Company Overview: TC Energy Corporation (NYSE: TRP) is engaged in the storage and transportation of natural gas and crude oil with interconnected pipelines and LNG export terminals across Canada, the US, and Mexico. The company’s power generation business encompasses a portfolio of seven power plants with a capacity of 4,200 MW in the calendar year 2020. These assets are contracted to retail consumers and communities on a long-term basis and carry lesser emission with natural gas and nuclear-fired generation plants. Besides, TRP also operates unregulated natural gas storage in Alberta with a capacity of 118 Bcf.

TRP Details

Diversified Portfolio: TC Energy Corporation operates North America’s largest natural gas pipeline network with 93,300 km of the pipeline supplying more than 27% of the US average daily demand. These pipelines strategically connect the low-cost basins in North America to consumers in the key markets – Canada, the US, and Mexico. Besides, the business is also comprised of regulated and non-regulated natural gas storage with a capacity of 653 Bcf. In the liquid pipeline business, TRP operates 4,900 km transporting 590,000 Bbl/d of crude oil to the Midwest and Gulf Coast of the US. The company’s Bruce Power generates ~30% of Ontario’s power. TRP had a 48.4% ownership stake in Bruce Power with a contracted capacity of 3,109 MW (out of a total of 6,400 MW) with power sales fully contracted to Ontario IESO through 2064.

Figure 1. Overview of Pipelines and Power Generation Assets:

Source: Company reports

Capital Programs: TRP has set-out a capital program consisting of ~CAD 37 billion of secured projects which include commercially supported and committed projects. In addition, there were CAD 11 billion projects under development. During nine months ending September 2020, the company placed about CAD 3.1 billion of growth projects into service. A sizeable portion of such capital programs was targeted for Canadian Natural Gas Pipeline and Liquids Pipeline business.

Figure 2. Capital Program of CAD 37 Billion with Projects Through 2023:

Source: Company reports

TRP is on-track to bring CAD 5 billion of projects into service in 2020. The company is keen on generating stable cash flows through regulated and long-term contracts by investing in low-cost gas basins for natural gas supply. TRP is currently pursuing expansion at NOVA Gas Transmission Ltd. which will provide ~1.5Bcf/d of incremental capacity underpinned by long-term receipts and deliveries.

For the Liquids Pipeline business, TRP commenced construction of the Keystone XL Pipeline Project which is expected to be placed into service by 2023 with an additional cost of US $8.0 billion. The pipeline is underpinned by 20-year contracts for 575,000 bpd that are expected to bring incremental EBITDA of ~US $1.3 billion per annum.

The company is pursuing a life extension program at its Bruce Power generation plant – is one of the largest private-sector infrastructure projects in Canada. TRP commenced component replacement for unit 6 in January 2020. It is expecting CAD 2.4 billion for 2020 through 2023 and CAD 5.8 billion for the remaining life of the plant through 2055. TRP may get it partly compensated through regular tariff revision.

Figure 3. At Current Revised Tariff of ~CAD 79/MWh, TRP Gets the Investments Recovered Partly:

Source: Company reports

Historical Financial Trend:

The company’s diversified energy infrastructure assets provide resilient revenues. Predictable and reliable cash flow streams from long-term and regulated contracts. The company’s portfolio represents a low-risk business model. Its natural gas business provided strong support to EBITDA generation historically driven by declining production costs. TRP has access to natural gas resources base that last beyond 100 years through increased investment in supply-chain and dominant access to Western Canadian Sedimentary Basin. The company divested conventional power generation assets replacing natural gas and nuclear-firing plants. This had steadily improved the EBITDA of the Power and Storage business. Low-risk business model and long-term customer contracts supplemented cash flow generation.

Figure 4. Three-Year Financial Trend of TC Energy Corporation:

Source: Company reports

Increased contribution from Columbia Gas and Columbia Gulf growth projects which were placed into service during FY19 lifted the earnings. Its Keystone Pipeline System reported higher volumes partly offsetting the sale of Northern Courier assets in July 2019. Realization from tariff hikes at Bruce Power elevated earnings of power and storage business. Depreciation increased as new projects were placed into services. Profitability was supported by the sale of matured assets for CAD 3.4 billion.

Figure 5. FY19 Key Financial Highlights:

Source: Company reports

Q3 FY20 Updates:

The pandemic had minimal impact on the company’s profitability as earnings are based on fixed-price contracts and rate-regulated assets. Comparable EBITDA slightly declined to CAD 7,028 million for nine months ending September 2020 over pcp. This was due to lower uncontracted volumes on the Keystone Pipeline System and lower earnings at Bruce Power due to planned maintenance activity and sale of Ontario natural gas-fired power plants in April 2020. The natural gas pipeline business showed traction as many projects were brought into services such as Sur de Texas pipeline, among others. Flow-through treatment of certain expenses on Canadian-rate regulated pipelines also impacted comparable EBITDA.

Despite the pandemic, TC Energy Corporation strengthened liquidity in excess of CAD 11 billion through the issuance of notes. The company was able to enhance the funding limit to ~CAD 13 billion committed credit facilities available as of September 2020. Its Keystone XL project equity contribution of US $1.1 billion from the Government of Alberta. On the capex front, TRP is expecting capex spend of CAD 6.7 billion towards Liquids Pipeline in FY21 and CAD 2.4 billion for Canadian Natural Gas Pipeline. It is expecting CAD 28 billion to be invested over the next three years.

Figure 6. Performance for Nine Months Ending September 2020:

Source: Company reports

TRP has been consistent in the dividend distribution. Dividends were paid at an average annual return of 12% since 2000. Dividends are projected to grow 8-10% in 2021 and 5-7% thereafter. The Board declared quarterly dividends of CAD 0.81 per share for the quarter ending December 2020, equating to CAD 3.24 per share on an annualized basis.

Figure 7. Dividends to Grow 8-10% in 2021:

Source: Company reports

Top 10 Shareholders: The top 10 shareholders together form ~27.87% of the total shareholding. RBC Wealth Management, International and Capital Research Global Investors are holding a maximum stake in the company at 3.72% each.

Figure 8. Top 10 Shareholders

Key Metrics: TRP exhibited low-risk business and stable earnings through fixed-price and rate-regulated long-term contracts which are reflected in consistent ROE generation. The healthy project pipeline and supply contracts for natural gas pipeline serve as a cornerstone for growth. Tariff hikes to pass-through incremental costs support power and storage business.   

Figure 9. Key Financial Metrics

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: TRP is expecting funds sourced from varied sources totalling CAD 10 billion along with incremental credit lines of US $2.0 billion will fully meet the capital program for FY20. The company is exploring opportunities for mass-producing hydrogen using nuclear technology. It had forged a partnership with Saugeen Ojibway Nation to jointly market isotopes. TC Energy Corporation identified 75MW Canyon Creek for pumped hydro energy storage and a 1,000 MW project in Ontario with a total investment of CAD 3.5 billion. Its Power and Storage is expected to deliver EBITDA growth of 6% on an annualized basis from 2017-2024. This is despite the fact that Bruce Power unit 6 will be offline from 2020-2023. TRP is expecting group-wide comparable EBITDA to reach CAD 9.3 billion in FY20 driven by take-or-pay contracts. Capex for 2021 is projected at CAD 13.8 billion with substantial capex towards the Keystone XL project.

Key Risks: TRP is exposed to counterparty risk for contract billing. Its capital programs are future revenue generation streams that are dependent on fundraising ability and capital market conditions (such as interest rate, etc). Regulatory intervention on electricity tariffs may affect realization. The company hedges dollar-denominated debt and associated interest expenses. Any material diversion in exchange rates may erode earnings. The company is exposed to geopolitical risk. In the recent development, the new US president revoked the permit of the company’s Keystone XL pipeline. The line was already in construction in Canada. This may hamper the capital programs and revenue projections. But the management is optimistic that TRG has ~CAD 25 billion pipeline projects (without Keystone XL) to support growth plans and dividend distribution. The company will cease capitalizing costs and will evaluate the carrying value of its investments in the project. This may affect Q1 FY21 earnings.  

Valuation Methodology: Enterprise Value to EBITDA Multiple Based Relative Valuation (Illustrative)

Enterprise Value to EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: TRP has delivered 3-month and 6-month returns of ~+3.51% and ~-9.80%, respectively. The stock is trading below the average of the 52-week high price of $57.92 and 52-week low price of $32.37. On the technical front, the stock has a support level of ~US$42.638 and a resistance level of ~US$45.266. We have valued the stock using EV to EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a slight discount as compared to its peer median EV/EBITDA (NTM Trading multiple) considering the recent development on cessation of the permit for its flagship Keystone XL project. The company was earlier expecting the project to add ~US $1.3 billion EBITDA per annum. The revocation of the permit may impact the Q1 FY21 results. For purpose of relative valuation, we have taken peers like Hess Corp (NYSE: HES), Helmerich & Payne, Inc. (NYSE: HP), ONEOK Inc. (NYSE: OKE), to name a few. Considering the stable cash flow generation and consistent ROE, strong pipeline projects, adequate liquidity, and funding flexibility, we give a “Buy” recommendation on the stock at the current market price of US$44.55, up 0.04% on February 16, 2021.

TRP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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