The Keystone Steele City pumping station in Steele City, Neb., Nov. 3, 2015.Nati Harnik/The Associated Press
In recent years, no pipeline company has done more to embrace the transition to a low-carbon economy than TC Energy Corp. TRP-T. But in recent months, no utility stock has been pummelled like TC Energy.
Shares in what used to be known as TransCanada Pipelines – a cornerstone holding in many retirement funds – are down 26 per cent over the past 12 months. Investors and credit-rating agencies are giving a thumbs down to cost overruns on a relatively green gas pipeline project earlier this year, as well as to July’s announcement of asset sales and an environmentally friendly plan to split up the company.
What TC Energy’s board no doubt assumed would be an easy-to-win shareholder vote next year on a proposal to spin out legacy oil pipeline businesses and move forward in more environmentally friendly sectors – natural gas, nuclear and renewable power – is now a referendum on both a transition strategy and management’s ability to execute.
Recent history shows this is a vote TC Energy could lose.
Investors, in step with voters, are feeling ornery. Look what happened earlier this year to Teck Resources Ltd.: The miner announced plans to spin out its coal business – where carbon emissions are only exceeded by cash generation – to focus on minerals of the future such as copper. Despite months of lobbying, Teck failed to win shareholder support for the structure and cancelled the vote on the day it was scheduled.
TC Energy faces the same negative sentiment, as its executives pitch plans to hive off an oil pipeline operator that pays reliable but slow-growing dividends – the payout is expected to increase by between 2 per cent and 3 per cent annually. If shareholders and regulators sign off, TC Energy would be reborn as a dominant player in North American gas distribution, growing at a 7-per-cent-plus annual clip.
On paper, TC Energy is making a compelling argument. So did Teck. The Calgary-based utility is facing headwinds, in the form of a declining stock price, because recent results fell short of past promises.
A key element in TC Energy’s transition strategy is moving natural gas across Northern British Columbia on its Coastal GasLink pipeline. The company estimated the project would cost $6.2-billion when it was launched in 2018. The price tag is now at $14.5-billion. While the project is 90 per cent complete and projected to be completed by year-end, investors are now in “show me” mode on the pipeline.
To pay down debt from projects such as Coastal GasLink, TC Energy is selling assets. Its largest deal to date – July’s sale of a 40-per-cent stake in the Columbia gas pipeline network to a private equity fund for $5.2-billion – came at a valuation that disappointed investors. Ratings agencies Moody’s and DBRS downgraded TC Energy last month on news of the pipeline sale.
TC Energy’s executives face challenges centred on their ability to get the nuts and bolts of the business right, as opposed to setting out a grand strategy for the company’s move away from its roots in the oilpatch.
To win back a premium valuation from investors, the utility needs to bring in projects on time and on budget. Executives need to exceed expectations, not fall short, when selling assets. And TC Energy has more major asset plans coming: Last week, the company asked regulators to approve the potential sale of a stake in its Nova Gas pipeline in Alberta and B.C., and named Indigenous groups as potential buyers.
The challenge of continuing to turn in strong performance while moving out of legacy businesses faces all the major domestic pipeline operators. In a recent report, RBC Capital Markets analysts Maurice Choy and Robert Kwan looked at TC Energy and peers such as Enbridge, Pembina and Keyera and said “the greatest near-term challenge facing management teams” is striking the right balance between investing in big-ticket energy transition opportunities and maintaining a strong balance sheet.
To steal a phrase from management guru Peter Drucker, when it comes to the energy transition, execution eats strategy for breakfast.
Andrew Willis