Analyst Note
| Stephen Ellis |TC Energy has announced a wide-ranging and attractive partnership with Mexico’s state-owned utility, Comision Federal de Electricidad. The agreement resolves existing arbitration relating to multiple Mexican projects with the creation of a 30-year service agreement for all Mexican assets stretching out to 2055. It also introduces a new $4.5 billion pipeline at a very attractive multiple that will be included in the new service agreement and encourages CFE to work to address regulatory and community stakeholder issues by providing it with an equity stake in the partnership’s assets. To fund the pipeline, TC Energy is issuing CAD 1.8 billion of shares at CAD 63.50 each, though with an allotment option, the issuance could be up to CAD 2 billion. We think the benefits (long-term contracts and attractive investment multiples) more than outweigh the minimal dilution compared with our CAD 68 fair value estimate, which we expect to leave unchanged. Our narrow moat rating is also unchanged.