TC Energy’s Fourth Quarter Is Challenging as Expected; Looking Forward to Cleaner 2023

As expected, TC Energy’s fourth quarter was challenging, but we think it heralds a bit of a reset as it enters what should be a much more promising 2023. We expect a bit of a return to normalcy, with adjusted EBITDA expected to increase to CAD 10.6 billion from CAD 9.9 billion in 2022 and the dividend to increase 4%, mainly driven by growth from the Mexican and Canadian natural gas units. TC Energy also remains exposed to U.S. LNG, with its market share of U.S. feedgas increasing to 30% from 25% and on track to reach 35% by 2025. We expect to maintain our TC Energy fair value estimate of CAD 63/USD 47 and narrow moat rating.

The Coastal GasLink project is perhaps even ahead of pace to meet its end-of-2023 target for mechanical completion, preventing further overrun costs of up to CAD 1.2 billion. Despite the progress, the incremental several billion dollars in earlier costs meant the firm had to take a CAD 2.6 billion after-tax impairment charge for the quarter.

TC Energy also reported a first look at its Keystone pipeline spill (the Milepost 14 incident) from December 2022. The firm has recovered 90% of the 12,937 barrels spilled. The pipeline is currently operating at lower pressures until regulators are satisfied it can return to full operation. TC Energy has accrued an expected liability of CAD 650 million in environmental liabilities as an initial estimate but also an asset of CAD 650 million in insurance recoveries, essentially zeroing out the expected liabilities. Costs will likely increase from this initial estimate. Still, insurance should be able to cover virtually all costs, with the exception of potential fines, in our view, keeping the impact to TC Energy shareholders to a minimum. The initial analysis of the root cause of the incident points to a weld flaw and bending stress, and TC Energy considers it a localized issue, though it is still analyzing the entire pipeline system for similar conditions.