TC Energy

TC Energy posted adjusted EBITDA of CAD 2.95 billion versus PitchBook consensus of CAD 2.84 billion. Strong performance in the US gas pipelines and power and energy segments drove the outperformance. Management also revised its long-term outlook for gas demand upward.

Why it matters: The CAD 20 billion "origination" pipeline, up CAD 5 billion from the last report, is primarily driven by interest in US and Canadian natural gas projects tied to power generation. The timeline for new gas turbines extends into the early 2030s, pushing the projects' realizability into 2030. US projects remain competitive from a return perspective and are plentiful, with two-thirds of the pipeline. The remaining one-third is Canada, which is less attractive and lower risk, but as the critical regional provider, TC will need to invest as gas remains a critical bottleneck for the basin. Ottawa has begun to throw its weight behind new oil pipelines, which will boost production of both oil and gas. So far, the federal government has stopped short of directly backing gas pipelines, but it could incentivize firms like TC to undertake capital projects. If so, we would further boost our growth assumptions.

The bottom line: We are slightly raising our per share fair value estimate to CAD 81 and lowering it to $58 after refreshing our model. Incorporating portions of the uncommitted backlog into our long-term forecast boosted our fair value, but weakening exchange rates resulted in a lower USD fair value. Shares look overvalued, trading well into 2-star territory. Our narrow moat rating, Medium Uncertainty Rating, and Standard Capital Allocation Rating remain unchanged.

We are lowering our fair value estimate to USD 58 per share from USD 59 after refreshing our model and incorporating stronger growth for the US and Canadian gas pipeline segments. Despite our CAD fair value increasing, our USD fair value declined as a result of a weaker exchange rate.

After updating our model, we increased our forecast 2028 EBITDA to CAD 13.1 billion, which is at the higher end of management's CAD 12.6 billion to CAD 13.1 billion guidance. Our US dollar fair value estimate relies on a 1.40 CAD/USD conversion of our Canadian dollar fair value estimate.

As a natural gas transmission operator, the firm’s performance is substantially divorced from volumes moved on the system. Returns in Canada are based on a cost-of-service return on assets, while the US and Mexico generate returns under long-term firm capacity agreements. In effect, this means that growth is the result of putting new projects into service and incremental rate increases, generally linked partially to an inflation index.

Our forecast sees dividends growing 3% per year with enough left over to fund the capital plan and retire or roll over debt as capital spending declines.

TC Energy earns a narrow Morningstar Economic Moat Rating via efficient scale due to the strength of its assets and contracts. Historically, the firm has generated a slight excess return on invested capital, and we are confident in its ability to do so going forward. TC is principally involved in natural gas transmission, which is insulated from movements in commodity prices as revenue is generated by regulated take-or-pay and cost-of-service fees. In 2025, 98% of EBITDA was generated by regulated assets or take-or-pay contracts.

Canadian natural gas pipelines earn a narrow moat.

The Canadian natural gas pipelines segment earns a narrow moat due to its efficient scale. It is predominantly composed of the NGTL and Canadian Mainline systems. The NGTL system is a sprawling regional network, gathering and moving natural gas in Alberta and British Columbia to in-basin hubs and long-haul pipelines, including the Mainline. It is essentially the foundational infrastructure for the Canadian natural gas sector. Canadian Mainline takes gas from Alberta and transports it east to population centers in Ontario and Quebec. It also delivers gas to the border with the US for further transmission to the US pipeline system.

Canadian natural gas pipelines differ in one key respect from the other segments; they are rate-regulated and can only generate 10.1% returns on equity with an assumed 40% equity structure from base rates. If the rate deviates from the target, tolls are reset to ensure the target is realized. These rates have been responsive, with neither the NGTL nor Mainline systems dipping substantially below this target.

US natural gas pipelines earn a narrow moat.

US operations are a much closer call but still deserve a narrow moat. Returns are narrowly under cost of capital when including goodwill but substantially and consistently higher when excluding it. Since 2016, the firm has focused on organic growth, which offers greater returns. The wide footprint makes mergers and acquisitions less attractive, giving us more certainty in the moat evaluation.

The footprint is so extensive that it either connects or passes close to basins holding an estimated 55% of remaining US natural gas resources. The sprawling, interconnected pipeline network for both supply and demand enhances the segment’s moat value. Other assets are also offshoots of the interconnected US-Canada network, with only a few small and isolated assets.

Revenue comes from regulated take-or-pay contracts. These contracts are long term, generally 20 years initially, allowing for a longer repayment period and certainty of cash flows. Beyond the contract, this relationship is also exceptionally sticky. An incumbent can more easily compete for both existing and incremental business.

Mexican natural gas pipelines earn a narrow moat.

Mexico’s operations earn a narrow moat through its unique and advantageous relationship with the government. The Mexican government has made a strategic decision to pivot from oil and diesel to using natural gas for power generation. In pursuit of this objective, the state-owned utility entered into a strategic relationship with TC Energy to boost infrastructure importing natural gas from Texas. As part of the partnership, the state utility agrees to support TC’s expansions regulatorily and help secure land and permits. Pipelines import gas from Texas to coastal population centers and connect the coast to the interior.

Returns for the segment have outpaced the US and Canada, in part due to the advantageous structure. Contracts are similar in structure to those in the US, with terms being take-or-pay on a 25- and 30-year term, and denominated in US dollars, insulating earnings from movements in the peso.

Going forward, the Mexico segment is a ripe target for asset recycling to fund development in Canada and the US. Management wants to keep the segment small and has been actively marketing the assets.

Power and Energy Solutions earns a wide moat.

Bruce Power, a nuclear power plant, underpins the moat evaluation. It supplies 30% of Ontario’s power and is currently undergoing a major modernization renovation. Until it is complete in 2033, returns for the segment will be suppressed as any two of the eight reactors will be offline. Once complete, returns improve as the operator will be fully earning increased rates through the life of the contract to 2064. With 30-year terms, we can have high confidence in a wide over a narrow moat.

Other assets include natural gas power generation facilities across Canada, various wind and solar projects that sell power under long term purchase agreements, and natural gas storage facilities connected to the NGTL system in Alberta.

Natural gas demand is poised to grow through the next decade, and TC Energy is almost fully exposed to that growth.

Performance is secured by long-term contracts and regulated activity.

The dividend can durably grow 3% per year through the next decade.

The market has become exuberant about natural gas, pushing up valuations of related companies.

Leverage is high and has no clear path to decline with the current capital plan. Disruptions in the market’s willingness to extend credit or refinance debt could cause severe issues.

Rising interest rates could affect the firm’s value as yield-focused investors look elsewhere.