TC Energy Strengthens Long-Term Growth Outlook with Strategic Alliance
TC Energy and Mexico’s Comisión Federal de Electricidad (CFE) have officially announced a landmark strategic partnership aimed at enhancing energy access for millions in Mexico through the development of crucial energy infrastructure. This alliance is poised to bring significant benefits by ensuring a more reliable and cleaner energy supply across the nation.
The core of this partnership involves consolidating Transportadora de Gas Natural de la Huasteca (TGNH) assets, which include the Tamazunchale, Tula-Villa de Reyes (TVDR), and Tuxpan-Tula (TXTL) pipelines. These assets will now operate under a unified, U.S. dollar-denominated Transportation Service Agreement (TSA) that extends to 2055, providing long-term stability and predictability.
Furthermore, both parties have agreed to discontinue the ongoing international arbitrations concerning the TXTL and TVDR pipelines. Pending a final investment decision (FID), the partnership will also focus on completing the TXTL pipeline, a project of significant importance for Mexico’s energy infrastructure.
A major highlight of this strategic alliance is the joint commitment by TC Energy and Cfe Mexico to develop and construct the TGNH Southeast Gateway Pipeline. This US$4.5 billion offshore natural gas pipeline is a critical project supporting the Mexican government’s objective to deliver essential natural gas to the central and southeast regions of the country. This pipeline will be integrated into the consolidated TGNH System assets, further enhancing its strategic value.
The sanctioning of the Southeast Gateway Pipeline elevates TC Energy’s secured capital program to an industry-leading $33 billion. This project is expected to positively impact TC Energy’s comparable EBITDA growth outlook for 2021-2026 and improve comparable per share metrics, underscoring the financial benefits of this alliance.
CALGARY, Alberta – Aug. 4, 2022 – News Release – TC Energy Corporation (TSX, NYSE: TRP) (TC Energy or the Company), a leading North American energy infrastructure company, and CFE Mexico, Mexico’s state-owned electric utility and a key player in the country’s energy sector, have formalized a strategic alliance. This alliance is designed to expedite the development of natural gas infrastructure, particularly in the central and southeast regions of Mexico, areas experiencing growing energy demand.
Under this agreement, TC Energy and CFE Mexico will consolidate existing TSAs related to TC Energy’s natural gas pipeline assets in central Mexico. These assets, operated by TC Energy’s Mexico-based subsidiary TGNH, will now be governed by a single, U.S. dollar-denominated, take-or-pay contract valid until 2055. This consolidated TSA will also encompass future infrastructure projects developed collaboratively by TC Energy and CFE Mexico.
François Poirier, President and CEO of TC Energy, highlighted the significance of this partnership: “We are honored to be chosen by CFE Mexico as their partner and to establish this strategic public-private partnership, a groundbreaking initiative in CFE Mexico’s 85-year history.” He emphasized the synergistic strengths of both organizations, stating, “This alliance leverages the unique capabilities of TC Energy and CFE Mexico. Together, we will build vital energy infrastructure to serve the expanding central and southeast regions of Mexico. The Southeast Gateway Pipeline, TC Energy’s second offshore natural gas pipeline in Mexico, connecting Veracruz and Tabasco coastal regions, exemplifies our capacity to develop world-class projects that enhance our long-term growth prospects.”
Key Advantages of the CFE Mexico Strategic Alliance
A primary outcome of the strategic alliance is the final investment decision to proceed with the Southeast Gateway Pipeline. This significant project involves constructing a 715-kilometer offshore natural gas pipeline with a capacity of 1.3 billion cubic feet per day. The pipeline is crucial for meeting the increasing demand for secure, dependable, and affordable energy in southeastern Mexico, a region marked by rapid industrial and population growth. The project’s estimated cost of US$4.5 billion is based on a third-party verified Class 3 estimate, with over 70 percent of costs secured at fixed prices, providing financial certainty. The agreements between TC Energy and CFE Mexico include provisions for cost sharing above the initial FID estimates, subject to necessary reviews and approvals.
The execution of the Southeast Gateway Pipeline project will draw upon TC Energy’s successful experience in constructing the 770-kilometer Sur de Texas pipeline, a 2.6 billion cubic feet per day offshore pipeline completed in approximately three years post-FID and commissioned in 2019. The Southeast Gateway Pipeline will commence onshore in Tuxpan, Veracruz, extend offshore, and make landfall at Coatzacoalcos, Veracruz, and Dos Bocas, Tabasco. The project is on track to become operational by mid-2025, rapidly enhancing Mexico’s energy infrastructure.
Furthermore, TC Energy and CFE Mexico have agreed to mutually resolve the suspended international arbitrations related to the TVDR and TXTL pipelines. TC Energy will recover returns on its invested capital in these projects, resolving previous disputes amicably. Both entities will also collaborate to advance and complete the TXTL pipeline, focusing on constructing its central segment, with a final investment decision expected in the fourth quarter of 2022. CFE Mexico will play an active role in securing land access, community engagement, and necessary permits, leveraging its extensive experience in managing linear infrastructure, which includes over 200,000 kilometers of easements. These projects underscore TC Energy’s long-standing commitment to safe, reliable, and robust risk-adjusted growth in Mexico over several decades.
Subject to regulatory clearances from Mexico’s economic competition commission (COFECE) and the Regulatory Energy Commission (CRE), the strategic alliance offers CFE Mexico the opportunity to acquire an equity stake in TGNH. CFE Mexico’s equity participation is contingent upon meeting specific capital contributions and fulfilling responsibilities related to land acquisition, community relations, and permitting for the TVDR, TXTL, and Southeast Gateway Pipeline projects. Regulatory approvals for CFE Mexico’s equity stake in TGNH are anticipated within 24 months.
Upon successful completion of the Southeast Gateway Pipeline and subject to certain conditions, CFE Mexico’s initial equity interest in TGNH will be 15 percent. By the end of the Southeast Gateway Pipeline’s contract term in 2055, and after TC Energy has achieved a full return on its investment, CFE Mexico’s equity share in TGNH will increase to approximately 35 percent. This reflects an equivalent of about 49 percent of the net value of the Southeast Gateway Pipeline and 15 percent of the other TGNH pipelines, demonstrating a long-term alignment of interests.
TC Energy will proactively manage its net economic exposure in Mexico, aiming to maintain it at roughly 10 percent of its total consolidated comparable EBITDA. This will be achieved through country-level debt financing, exploring strategic partnership opportunities within Mexico, and assessing appropriate risk insurance mechanisms. The company plans to secure up to US$2.0 billion in incremental country-level debt financing. Combined with a recently closed term loan credit agreement at its 60 percent owned affiliate, which owns the Sur de Texas pipeline, TC Energy will have raised country-level debt, non-recourse to TC Energy, equivalent to approximately 65 percent of the Southeast Gateway Pipeline project costs. The substantial and predictable cash flow expected from the Southeast Gateway Pipeline once operational is projected to support further debt capacity, enhancing financial flexibility.
Poirier added, “Our core value proposition remains consistent. We continue to identify and develop high-caliber projects that align with our risk preferences and return expectations. TGNH’s stable cash flows are secured by long-term, take-or-pay, U.S. dollar-denominated contracts with a creditworthy counterparty.” He further noted, “We are committed to utilizing the most efficient funding strategies to maintain our financial strength and flexibility while enhancing per share value. The incremental growth from the Southeast Gateway Pipeline project will be judiciously funded through a mix of common equity, hybrid securities, long-term debt, commercial paper, and potential non-core asset sales and strategic partnerships in Mexico. The alliance with CFE Mexico and the sanctioning of the Southeast Gateway Pipeline project provide enhanced visibility into our earnings and cash flow growth, supporting our progress toward our overall leverage targets.”
About TC Energy
TC Energy is a team of over 7,000 energy professionals dedicated to solving North America’s energy challenges. The company focuses on moving, generating, and storing the energy that underpins modern life. TC Energy is actively working towards a more sustainable and secure energy future by innovating to reduce emissions from its operations and by developing new energy solutions, including natural gas, renewables, carbon capture, and hydrogen, to assist other sectors in decarbonizing. TC Energy is committed to investing in the communities where it operates, fostering resilience and building a stronger future in collaboration with local stakeholders.
TC Energy’s shares are traded on the Toronto (TSX) and New York (NYSE) stock exchanges under the symbol TRP. For more information, please visit TCEnergy.com.
FORWARD-LOOKING INFORMATION
This announcement contains forward-looking information and future-oriented financial information intended to provide insights into management’s current expectations and future prospects. Forward-looking statements are based on assumptions and current knowledge, and often include terms like “anticipate,” “expect,” “believe,” “may,” “will,” “should,” “estimate,” or similar expressions.
These statements are not guarantees of future performance and are subject to various risks, uncertainties, and assumptions related to TC Energy’s business, the alliance with CFE Mexico, the TXTL and TVDR pipelines, the Southeast Gateway Pipeline, and broader market conditions. Actual outcomes may differ significantly. Forward-looking information in this release includes statements about: the anticipated impacts and benefits of the TC Energy-CFE Mexico alliance, including effects on earnings, cash flow, leverage, and communities; the Southeast Gateway Pipeline project, including costs, route, capacity, timing, and its expected build multiple and impact on financial metrics; leveraging experience from the Sur de Texas pipeline for the Southeast Gateway Pipeline; risk management in Mexico, including economic exposure and financing strategies; the TXTL and TVDR pipelines, including FID timing; projected EBITDA CAGR; gas import and demand forecasts; CFE Mexico’s equity acquisition in TGNH; and financing plans for the Southeast Gateway Pipeline and broader debt capacity.
Key assumptions underlying these statements include the realization of alliance benefits, successful strategic priority execution, effective capital allocation, asset performance, capacity sales and rates, power generation revenues, production levels, project completion, cost and resource availability, commodity prices, market access, interest and exchange rates, counterparty performance, regulatory and legal outcomes, adaptation to policy changes, realization of asset value, competitive conditions, weather events, cybersecurity, ESG risks, energy transition impacts, economic conditions, and global health crises.
Given the potential for significant variations from forward-looking information, undue reliance should not be placed on these statements. These statements are relevant as of the release date and should be considered in the context of their intended purpose. TC Energy disclaims any obligation to update forward-looking statements unless legally required. For detailed information on assumptions and risks, please refer to TC Energy’s latest Quarterly and Annual Reports available on SEDAR (www.sedar.com) and the U.S. Securities and Exchange Commission (www.sec.gov).
Non-GAAP and Other Financial Measures
This release refers to comparable EBITDA and FGFO, which are non-GAAP measures without standardized definitions under GAAP. These measures may not be comparable to similar metrics used by other entities. Comparable EBITDA is derived from segmented earnings (a GAAP measure) and adjusted for items not reflective of core operations. FGFO represents net cash from operations before working capital changes. Reconciliations and further details on non-GAAP measures are available in TC Energy’s MD&A for relevant periods, accessible on SEDAR. Build multiple is calculated as capital expenditures divided by comparable EBITDA, and may not be directly comparable to measures used by other companies.
[1] Comparable EBITDA is a non-GAAP measure; refer to the Non-GAAP section of this release for more details and reconciliations to Segmented earnings.
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