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.

This entry was posted on Thursday, July 27th, 2023 at 8:13 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.