TC Energy, Federal Electricity Commission to develop world-class energy infrastructure in Mexico

TC Energy Corporation and the Federal Electricity Commission (CFE), Mexico’s state-owned electric utility, have agreed to forge a strategic alliance to accelerate the development of natural gas infrastructure in the central and southeast regions of Mexico. TC Energy and the CFE have agreed to consolidate previous TSAs executed between TC Energy’s Mexico-based subsidiary TGNH and the CFE in connection with our natural gas pipeline assets in central Mexico under a single, U.S. dollar-denominated take-or-pay contract that extends through 2055. This new TSA will also govern related new infrastructure projects to be developed in conjunction with the CFE.

“We are pleased to have been selected by the CFE as its partner and to forge this strategic and important public-private partnership, a first-of-its-kind in the CFE’s 85-yr history.” said François Poirier, President and CEO, TC Energy. “This alliance capitalizes on each of our strengths. Together, TC Energy and the CFE will develop critical energy infrastructure to serve the growing central and southeast regions of Mexico. The Southeast Gateway Pipeline will be TC Energy’s second marine natural gas pipeline in Mexico, connecting to the coastal regions of Veracruz and Tabasco, and is another prime example of our ability to originate world-class projects that offer incremental growth to our long-term outlook.”

Key benefits of the strategic alliance with the CFE

In connection with the strategic alliance, TC Energy and the CFE have reached an FID to proceed and build the Southeast Gateway Pipeline, a 1.3 Bft³d, 715-kilometer offshore natural gas pipeline to serve the growing need for safe, reliable and affordable energy in the southeast region of Mexico. The estimated project cost of US$4.5 B was developed utilizing a third-party verified Class 3 estimate that includes over 70 per cent fixed cost pricing. Subject to review and approvals, the agreements between TC Energy and the CFE allow for sharing of costs above those approved at FID.  Project development and execution will leverage our prior experience constructing the 770-kilometre, 2.6 Bft³d offshore Sur de Texas pipeline that was placed into service in 2019, approximately three years following FID. The Southeast Gateway Pipeline will originate onshore in Tuxpan, Veracruz, then proceed offshore, making landfall at Coatzacoalcos, Veracruz and Dos Bocas, Tabasco. The project is anticipated to be in-service by mid-2025.

TC Energy and the CFE have agreed to mutually terminate presently suspended international arbitrations between the two parties related to TVDR and TXTL, with TC Energy earning a return on and of all previous capital invested. TC Energy and the CFE have also agreed to work together to develop and complete the TXTL pipeline through construction of the project’s central segment, subject to FID in fourth quarter 2022. The CFE will take an active role in fulfilling land, community and permitting responsibilities, leveraging upon its experience operating, building and maintaining an extensive network of linear infrastructure of over 200,000 kilometres in easements. These projects represent key milestones in TC Energy’s multi-decade history of safe, reliable, and strong risk-adjusted return growth in Mexico.

Subject to regulatory approvals from Mexico’s economic competition commission (COFECE) and the Regulatory Energy Commission (CRE), the strategic alliance provides the CFE with the opportunity to hold an equity interest in TGNH. The CFE’s equity interest is conditional upon the CFE fulfilling specified capital contributions along with land, community and permitting responsibilities on TVDR, TXTL and the Southeast Gateway Pipeline. Regulatory approvals related to the CFE’s equity participation in TGNH are expected to take up to 24 months.   

Following positive FID, in-service of the Southeast Gateway Pipeline project and subject to certain other conditions, the CFE’s equity interest in TGNH would equal 15%. At the end of Southeast Gateway Pipeline’s contract life in 2055 and after TC Energy has recovered a full return on and of capital, the CFE’s equity interest in TGNH would increase to approximately 35%, thereby reflecting the equivalent of approximately 49% of the net value of the Southeast Gateway Pipeline and 15% of the other TGNH pipelines.

The Company will continue to monitor and manage its net economic exposure in Mexico to approximately 10% of total consolidated comparable EBITDA through the utilization of country-level debt financing, potential strategic partnership opportunities in Mexico and evaluating appropriate forms of risk insurance. We intend to secure up to $2 B of incremental country-level debt financing and when combined with our recently closed term loan credit agreement at our 60% owned affiliate which owns the Sur de Texas pipeline, we will have raised country-level debt, non-recourse to TC Energy, equivalent to approximately 65% of the Southeast Gateway Pipeline project costs. Once the Southeast Gateway Pipeline is in-service, we expect the sizeable and predictable cash flow profile to support further debt capacity.

 

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