In late July 2023, TC Energy made a significant announcement regarding its plans to enhance its corporate structure by separating its Liquids business. This strategic move aims to establish two distinct, independent, publicly listed companies concentrating on energy transition and energy security. Let's delve into the details of this spin-off and its implications:

Up until this point, TC Energy (TSX: TRP) has been a prominent energy infrastructure firm operating across North America. The company has been organized into five key segments: Canadian Natural Gas Pipelines, US Natural Gas Pipelines, Mexico Natural Gas Pipelines, Liquids Pipelines, and Power and Energy Solutions. Among its assets are an extensive network spanning 93,700 kilometers of natural gas pipelines, which transport gas from source areas to various destinations including local distribution firms, power plants, LNG export terminals, and other locations. TC Energy also boasts substantial natural gas storage facilities with a capacity exceeding 500 billion cubic feet. Additionally, the company possesses nearly 5,000 kilometers of liquids pipeline systems that link Alberta's crude oil pipelines to refining markets in states like Illinois, Oklahoma, and Texas. The company's portfolio further includes seven power generation facilities.

Recent developments involve TC Energy's decision to spin off its liquids pipelines business from its natural gas and low-carbon operations, effectively bifurcating the company into two distinct entities:

1. One company will exclusively handle the liquids pipelines business.
2. The other entity will manage natural gas and power assets.

This announcement follows closely after TC Energy's sale of a 40% stake in its two US natural gas pipeline networks for $5.2 billion. This divestiture aligns with the company's efforts to expedite its debt reduction objectives.

The company anticipates completing this corporate restructuring in the latter half of 2024. To provide context, in the second quarter of 2023, TC Energy's EBITDA from its liquids pipeline business amounted to $286 million, constituting 12% of the company's total EBITDA. During the same period, the gas pipelines, power, and storage business reported an EBITDA of $2.1 billion.

The newly established liquids pipelines company will prioritize enhancing capacity within portions of TC Energy's existing transport system and expanding connectivity to additional LNG terminals. In contrast, following the split, TC Energy will narrow its focus on natural gas infrastructure and explore new opportunities in the power and energy sector, including ventures like nuclear and pumped hydro storage.

Given these recent developments, investors are likely to require some time to absorb this succession of news. The company expects the transaction to have no tax implications, and the combined initial dividends of the two separate companies will be equivalent to TC Energy's annual dividend just before the transaction's completion. TC Energy is expected to grow EBITDA at 7% annually and grow the dividend by 3% to 5% annually. Similarly, the liquids business is expected to grow at 2% to 3% annually and have a similar dividend growth rate.

This announcement arrives at a time when TC Energy's stock is experiencing pressure due to the company's elevated debt levels and ongoing asset sales. Following the cancellation of the Keystone XL pipeline project in 2021, TC Energy encountered substantial cost overruns, straining its financial standing. The company saw credit downgrades and the shares have been under pressure for over a year.

All the best!

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.