Investors await TC Energy spinoff

In the next few months, investors will be watching TC Energy Corp. (TSX:TRP) as it splits into two public companies, one holding its pipeline assets and the other its natural gas and nuclear power plant assets.

Spinoffs are often good for investors because the businesses are well developed, with a track record that includes many market cycles, both good and bad.

They have experienced management teams that can be more agile once they’re out from under the bigger umbrella. They also come with longstanding marketing and distribution networks. The parent often retains a stake which is another incentive for them to set the spinoff up for success.

Here’s an update:

TC Energy Inc. (TSX, NYSE: TRP) Recent price $49.73

Background: TC Energy is one of North America’s largest pipeline companies with a network that extends more than 68,000 km. It is one of the continent’s largest providers of gas storage and related services with 368 billion cubic feet of storage capacity. It has interests in 10 power generation facilities with combined capacity of approximately 6,000 megawatts.

Performance: The shares hit a low of $43.70 in October as rising interest rates and cost overruns at its Coastal GasLink project in B.C. worried investors. Since then, they have gradually moved higher. They are down 3.9% year-to-date and up 13% from their low.

TC Energy reported a $1.46 billion profit for its fourth quarter, or $1.41 per share, compared with a loss of $1.45 billion or -$1.42 per share in the same 2022 period. The loss was due to a one-time charge related to the Coastal GasLink project.

The corporate split is expected in the second half of this year. TC Energy will focus on natural gas power plants and other infrastructure, including nuclear power. The pipeline business will be called South Bow Corp. and will focus on the company’s 4,900 kilometres of crude oil pipelines. This includes the Keystone pipeline system, which moves oil from Alberta to refining markets in the US Midwest and Gulf Coast.

RBC analysts Robert Kwan and Maurice Chan said in a recent research report they expect TC Energy to outperform its peers. They note that TC Energy’s price/earnings ratio is at a 15-year low, which leaves room for share appreciation. Post spinoff, they see it as an attractive vehicle for many investors. They have a price target of $59.

Dividend: TC Energy will raise its dividend by 3.2% to $0.96 quarterly with the April 30 payment. Post spinoff, the combined dividends of the two companies will be equivalent to TC Energy’s annual dividend prior to the split. Over time, the combined value of the two dividends is expected to remain consistent. 

Share distribution plan: TC Energy shareholders will receive a pro-rata allocation of shares in South Bow in a tax-free distribution. The exact amount will be determined prior to closing.
The company says a circular will be filed soon, a shareholder vote on the split will happen by mid-year, and a spin off sometime in the second half.