Back in August of 2023, we wrote about how TC Energy Corporation (TRP) had announced the board’s approval of plans to spin-off the company’s Liquid Pipelines Business under the name South Bow. This was a major announcement given TRP’s substantial position in the North American energy industry, with a market capitalization of $56.41 billion. The news was the result of the company’s prior two-year long strategic review, and the transaction was expected to close in the second half of 2024.

Fast forwarding to today, on June 4^th, 2024, TRP announced that shareholders have given the greenlight on the spinoff. Shareholders even further voted to advance the timing of the spinoff, which is now expected to close in late Q3 or early Q4 of this year, and we wanted to update investors on the details.

Value Proposition

Looking at TRP’s business pre-split, the company operates through five segments: Canadian Natural Gas Pipelines; U.S. Natural Gas Pipelines; Mexico Natural Gas Pipelines; Liquids Pipelines; and Power and Energy Solutions. For the most recent quarter, the revenue and earnings breakdown between these segments was:

Source: TC Energy Q1 Quarterly Report

Natural gas pipelines are evidently TRP’s largest source of revenue and earnings. Liquid pipelines would be the next largest source, which is part of the reason this split is so significant.

TRP outlined the value proposition of each stand-alone entity as further outlined. TC Energy will be focused on the natural gas and energy solutions side of the business. This is the more established side of the company, given the large portfolio of natural gas infrastructure which is ‘utility like.’ The energy solutions component of TC Energy will focus on nuclear, pumped hydro energy storage and new energy opportunities. TC Energy is responsible for supplying approximately 30% of the natural gas demand in North America. Company forecasts project a 3%-5% sustainable dividend growth rate and a targeted EBITDA CAGR of ~6% from 2023-2026.

South Bow is going to be an oil infrastructure company focussed on liquids transportation and storage. Being a stand-alone entity will give South Bow more capital flexibility to pursue growth initiatives. This particularly relates to the pipeline infrastructure connecting WCSB crude oil to the U.S. Midwest and Gulf Coast. South Bow’s forecast for long-term comparable EBITDA growth is 2% to 3%.

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 Split Details

Current TRP shareholders will receive, in exchange for each TRP share they hold, one new TC Energy share and 0.2 of a South Bow common share. TRP is well-known for paying a high yield currently at around 7%. Under the split agreements, the dividend is expected to be divided approximately 86% to TC Energy shareholders and 14% to South Bow shareholders. Making this split as tax efficient as possible was of utmost importance for TRP’s management team, and it will be tax-free for resident shareholders outside of special circumstances.

Our Thoughts

Speaking generally, spin-offs do a good job at creating shareholder value for the parent company or the new entity. In this case, we think South Bow will stand to benefit by being able to finance growth initiatives separately from TC Energy. There are also benefits for TC Energy, as the balance sheet will likely be under less pressure with South Bow’s growth being funded independently. While both entities have ‘low risk’ profiles as identified by the company and the nature of the business, we see TC Energy as the more conservative option and South Bow with more growth upside. There is still time until the split is complete, but we feel it could be attractive for current TRP shareholders.

Take Care,