Buried within the optimistic pronouncements and record earnings of TC Energy's Q1 2024 earnings call lies a tantalizing hint of a future growth driver that could redefine the company's trajectory: data centers. While analysts buzz about the implications of the liquids pipeline spinoff and dissect divestiture strategies, a subtler story emerges, one with the potential to fuel both TC Energy's gas pipelines and power businesses for years to come.

The transcript reveals a keen awareness within TC Energy of the burgeoning data center industry's insatiable appetite for reliable energy. CEO Francois Poirier speaks of "new growth drivers like data centers" that will sustain the already robust demand for natural gas, a demand reflected in the company's record-breaking throughput volumes. Stan Chapman, EVP and COO of Natural Gas Pipelines, dives deeper, predicting a "meaningful load growth opportunity" from data centers, with potential incremental gas demand reaching a staggering 6 to 8 billion cubic feet (Bcf) per day by 2030. Some estimates, he notes, even surpass 10 Bcf per day, highlighting the explosive growth trajectory of this sector.

But what makes this seemingly innocuous detail so significant? It speaks to a strategic shift within TC Energy, a subtle but profound repositioning of the company at the heart of an emerging energy paradigm. As renewable energy sources gain prominence, intermittency remains a critical challenge. Data centers, with their mission-critical operations, demand unwavering reliability, making natural gas the ideal partner to bridge the gap and ensure uninterrupted power supply. TC Energy, with its vast gas pipeline network and strategically located power assets, is perfectly positioned to capitalize on this dynamic.

Here's where the story gets even more interesting. Chapman, astutely recognizing the localized nature of data center energy demand, emphasizes TC Energy's strategy to "increase connectivity with LDCs" (local distribution companies). He notes that the company's pipeline footprint connects to eight of the ten largest LDCs across the US, giving it an enviable advantage in serving data center clusters concentrated behind these LDCs. This strategic focus on LDC connectivity, manifested in the recent flurry of projects announced in data center hubs like Virginia and Wisconsin, speaks volumes about TC Energy's commitment to capturing this emerging market.

Potential Data Center Gas Demand by 2030

The following chart illustrates TC Energy's estimates for data center gas demand, based on statements from Stan Chapman during the Q1 2024 earnings call.

Now, let's delve into some numbers. Chapman pegs the data center opportunity at 6 to 8 Bcf per day by 2030. Assuming a conservative estimate of 7 Bcf, and utilizing a hypothetical EBITDA build multiple of 6 times (consistent with recent projects), this translates to a potential EBITDA uplift of $42 billion per year. Even if TC Energy captures just a fraction of this market, say 25%, the impact on its earnings could be transformative, adding over $10 billion in annual EBITDA.

To put this into perspective, TC Energy's current 2024 EBITDA guidance sits between $11.2 billion and $11.5 billion. The data center boom, then, has the potential to almost double the company's earnings power within a decade, a prospect that likely escaped the notice of analysts fixated on near-term divestitures and the liquids pipeline spinoff.

The implications are far-reaching. This surge in EBITDA would further bolster TC Energy's already strong balance sheet, potentially accelerating its deleveraging plans and pushing its debt-to-EBITDA ratio well below the targeted 4.75 times. It would also provide a massive cash flow windfall, paving the way for accelerated dividend growth and potentially even share buybacks, further enhancing shareholder returns.

Moreover, the data center boom could breathe new life into TC Energy's power business. While the company currently focuses on nuclear and pumped hydro, the need for reliable baseload power to complement renewable sources could rekindle interest in gas-fired power generation. The potential is particularly significant in regions with burgeoning data center clusters, like Virginia, where TC Energy's Columbia Gas pipeline is already a key player.

"Founded in 1951 to build the TransCanada Pipeline (now part of the NGTL system), TC Energy has consistently adapted to evolving energy landscapes. This latest strategic pivot towards the data center market is yet another testament to its ability to anticipate and capitalize on emerging trends."

In conclusion, while the liquids pipeline spinoff and divestiture program rightfully dominate headlines, TC Energy's quiet recognition of the data center opportunity hints at a potentially game-changing growth trajectory. This under-the-radar story could propel the company's earnings and shareholder returns to new heights, solidifying its position as a dividend king and establishing it as a leader in the evolving energy landscape.

"Fun Fact: The amount of data generated globally each day is staggering. According to some estimates, it's enough to fill 500 million floppy disks! This data explosion is a key driver of the data center boom and TC Energy's strategic focus on this market."