TC Energy to Spin Off Oil Business in 2024; Dividend Investors Kept Whole

Canadian-based TC Energy has announced plans to split into two separate investment-grade infrastructure companies in a tax-free transaction by the end of 2024.
Source: TC Energy Investor Presentation

Management intends to keep income investors whole, with the combined dividends of each company being at least equal to TC Energy's dividend at the time of closing.

Recognizing this commitment to the payout and the firm's ability to generate stable cash flow from its essential and hard-to-disrupt infrastructure network, we are reaffirming TC Energy's Safe Dividend Safety Score.

The announced spinoff arrives two years after the company initiated a strategic review following a notable setback when plans for the Keystone XL pipeline were derailed by President Biden's decision to revoke the project's permit – signaling an increasingly challenging environment to grow oil-related infrastructure.

TC Energy plans to spin off its oil transportation arm, which includes the high-profile Keystone pipeline (not to be confused with the failed Keystone XL project), used to transport oil from the Canadian oil sands to refiners along the U.S. Gulf Coast, into what is being referred to as the Liquids Pipelines Company.

The Liquids Pipelines Company will operate approximately 3,000 miles of pipelines that carry little volumetric or commodity risk, with almost 90% of comparable earnings tied to favorable long-term contracts, often with minimum volume commitments, and nearly 100% of customers being investment-grade caliber.
Source: TC Energy Investor Presentation

That said, management expects the Liquids Pipelines Company's earnings to grow modestly at a 2% to 3% clip through 2026 as the world attempts to reduce oil consumption.

Despite slower growth, converting the world to alternative energy sources will take time, and the company is likely to remain a cash cow for many years thanks to its critical infrastructure and the still heavy role oil plays in the global economy.

The Liquids Pipelines Company plans to align dividend growth with earnings, targeting around 2% to 3% annually.

Post-spin, TC Energy will be a more natural gas-focused enterprise poised to respond to the escalating demand for dependable and more environmentally conscious energy solutions. 

TC Energy owns one of North America's largest and most diversified natural gas networks, stretching from western Canada to the Gulf of Mexico and the northeastern region of the U.S., in addition to operating several pipelines in Mexico.
Source: TC Energy Investor Presentation

This infrastructure network supports around 30% of all liquified natural gas exported from U.S. terminals and connects some of the lowest-cost production basins to the highest-demand end markets.

Nearly all (96%) post-spin earnings come from deals with regulated utilities (79%) or long-term contracts with other credit-worthy customers (17%).

Following the spin-off, TC Energy intends to grow its dividend by 3% to 5% annually. 

Shareholders will retain their TC Energy stake as part of the transaction and receive a proportional distribution of shares in the newly formed Liquids Pipelines Company.

The deal is pending shareholder approval at the company's next annual meeting in the spring of 2024. Assuming the transaction moves forward, we plan to provide another update as the spin-off gets closer and more details are known about each company's dividends.

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