TC Energy Earnings: Midwest Capacity Approved; Canadian Growth Likely

Key Morningstar Metrics for TC Energy

• Fair Value Estimate
  : C$80.00
• Morningstar Rating
  : ★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Medium

What We Thought of TC Energy’s Earnings

TC Energy TCE reported EBITDA at the high end of PitchBook consensus, C$3.09 billion versus C$3.04. The committed backlog increased by C$2.1 billion to C$23.2 billion, driven by sanctioning of the Appalachian Supply project. The uncommitted backlog declined by the same amount.

Why it matters: Management continues to commercialize projects, as demand for gas accelerates. While the late-stage backlog shrinking seems bad, it represents a quarter of the backlog with the opportunity for further incremental expansions along a high-demand growth corridor.

• Management may be loosening its C$6 billion-C$7 billion annual capital expenditure target as the decade progresses. The uncommitted backlog is becoming concentrated in 2030, as gas demand grows. Competitors could take on projects that would otherwise have been approved.
• The long-term 4.75 times debt/EBITDA midpoint target remains intact. By 2030, we expect additional financial capacity to power increased spending without endangering the target.

The bottom line: We are raising our fair value estimate to C$80 per share, largely due to our new cost-of-capital methodology. Our assumed WACC was lowered to 5.8% from 6.2%.

• We now see shares trading narrowly in two-star territory.
• Our narrow moat, Standard Capital Allocation, and Medium Uncertainty Ratings are unchanged.

Coming up: We expect further movement on Coastal Gaslink Phase 2. Agreements between the pipeline operating company and LNG Canada were firmed up in March for the expansion.

• On the upstream side, Shell, the largest owner and offtaker from LNG Canada Phase 1, plans to acquire Arc Resources. Some of the acquired assets are already supplying LNG Canada, and can be scaled up to meet the additional offtake obligations.
• Together, these moves indicate that an investment decision for Phase 2 of LNG Canada is coming, which requires the pipeline expansion.