Varcoe: TC Energy makes another bold move, but can it win over a skeptical market?

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First came the $5.2-billion sale of a big stake in its U.S. natural gas pipeline business.

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Then came blockbuster news that TC Energy was spinning off its oil pipelines — including the Keystone system — into a new publicly listed company.

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“Well, it’s been a busy week,” TC chief executive Francois Poirier declared Friday to open the company’s second-quarter earnings call.

“Separating into two businesses, with separate mind and management, each with a strong balance sheet and their own currency, will allow us to pursue more growth for the benefit of our shareholders than we could today.”

TC, which has been grappling with a stagnant share price and aiming to lower its debt — announcing plans last year to sell off $5 billion of assets — made good on that pledge this week, and then went one step further.

On Monday, it announced the sale to Global Infrastructure Partners of a 40 per cent stake in its Columbia Gas and Columbia Gulf Transmissions systems for $5.2 billion. It purchased Houston-based Columbia Pipeline Group for US$13 billion — including $2.8 billion debt — in 2016 under former CEO Russ Girling.

Late Thursday, TC Energy revealed that its liquids pipeline assets will be spun off into a new company, to be led by executive vice-president Bevin Wirzba, and headquartered in Calgary.

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(TC Energy had more than 7,400 employees at the end of last year, including 2,859 in Calgary; it’s not yet known how many will shift to the new enterprise.)

Investors in TC Energy will receive shares in the new entity. A shareholder vote is expected in mid-2024, with the spinoff finalized in the second half of next year.

Once complete, TC Energy will continue operating its mammoth natural gas infrastructure network in North America — including the Nova Gas Transmission Line (NGTL) in Western Canada, the under-construction Coastal GasLink pipeline and Columbia — along with its power unit and energy solutions business.

TC will continue to be led by Poirier, who took over from Girling in 2021.

The liquids company, yet to be formally named, will hold 4,900 kilometres of oil pipelines, including the Keystone and Marketlink network, as well as the Grand Rapids and White Spruce pipelines in Alberta.

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The new company will have about $8 billion of senior and subordinated debt, with proceeds used to repay debt at TC Energy.

But will TC’s move win the hearts and minds of investors?

(A similar move was made when Encana Corp., as it was then known, decided in 2008 to spin off the company’s oil business into Cenovus Energy.)

In TC’s case, it has been grappling with the construction of the Coastal GasLink pipeline, which is well over its original budget. In February, it said costs had risen to $14.5 billion — construction is now 91 per cent done and it’s slated to be mechanically completed by year’s end.

TC Energy was also caught up in the noise surrounding the Keystone XL expansion, which dragged on for years. It was ultimately nixed by the Biden administration in the U.S., even after construction had started.

On Friday, TC Energy’s share price dropped $2.05 to close at $45.25 on the Toronto Stock Exchange, and has fallen by a third in the past 12 months.

“Nobody expected it and it is financial engineering at its worst because we can’t see the benefit,” said Laura Lau, chief investment officer with Brompton Group, which has previously owned TC shares.

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“If they’re trying to get a higher valuation, I’m not convinced they’re going to get it.”

Others embraced the rationale, pointing to the slower future growth expected for liquids pipelines compared with TC Energy’s gas and power business — including areas such as pumped hydro and nuclear — along with the different ESG profiles between oil and gas/power infrastructure.

“They want to really highlight the more attractive growth prospects, versus being weighed down by the oil business . . . and this will help them lower their leverage at TC Energy,” Morningstar analyst Stephen Ellis said in an interview.

“Being able to separate those two, I think it’s a plus.”

The TC Energy building
The afternoon sun shines through the sculpture “Weaving Fence and Horn” outside the TC Energy building in downtown Calgary on Jan. 9. Gavin Young/Postmedia

The new spinoff entity had EBITDA (earnings before interest, taxes, depreciation and amortization) last year of $1.4 billion, compared with $8.5 billion in the gas/power business.

“Is that transformational? Maybe not the word I would pick,” Ellis added. “Is it an attractive, incremental improvement to the business that I think is thoughtful, about trying to create some shareholder value? Yes”

TC Energy, formerly known as TransCanada, has been no stranger to making bold moves, such as the acquisition of Columbia, its blockbuster merger with Nova Corp. in 1998, its attempt to build Keystone XL or Energy East, which was cancelled in October 2017.

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Former TransCanada CEO Hal Kvisle, who ran the company when it first built the Keystone Pipeline, said it made sense for the company to develop an oil pipeline platform two decades ago, later underscored by submitting its applications for Keystone XL.

“But I can’t blame my successors for rethinking all that, given the challenges that they faced in trying to get Keystone XL approved . . . so I can see that maybe the oil pipeline growth story is not quite as appealing,” said Kvisle, who retired in 2010.

“I know they’re getting beat up a little bit in the market right now. But I still think it’s a hell of an enterprise and I’m not selling my shares.”

But TC Energy has some work to do to win over the market.

In a note, analyst Ben Pham of BMO Capital Market said Friday that he previously expected TC’s valuation to rise on asset sales, by paying down debt and the easing of concerns surrounding Coastal GasLink.

“Now, we believe share performance will be driven by perceived value of the two separate entities, and while (natural) Gas/Power could trade at a healthy valuation, we are doubtful Liquids will,” he wrote.

“As such, we are not yet convinced the separation will add value. Instead, we believe it will detract for now.”

As Poirier stressed on his call, both businesses have huge growth potential in the future as energy consumption increases.

Now, he has to prove it.

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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