TC Energy's Southeast Gateway Pipeline: A Strategic Lever for Growth in Mexico's Energy Transition

The Southeast Gateway Pipeline, TC Energy's (TRP) flagship project in Mexico, stands as a testament to operational excellence and strategic foresight. Completed 13% under budget at $3.9 billion, this 715-km gas infrastructure marvel is now delivering tangible cash flows to shareholders. With May tolls collected on schedule and a critical role in Mexico's 8.5GW gas power expansion, the project marks a pivotal shift toward revenue generation for TC Energy. This article explores how the pipeline's cost efficiency, timely execution, and strategic alignment with Mexico's energy transition make TRP an attractive buy for income-focused investors.

Cost Efficiency: A Catalyst for ROIC and Dividend Strength

The Southeast Gateway Pipeline's 13% cost savings ($580M) exemplify TC Energy's discipline in capital allocation. By executing the project in under three years—a feat in an industry plagued by delays—the company not only reduced upfront costs but also accelerated revenue recognition. This efficiency directly improves Return on Invested Capital (ROIC), a key metric for assessing capital deployment.

The project's under-budget completion aligns with TC Energy's broader 15% cost reduction target across its $8.5B 2025 project pipeline. Such savings bolster free cash flow, enabling the company to sustain its industry-leading dividend—currently yielding 4.8%—while funding growth.

Timely Execution: Transitioning from Construction to Cash Generation

The pipeline's May 2025 toll collection commencement is a watershed moment. With 100% of capacity contracted to Mexico's state-owned CFE, the project ensures stable, regulated cash flows. This shift from construction to revenue generation is critical for reducing execution risks and proving the model's replicability in future projects.

While awaiting final regulatory approval from Mexico's National Energy Commission (CNE) for interruptible service rates, TC Energy's Q1 2025 results already reflect the pipeline's impact: comparable EBITDA rose 7% year-over-year, nearing the upper end of its $10.7–$10.9B 2025 guidance.

Strategic Positioning in Mexico's Energy Transition

The pipeline's 1.3 billion cubic feet per day (Bcf/d) capacity is a linchpin of Mexico's 8.5GW gas power expansion, supporting 10 of 14 planned gas-fired plants. This expansion is part of a broader 29GW gas capacity target by 2030, underscoring the pipeline's long-term relevance.

By enabling lower-emission energy generation, the project aligns with Mexico's climate goals while securing TC Energy's position as a critical infrastructure partner. The pipeline's role in CFE's power portfolio—contracted until at least 2032—ensures decades of predictable cash flows, reducing reliance on volatile commodity prices.

Regulatory Hurdles and Upside Potential

While CNE approval for interruptible rates remains pending, the delay is a procedural hurdle, not a fatal flaw. Once resolved, TC Energy can serve additional customers, unlocking incremental revenue. Management's confidence in securing approval by late 2025 suggests minimal downside risk.

Investment Thesis: Buy TRP for Dividend Safety and Growth

TC Energy's stock trades at a 10.2x EV/EBITDA multiple, below its five-year average of 12.5x, offering a valuation discount despite strong fundamentals. Key catalysts include:
1. Contracted cash flows: 100% of Southeast Gateway's capacity is under long-term take-or-pay agreements.
2. Regulatory approvals: CNE approval would unlock upside from interruptible service users.
3. Dividend sustainability: The 4.8% yield is well-covered by free cash flow, with TRP targeting 5–7% annual dividend growth through 2027.

Conclusion

The Southeast Gateway Pipeline is more than a project—it's a blueprint for TC Energy's future. Its cost discipline, timely execution, and strategic alignment with Mexico's energy goals position TRP to deliver steady cash flows and dividend growth. At current valuations, the stock presents a compelling entry point for investors seeking stability in an uncertain market. While regulatory risks linger, the pipeline's operational success and contracted revenue streams make TRP a buy for long-term income portfolios.

Recommendation: Buy TC Energy (TRP) for its dividend resilience and exposure to Mexico's energy transition. Target price: $65/share (12x 2025E EBITDA). Risk: Regulatory delays, macroeconomic slowdowns.