TC ENERGY CORP: Annual Review and Strategic Outlook (Year Ended December 31, 2023)

TC Energy Corp. underwent a significant transformation in 2023, reshaping its future focus. This annual review summarizes the company's performance and strategic direction for the year ended December 31, 2023, offering key insights for investors. All financial figures are in Canadian dollars (C$) unless otherwise noted.

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Business Overview

Strategic Transformation: A Focused Future On October 1, 2024, TC Energy successfully spun off its Liquids Pipelines business into a new, independent entity, South Bow Corporation. This pivotal strategic move significantly reshapes TC Energy, allowing the company to focus exclusively on its core strengths: Natural Gas Pipelines and Power and Energy Solutions. Shareholders of TC Energy received shares in South Bow before this date. The spin-off aims to enhance capital allocation efficiency, provide a clearer investment thesis for both companies, and reallocated debt and assets.

Core Business Segments TC Energy now operates primarily through two segments:

• Natural Gas Pipelines: This segment forms the backbone of the company's operations, providing essential energy infrastructure through a vast network transporting natural gas across Canada, the U.S., and Mexico. Key assets include the NGTL System in Canada, major interstate pipelines in the U.S., and critical infrastructure in Mexico.
• Power and Energy Solutions: This segment focuses on power generation, energy storage, and other energy-related services, including renewable energy initiatives, diversifying the company's energy portfolio. It includes natural gas-fired power plants, wind, solar, and energy storage projects.

Canadian Natural Gas Pipelines: Growth and Stability TC Energy significantly invested in and expanded its NGTL System, an extensive natural gas gathering and transportation network in Canada.

• Recent Expansion Projects:
  • 2021 NGTL System Expansion Program: Completed in 2024, this program added 344 km (214 miles) of pipeline and 1.45 Bcf/d of capacity at a cost of C$3.6 billion.
  • 2022 NGTL System Expansion Program: Completed in 2023, it added 166 km (103 miles) of pipeline and 722 MMcf/d of capacity for C$1.4 billion.
  • 2023 NGTL System Intra-Basin Expansion: Completed in 2024, this expansion added 23 km (14 miles) of pipeline and 238 MMcf/d of capacity for C$0.5 billion.
  • NGTL System/Foothills West Path Delivery Program: Completed in 2023, this project added 107 km (66 miles) of pipeline to facilitate gas exports, backed by contracts exceeding 30 years. The project cost C$1.6 billion.
  • Valhalla North Project: TC Energy expects to bring a 33 km (21 miles) pipeline, part of the larger Valhalla North and Berland River Project, into service in the third quarter of 2025, with an estimated cost of C$0.2 billion. The company anticipates completing the Berland River section in the second half of 2026, costing an estimated C$0.3 billion.

Coastal GasLink Pipeline: Operational Milestone Achieved The Coastal GasLink pipeline, where TC Energy holds a 35% ownership stake, reached a significant operational milestone in 2023: mechanical completion and readiness to deliver gas. This 671 km (417 miles) pipeline is now operational, despite substantial cost overruns that saw its estimated total cost balloon to C$14.5 billion. Factors like the pandemic, labor shortages, and weather contributed to these increases. TC Energy recorded pre-tax impairment charges totaling C$5.1 billion between December 2022 and September 2023 related to these cost increases. The company has not recorded further impairment charges since September 2023. Mechanical completion also triggered a C$200 million incentive payment, which TC Energy recognized as revenue.

Other Key Business Areas: U.S., Mexico, and Power While this summary highlights major Canadian developments, TC Energy's U.S. Natural Gas Pipelines, Mexico Natural Gas Pipelines, and Power and Energy Solutions segments remain integral to its diversified asset base. The U.S. segment includes major interstate pipelines, and the Mexico segment provides critical energy infrastructure to growing markets. The Power and Energy Solutions segment encompasses natural gas-fired power generation, wind, solar, and energy storage projects.

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Risk Factors TC Energy's operations face various risks and uncertainties inherent in the energy infrastructure industry. Key risks include:

• Regulatory and Political Risk: Changes in environmental regulations, pipeline safety standards, energy policies, and trade agreements across Canada, the U.S., and Mexico could impact operations, project approvals, and profitability.
• Operational and Project Execution Risk: The company faces risks associated with constructing, maintaining, and operating large-scale infrastructure projects. These include cost overruns (as seen with Coastal GasLink), schedule delays, and unforeseen technical challenges. Operational incidents like pipeline ruptures or equipment failures could lead to significant costs, liabilities, and reputational damage.
• Environmental and Climate Change Risk: An increased focus on climate change and greenhouse gas emissions could lead to more stringent regulations, carbon pricing, and reduced long-term demand for natural gas. Physical risks from extreme weather events could also impact infrastructure.
• Commodity Price and Market Risk: While largely mitigated by long-term contracts, fluctuations in natural gas supply and demand, and commodity prices, could indirectly affect throughput volumes and future investment decisions.
• Interest Rate Risk: As a capital-intensive business, TC Energy is exposed to changes in interest rates, which can affect borrowing costs and debt valuation.
• Cybersecurity Risk: The increasing reliance on digital infrastructure exposes the company to cybersecurity threats that could disrupt operations, compromise data, or lead to financial losses.
• Litigation and Legal Proceedings: The company may face various legal and regulatory proceedings that could result in significant liabilities or impact its operations.

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Management Discussion (MD&A Highlights) The strategic spin-off of the Liquids Pipelines business significantly repositions TC Energy, allowing for a sharper focus on its core natural gas and power generation assets. Management emphasizes the enhanced capital allocation efficiency and clearer investment thesis for the remaining entity. Substantial investments in the NGTL System underscore the company's commitment to expanding its regulated asset base and securing long-term, predictable cash flows. The completion of Coastal GasLink, despite its cost challenges, represents a major operational achievement that will contribute to future earnings. Management's focus remains on optimizing existing assets, executing growth projects, and maintaining a strong financial position while navigating evolving regulatory and environmental landscapes. The company continues to prioritize shareholder returns through its dividend policy, supported by stable cash flows from its largely regulated asset base.

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Future Outlook

• Future Growth and Regulatory Certainty: In September 2024, regulators approved a new five-year plan for the NGTL System, effective from 2025. This plan authorizes up to C$3.3 billion in new expansion projects (Multi-Year Growth Plan, or MYGP) to increase system capacity by approximately 1.0 Bcf/d. TC Energy has made final investment decisions on C$1.1 billion of these projects to date. The plan also establishes a stable 10.1% regulated return on equity for the NGTL System, providing predictable cash flows. Furthermore, it includes new incentives for emissions reduction, such as performance-based mechanisms tied to methane emissions targets, aligning with TC Energy's environmental commitments.
• Capital Investment Program: The company anticipates an annual capital expenditure program over the next few years, reflecting continued investment in its core natural gas and power segments.
• Dividend Policy: TC Energy maintains its long-standing commitment to dividend payments, reflecting confidence in future cash flows and earnings stability.
• Strategic Focus: The company's strategy centers on optimizing its natural gas pipeline network, expanding its presence in power and energy solutions, and pursuing opportunities that align with energy transition goals, while maintaining financial discipline.

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Competitive Position TC Energy holds a strong competitive position in the North American energy infrastructure sector, primarily due to:

• Extensive and Strategically Located Asset Base: The company owns and operates one of North America's largest natural gas pipeline networks, connecting key supply basins to major demand centers across Canada, the U.S., and Mexico. This vast footprint provides significant economies of scale and high barriers to entry for competitors.
• Regulated and Contracted Cash Flows: A substantial portion of TC Energy's assets operates under long-term, take-or-pay contracts or regulated rate structures, providing highly predictable and stable cash flows—a key competitive advantage.
• Integrated Infrastructure: The interconnected nature of its pipeline systems allows for operational flexibility and optimization, enhancing its value proposition to customers.
• Expertise in Large-Scale Project Development: Despite challenges, the company has a proven track record of developing and executing complex, multi-billion-dollar energy infrastructure projects, demonstrating significant engineering and project management capabilities.
• Customer Relationships: Long-standing relationships with a diverse base of producers, utilities, and industrial customers provide a stable foundation for its business.

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Key Takeaways for Investors

• Focused Strategy: The spin-off creates a more streamlined TC Energy, concentrating on natural gas infrastructure and power generation. This potentially offers a clearer investment profile and improved capital allocation.
• Significant Growth Investments: TC Energy has invested billions in expanding its Canadian natural gas pipeline network, with further substantial investments planned. This indicates a commitment to meeting growing energy demand and securing long-term contracts.
• Predictable Returns: The regulated nature of a significant portion of its assets, particularly the NGTL System with its stable 10.1% regulated return on equity, provides a foundation for predictable cash flows and dividend stability.
• Project Execution & Risk Management: The Coastal GasLink project underscores the complexities and financial risks associated with large-scale infrastructure development, including cost overruns. However, its completion and operational status now contribute to revenue.
• Environmental Commitments: The NGTL plan's inclusion of emissions reduction incentives highlights TC Energy's efforts to integrate environmental considerations and sustainability into its business strategy.