that moving to debt to EBITDA as the basis for measuring leverage better aligns the company with its peer group, which is primarily located in the U.S., and which is evaluated on a debt-to-EBITDA basis. This is particularly the case, given that the company receives almost half of its revenue from its U.S. assets. We believe that TC’s businesses, which have a significant proportion of regulated or contractual arrangements, provide some mitigation with respect to the company’s leverage and are consistent with a ‘BBB+’ rating when leverage is about 4.7x.

The negative outlook reflects our view that there is execution risk in the company’s divesture program, the success of which is required in order for TC to deleverage its balance sheet to about 4.7x in 2024 and 2025.

We could take a negative rating action if adjusted debt to EBITDA remains above 4.75x on a consistent basis. This could result from increased debt to finance large capital projects or debt-funded acquisitions or from cost overruns or delays in projects entering service. This could also result from the company receiving lower proceeds for asset sales than forecast without any mitigations such as lower capital expenditures.

We could revise the outlook to stable if TC adopts a more conservative financial policy that improves credit measures, such that adjusted debt to EBITDA is consistently in the 4.7x-4.75x area or lower.

Affected issues are: TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F, TRP.PR.G, TRP.PR.H and TRP.PR.I.