TC Energy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 16 speakers on the call.

Operator

you for standing by. This is the conference operator. Welcome to the TC Energy First Quarter 2024 Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Operator

I would now like to turn the conference over to Gavin Wiley, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thanks very much and good morning. I'd like to welcome you to TC Energy's 2024 Q1 conference call. Joining me are Francois Poirier, President and Chief Executive Officer Joel Hunter, Executive Vice President and Chief Financial Officer, along with other members of our senior leadership team. Francois and Joel will begin today with some comments on our financial results and operational highlights. A copy of the slide presentation that will accompany their remarks is available on our website under the Investors section.

Speaker 1

Following their remarks, we will take questions from the investment community. We ask that you limit yourself to 2 questions. And if you're a member of the media, please contact our media team. Before Francois begins, I'd like to remind you that today's remarks will include forward looking statements that are subject to important risks and uncertainties. For more information, please see the reports filed by TC Energy with the Canadian Securities Regulator and the U.

Speaker 1

S. Securities and Exchange Commission. Finally, during the presentation, we will refer to certain non GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC Energy's operating performance, liquidity and its ability to generate funds to finance its operations. A reconciliation of various GAAP and non GAAP measures is contained in the appendix of this presentation.

Speaker 1

With that, I'll turn the call over to Francois.

Speaker 2

Thanks, Gavin, and good morning, everyone. We set out with 3 clearly defined priorities for 2024 that focus on maximizing the value

Speaker 3

of our assets, project execution

Speaker 2

and enhancing our balance sheet strength. And I'm pleased to report that we continue to deliver on all of these commitments. We saw another quarter of record earnings with comparable EBITDA up 11% compared to the Q1 of last year. With a relentless focus on safety and operational excellence, the company saw high availability and utilization across our asset base, including multiple first quarter all time records. Our secured capital program continues to progress on plan and we are tracking to cost and schedule with our major projects, Southeast Gateway and the Bruce Power Unit 3 MCR.

Speaker 2

In March of 2024, the US300 $1,000,000 Gilles access project was placed into service with a build multiple of approximately 6 times. This greenfield pipeline system connects gas production sourced from the Gilles hub to downstream markets in Southeast Louisiana. Gilles, along with projects on our NGTL system, mean that we've placed approximately $1,000,000,000 of projects into service so far this year, largely on budget. Additionally, dollars 200,000,000 of maintenance capital was placed into service over the quarter. We continue to execute against our $3,000,000,000 asset divestiture program with the recent sale of PNGTS for expected pre tax proceeds of approximately CAD1.1 billion, which includes the assumption by the purchaser of US250 million dollars of senior notes outstanding at PNGTS.

Speaker 2

We also continue to progress the proposed spin off of Southbow. As you saw a couple of weeks ago, we released our management information circular and the shareholder vote is scheduled for June 4. Finally, we're pleased to announce Sean O'Donnell as our incoming Executive Vice President and Chief Financial Officer effective May 15, following Joel's decision to pursue another opportunity. We're grateful for Joel's 26 years with TC Energy and the incredible impact he's made on the company. And I'll reserve a few more thank yous for Joel in my closing remarks.

Speaker 2

As for Sean, he joined TC Energy 6 months ago as part of our succession planning and brings 30 years of invaluable energy industry experience, including past roles as CFO. This, paired with his tenure in Corporate Finance and Private Equity, aligns directly with our clear set of strategic priorities. In Mexico, we continue to achieve milestones in the construction of Southeast Gateway. The total offshore pipe installation is now over 70% complete. The offshore portion represents about 6.70 of the total 7.15 kilometers of pipeline length.

Speaker 2

Onshore, all critical permits for construction have been obtained and we have completed construction on all three landfall sites. Importantly, the project continues to track schedule and expected cost of US4.5 billion dollars Continued high utilizations across our integrated natural gas system in the Q1 reflect continued demand growth for natural gas in the markets we serve. Total NGTL system deliveries in Canada averaged 15.3 Bcf a day with a new daily record high of 17.3 Bcf achieved in January. In the U. S, daily average flows of 30 Bcf were up 5% compared to the Q1 of last year.

Speaker 2

Once again, various pipelines achieved record throughput volumes, including in our Columbia Gas, Columbia Gulf and Great Lakes systems. Natural gas demand growth is continuing, empowering the U. S. As electricity demand grows. 2023 was a record year for power burn across the U.

Speaker 2

S. And that strength is continuing into 2024. Mirroring that, our assets continue to support the record demand and we set a 1st quarter record for deliveries to power generators of 2.9 Bcf per day, up 11% versus the Q1 of 2023. New growth drivers like data centers will help continue that positive growth momentum. In Mexico, average daily throughput was nearly 3.0 Bcf per day, up 13% versus the Q1 of last year.

Speaker 2

In our power business, our power assets were available to deliver power when it was needed most, resulting in an increase to comparable EBITDA of 14% versus the Q1 of last year. As you all know, Bruce Power produces 30 percent of the electricity in Ontario. And Bruce met continued demand in the Q1 by providing and delivering availability of 92%. We continue to expect average availability in the low 90s percent range for 2024, which is a significant and gradual improvement over the last decade or so. The Bruce Power major component replacement program to extend the asset life for the next 40 years continues to progress on plan.

Speaker 2

Unit 3 is tracking cost and schedule and Unit 4 received the ISO's approval to begin in early 2025. Our Alberta cogeneration fleet also delivered strong performance and reliability in the quarter with overall portfolio availability of 98.7%. There continues to be strong demand for our transportation service in our liquids business and Keystone is meeting this demand, achieving 96% operational reliability in the Q1. This operational strength supported a 28% increase in comparable EBITDA as compared to the Q1 of last year. Turning to Southbow and the proposed spin off of the liquids pipeline business.

Speaker 2

Bevan and the Southbow team continue to make meaningful progress towards the Southbow business transitioning to a standalone public company. We are confident we will have a successful launch of an independent South Bow in late Q3 or Q4 of this year. We do not anticipate any material dis synergies related to Southbow as the liquids business was operated mostly as a standalone business within the broader TC Energy and we intend to offset any potential dis synergies in the year in which they would have otherwise been incurred. Further, the team plans to develop the Blackrod Connection project. This project is expected to underwrite a meaningful portion of South Bow's near term comparable EBITDA growth targets.

Speaker 2

We issued our management information circular on April 16, and you may have seen that leading proxy advisor, ISS, has come out with a supportive recommendation for the transaction. As described in the circular, favorable tax rulings have now been received in both Canada and the U. S. Our 2024 Annual and Special Meeting will be held on June 4. I hope you take the time to look at the information in the circular and on our website to support your voting decision.

Speaker 2

And now, I'll turn the call over to Joel.

Speaker 4

Thanks, Francois, and good morning. Exceptional operational performance during the 1st 3 months of the year delivered 11% year over year growth in comparable EBITDA. As Francois mentioned, we saw strong year over year increases across all of our business units, including a 14% increase in Power and Energy Solutions, driven by increased availability and in our liquids business, a 28% increase in comparable EBITDA, driven by higher utilizations on both Keystone and Market Link systems. We also delivered a 4% increase in quarterly comparable earnings relative to Q1 of last year. This largely resulted from increased comparable EBITDA, partially offset by higher net income attributable to non controlling interest following the Columbia sale in 2023 and higher interest expense primarily due to long term debt issuances, net of maturities partially offset by reduced levels of short term borrowings and higher capitalized interest.

Speaker 4

We reaffirm our outlook for 2024, which does not take into consideration the proposed liquids pipeline spin off. As a reminder, in 2024, we expect comparable EBITDA to be between $11,200,000,000 $11,500,000,000 This growth is primarily driven by an increase in the NGTL system, the full year impact of projects placed into service last year and approximately $7,000,000,000 of new projects expected to be placed into service this year. As a reminder, the $7,000,000,000 includes Coastal GasLink, which is expected to be placed into commercial in service later this year. At the end of April, we placed approximately $1,000,000,000 of projects into service, including Gilles Access and the Columbia Gas Virginia Electrification Project. Comparable earnings per common share is expected to be lower than 2023, largely due to higher net income attributable to non controlling interests related to the Columbia sale.

Speaker 4

Total net capital expenditures for this year are expected to be approximately $8,000,000,000 to $8,500,000,000 We continue to actively manage our fixed floating interest rate mix, which helps to insulate us from rising rates. Approximately 92% of our debt is fixed with an average term to maturity of approximately 17 years and a pre tax weighted average coupon of approximately 5.3%. We are making progress towards our asset divestiture program with the announced sale of PNGTS, which will put us over a third of the way towards our $3,000,000,000 target for 2024. This transaction implies a valuation multiple of approximately 11 times 2023 comparable EBITDA. We remain committed to achieving our 4.75 times debt to EBITDA target in 2024, the upper limit to which we will manage to and expect to announce incremental asset sales in the coming months.

Speaker 4

Related to the liquids spin off, shareholders of TC Energy as of the distribution record date established for the spin off will receive 1 new TC common share and 0.2 common shares in exchange for each TC common share. As highlighted on this slide, dividends are expected to remain whole following the liquids spin off. In addition, we expect to have the capital structure in place prior to the spin off subject to a successful shareholder vote on June 4. Anticipated proceeds from the senior and subordinated debt issued at South Bo were used to repay approximately $7,900,000,000 of PC Energy debt and help meet future funding requirements. Our long standing value proposition sets the foundation for continued operational and financial strength, insulating us well from volatility we see in the broader market.

Speaker 4

Our stable, low risk business model and highly utilized asset portfolio provides stability in our comparable EBITDA and cash flows. PC Energy's Board of Directors has declared a Q2 2024 dividend of $0.96 per common share, which is equivalent to $3.84 per share on an annual basis. As we look ahead, both TC Energy and Bo are expected to maximize respective value propositions in a manner that will benefit shareholders for years to come. I've had a great career here at TC Energy. As you know, I'm moving on to a new opportunity, but I am truly grateful for my time with the company.

Speaker 4

TC Energy has been a great place to work and I appreciate everything I've been able to accomplish during my time here. As Francois mentioned, effective May 15, Sean O'Donnell will step into the role of Executive Vice President and Chief Financial Officer. And I will remain part of the team and as an Executive Advisor until my last day on July 1st to support a seamless transition. TC Energy is in good hands with Sean, who has tremendous amount of experience in the energy industry and expertise across North America. Now with that, I'll pass the call over to Sean for

Speaker 5

a few words. Thanks, Jill, and good morning, everyone. As I've mentioned to many of our stakeholders over the past several weeks, I am very excited for the opportunity to succeed you as the next CFO of TC. For our shareholders, I want to highlight that I, like Joel, will be focused on the continued successful execution of the 2024 strategic priorities that Francois detailed earlier. I look forward to connecting in person with as many shareholders as possible over the coming months.

Speaker 5

But for now, I'll turn the call back over to Francois for his closing remarks.

Speaker 2

Thanks, Sean. I'm happy to share that we've once again delivered record results, supported by our relentless focus on safety and operational excellence. Our priorities for this year are very clear. 1st, continue to maximizing the value of our assets through safety and operational excellence. 2nd, remaining focused on project execution, delivering our projects on time and on budget, including Southeast Gateway and Bruce Power's Unit 3 MCR.

Speaker 2

And third, we will continue on our path to achieving and sustaining our 4.75 debt to EBITDA upper limit by the end of the year by advancing our divestiture program and continuing to streamline our business through efficiency efforts. Before I turn it over to the operator, I would like to take a moment to thank Joel for his contributions to TC Energy over his 26 years with the company. Joel, you've been a valued member of the TC Energy team. I know you share our passion and commitment to the strategic path we're on, and I look forward to working with you until mid year. Also, on behalf of the entire team, we wish you the best in your next opportunity.

Speaker 2

I'll now turn the call back to the operator for questions.

Speaker 6

Thank you.

Operator

Our first question comes from Ben Them of BMO. Please go ahead.

Speaker 7

Hi. Thanks. Good morning. And maybe start off on asset sales. You mentioned potential additional asset sales in the coming months.

Speaker 7

Can you talk about then just really anything has changed just with respect to the buyer interest? Does the federal budget change perhaps some of the discussions on the NGTL and the federal loan guarantee for First Nations? And then there's a CFE purchase that you've disclosed. Is that going to be included in that $3,000,000,000 target?

Speaker 2

Hi Ben, it's Francois. Thanks very much for the question. Things have been progressing very well on all fronts on our divestiture program. I can report that and yes, the CFE's purchase of an equity interest in TGNH is included in that number. I can report that the CFE has received all approvals for its investment.

Speaker 2

They have secured the funds and we are in the final throes of negotiating documentation. And we can expect to receive proceeds in exchange for an approximately 15% interest perhaps as early as next week. I will remind everyone that this transaction was negotiated at the outset of the Southeast Gateway sanctioning and consideration provided by CFE includes not only cash, but also assets in kind as well as them agreeing to take on certain risks disproportionately around land acquisition and permitting as well as a disproportionate percentage of cost overruns by virtue of them taking on 50% of those with only a minority interest in TG and H. So, we're very optimistic about that occurring as early as next week. On other asset sales, we're focusing on Canada in the nearer term.

Speaker 2

The budget does not have any impact on our ability to proceed nor have we seen any impact on prospective valuations. We have a couple of processes that are reasonably well advanced in Canada and we could expect to announce additional divestitures in the second quarter if progress continues on the positive path it is on. Beyond that, we continue to focus on other divestiture opportunities to progress our divestiture plans and deleveraging plans, whether it's in Mexico where we are in conversations with a number of parties. We're also exploring a Fibra E as a potential alternative, as well as a number of other assets smaller assets in our portfolio. So we're very confident in the $3,000,000,000 number.

Speaker 2

And we look forward to announcing more positive progress over the coming months.

Speaker 7

Okay. Thank you, Francois. I'll get back in the queue.

Speaker 8

You

Operator

bet. Our next question comes from Rob Hope of Scotiabank. Please go ahead.

Speaker 9

Good morning. I want to ask a question on increasing power demand driving increasing gas demand, which you noted in your prepared remarks. How are you seeing this kind of manifest itself across your system? And what opportunities does it provide in both your gas and pipeline, our gas pipeline and power business? And I guess as a kind of offset there would be, could we see renewed interest in additional power investments on a longer term basis and kind of what does this mean for the Ontario storage project?

Speaker 3

Good morning, Rob. This is Stan. I will start and then pass it over to Ansley. I want to make sure that you all have a proper appreciation for the really strong growth story that's going on right now. And due to the operational excellence that our teams have demonstrated, we're seeing record deliveries across all of our jurisdictions.

Speaker 3

In Canada, flows on the NGTL system are up 5% quarter over quarter, including strong deliveries not only to power generators, but also within the oil sands. In Mexico, our flows were up 13% quarter over quarter, led by higher volumes on both our Certeja system and the Tapa Lobo system. And similarly across the U. S. Our throughput was up 5% quarter over quarter with new record deliveries to power generators leading the way.

Speaker 3

Our power generation deliveries were up over 11% quarter over quarter. Matter of fact, over the past 6 months, 6 of our 13 pipelines in the U. S. Set new record peak day deliveries. Again, just showing the demand for the assets that we have and we're well positioned to continue to capture that growth with projects like our Heartland project on the ANR system that we announced last quarter.

Speaker 3

Somebody is probably going to ask about data centers in particular, so it's probably a good time to bring that up right now. We do see a meaningful load and growth opportunity and increased demand in coming years due to data centers. When we look and do the math, we think somewhere between 6 to 8 Bcf of increased gas demand between now and 2,030 is more than reasonable, but there are also higher forecasts out there that exceed 10 Bcf a day. Reliability requirements associated with data centers are also driving increased appreciation for the role that natural gas is going to play in supporting those loads as well. We believe that much of the data center load is likely to materialize behind LDCs as opposed to be directly connected to our mainline pipes.

Speaker 3

And given that and given our best in class pipeline footprint, which happens to connect to 8 of the 10 largest LDCs across the U. S, it's just a reinforcement of our strategy to increase connectivity with LDCs via both formidable, constructible in quarter expansions with long term take or pay contracts, particularly in data center hungry areas like Virginia and Wisconsin. So if you notice the disproportionate amount of the projects that we announced over the past couple of quarters are in those two states and that's why.

Speaker 6

Thanks, Dan. So I'll speak to the power part of your question, Rob. Our power and energy solutions strategy really remains for the near term to focus our investment in nuclear and pumped hydro. We have continued great opportunity through our investment in Bruce Power to deploy capital dollars. Nuclear is baseload generation that will continue to support the grid.

Speaker 6

And then our Ontario pump storage project, which I think you spoke to specifically, we continue to have really great support from municipalities and local communities. We received just in the last couple of weeks another city municipal council vote in support of the project. We also feel really strongly along with our partners, the Saugeen Ojibwe Nation, that the project will offer Ontario really good socioeconomic benefits, dollars 6,800,000,000 to the economy in present value terms over the life of the project, 90% of which will benefit Ontario directly and much of that is in rural communities. That said, as we continue to progress the project, we are very mindful that we will not continue to invest capital dollars without having a cost recovery and commercial framework in place. We're very province, but that is sort of what our near term focus is, is securing that agreement.

Speaker 9

All right. Appreciate that. And then maybe as a follow-up and more broadly, through the years we've seen TC Energy kind of shift capital between its power and pipeline business. Recognize right now on the power side, the focus is on the pump storage as well as nuclear. But in a world where North America is short power in a number of years, if gas fired generation can give you good risk adjusted returns and good contractual backlogs, could we see you kind of reinvigorate kind of your development pipeline on that side of the business?

Speaker 6

For right now, we really are focused in the near term on nuclear and pumped hydro. We're committed to adhering to our $6,000,000,000 to $7,000,000,000 capital spend commitment. It's not to say that we wouldn't opportunistically look at those opportunities given exactly what you've described relative to power demand, but it would have to fit within that $6,000,000,000 to $7,000,000,000 limit.

Speaker 2

And what I would add, Rob, it's Francois, is that we've had a couple of assets achieve or reach contract expiry, and we've been able to renew and extend those contracts, which obviously protects the terminal value of our businesses. The one example I'd point you to is in New Brunswick, our cogen, we were able to extend that contract. And we've got other assets such as Bicancour where we are in very positive conversations with potential customers about extending and entering into new contracts just to continue to perpetuate those cash flows. So the dynamic around natural gas demand and power demand is very positive. That's exactly at the intersection of the strategy for the new TC.

Speaker 2

We are a gas and power company focusing on growing our gas franchises in all three countries as well as growing our investment in primarily emissionless power going forward, but also extending the life of our existing natural gas power generation assets.

Speaker 9

All right. Thank you. And Joel, all the best in the new role and Sean, congratulations as well.

Speaker 3

Thanks, Rob. Thank you.

Operator

Our next question comes from Jeremy Tonet of JPMorgan. Please go ahead.

Speaker 10

Hi, good morning.

Speaker 2

Good morning, Jeremy.

Speaker 10

Joel, I want to wish best wishes going forward as well. Sean, congratulations. And just wanted to, I guess, start off, it seems like the business continues to kind of perform pretty well and exceeding expectations again here. And just wondering, I guess, how you see things, I guess, performing versus Analyst Day expectations at that point? And how you think things unfold going forward?

Speaker 2

I appreciate the question, Jeremy, and the acknowledgment of the strong performance we've delivered. This is why we have a very short set of priorities in 2024 as we did in 2023 and it begins and ends with strong execution. We are laser focused on improving the return on invested capital on our existing assets and then delivering on our new projects on time and on budget and essentially delivering the business cases that we brought forward to our Board of Directors. And we are performing exactly on that plan. We reaffirmed our guidance for 2024 prior to giving effect to the spin transaction because the timing could move around plus or minus a month at $11,200,000,000 to $11,500,000,000 of EBITDA.

Speaker 2

We remain confident and reaffirm that guidance. And there are a lot of things that contribute to where you end up in that band or outside of that band. Asset availability is a critical driver. It's a great opportunity to create upside with no capital. You've seen through laser focus of our operating groups, a huge focus on increasing the availability of our assets.

Speaker 2

We've talked about that in our prepared remarks in a fair amount of detail. We see that as low hanging fruit to continue to perform or even beat our expectations. For now, we're going to underpromise and overdeliver and reiterate our guidance as is for the remainder of the year.

Speaker 10

Got it. Understood. Thank you for that. And there seems to be some debate in the marketplace with regards to credit rating agencies, and if S and P were to downgrade TRP, just wondering if you could walk us through what type of impact that would have on the company, hybrids, etcetera?

Speaker 2

I'll provide a couple of overall comments and then pass it on to Sean who as our SVP of Capital Markets and Planning has been managing the dialogue with the rating agencies. And all I will say, first off, is that we are performing exactly to the plan we provided all rating agencies in our review last summer in advance of the announced intention to spin our business and we continue to execute against that plan. But over to you Sean.

Speaker 11

Yes. Thanks, Fred. Well, Jeremy, good to

Speaker 5

be connected. I just want to reiterate as a new voice on the phone, the commitment to these deleveraging plans remain exactly intact. I'm picking up where Joel left off. And as it relates to what the agencies are doing back to Francois's comment, we engaged with them last year significantly across their advisory service in developing these plans. They know very well all of the moving parts and we remain in regular contact with each of the agencies quarterly.

Speaker 5

We've been on the phone all this week and as interim updates whenever they ask for it for each of our kind of ongoing initiatives. So while I don't believe any company can or should predict what any one agency may or may not do, Your specific question about a particular notch downgrade, we've seen some of our peers get downgraded in the last couple of weeks and the bond market didn't move, but for a basis point. No market reaction whatsoever. And I think you have such disparate kind of views across the agencies. Investors are just taking kind of their own point of view on it.

Speaker 5

And as it relates to what would be the pricing impact across our complex, The JSNs are pretty far out, right? We've got a call date, but our maturity stack on the JSNs doesn't really arrive until 2027. So we've got a lot of time. And importantly, our deleveraging plan that sits with all the agencies shows this 4.75 very stable for the long term. So we feel really good about it and virtually no impact should anything like that happen.

Speaker 10

Got it. That's very helpful. Thank you for that.

Operator

Our next question comes from Linda Ezergailis of TD Cowen. Please go ahead.

Speaker 12

Thank you. I have a 2 pronged question. Your Alberta Natural Gas Storage business appears to have outperformed significantly in the quarter. I'm wondering if you could just help us understand maybe a breakdown between that and your lower business development costs to just get a sense of the magnitude of the outperformance. And is there something one time in nature?

Speaker 12

Or can there be some new emerging opportunities given some of the shifts in market dynamics?

Speaker 6

Hi, Linda. It's Ansley. Thanks for the question. So the outperformance in the gas storage business in Q1 was what drove the results there. The impact of the business development costs was much less significant.

Speaker 6

And the operational outperformance was really a result of us being able to capitalize on the severe weather event that happened in January. So the storage business benefits from the price volatility in the market, and we were able to deliver those results. It isn't something that you would expect to see quarter over quarter because it was related to the severe weather event, but we have demonstrated an ability to take advantage of those types of events in the past. And to the extent they were tapping in the future, we would expect the same thing.

Speaker 12

Thank you, Annalene. Just as a follow-up, recognizing that this might be somewhat opportunistic and provide a valuable service during some extreme times for the industry, How are you seeing the economics potentially improving for natural gas storage? Is there any contemplation of brownfield or potentially greenfield storage anywhere in your network? And can you comment on how that might become an increasing proportion of your natural gas related infrastructure opportunities? Or maybe this is also a question for Stan.

Speaker 12

I don't know.

Speaker 6

Yes, I can start and then I'll pass it over to Stan. I think with respect to the, unregulated gas storage business that we have in Canada, our focus is really just to continue to maximize the value of the exceptional assets that we have as part of that business. But Sam, maybe you want to comment further.

Speaker 3

Good morning, Linda. As you know, we're one of the largest storage owner operators in North America and do see a lot of value in storage going forward. In the aggregate, we operate around 6.50 Bcf of capacity with about 5.30 of that here in the U. S. With respect to our storage position in the U.

Speaker 3

S, high demand for it continues. We're in our 8th consecutive year of having 100 percent of storage capacity fully contracted for. Our storage is heavily located in our market area and over 80% of the storage is subscribed by our LDC customers who rely on it as a source of their peak day needs. Maybe a bit in contrast, much of the discussion going on today with respect to new storage is pertaining to locales in the Gulf Coast in response to demand volatility around LNG exports. And there's meaningful differences between those types of merchant storage activities versus our more integrated storage approach with our storage being integrated with our LDC customers that come with long term contracts that are take or pay in nature and have synergies back to the pipeline.

Speaker 3

So from my perspective, when I look at the opportunities going forward, I don't see us chasing these merchant opportunities that do not have synergies or not integrated with our assets. But I do see us building more storage that complements our best in class footprint through either enhancements and drilling new wells to our existing storage footprint or in some cases constructing new storage or even LNG peaking facilities as we have operated historically in the eastern part of our system.

Speaker 6

Thank you.

Operator

Our next question comes from Praneeth Satish of Wells Fargo. Please go

Speaker 11

ahead. Thanks. Good morning. If I could switch to South Bo. So you talked about initial leverage ratio there of 5 times.

Speaker 11

Has anything changed with respect to your thinking of the capital structure there in light of the higher interest rate environment? And then secondly, can you comment on any discussions? You mentioned that you're talking to the rating agencies frequently. Any discussions with them as it relates to the credit worthiness of South Bo? And what leverage profile would be consistent with investment grade credit rating?

Speaker 11

Yes. Excuse me. Sorry, Puneet, it's Bevan here. So first off, I'll address your last question first, I guess is, we just recently went back to the credit agencies here just a few weeks ago with my CFO, Van Dafoe, outlining the update of our plan. You've seen the outperformance this past quarter of the business as well as bringing forward the Blackbaud project, which is credit accretive.

Speaker 11

And so very solid ground with respect to our leverage profile of South Bow with the agencies coming out being investment grade a commitment that we made in the information circular that went out. With respect to our capital allocation priorities and your comment around the interest rates. Our capital allocation priorities are first our deleveraging. The way we can because we believe that deleveraging is accretive to the equity investor. The way we can achieve that on an accelerated basis compared to what we highlighted at Investor Day is allocating capital to Blackrod.

Speaker 11

That project is a very short cycle project, will be on in early 2026. Cash flows can be created off that asset at the low end of our EBITDA build multiple range at the 6 times level. That allows us to really accelerate our delevering in the face of that interest rate environment that you point out. Our second priority is in capital allocation is organic growth in that build multiple range. With Blackbaud, we achieve just about 60% of our EBITDA growth CAGR that we highlighted at Investor Day.

Speaker 11

So that's strong. And then with discretionary capital, we want to look at the bottom. We want to have the opportunity to do share buybacks or over the long term increase the dividend. And as you may have pointed out, starting with deleveraging is critical given the interest rate environment, but also getting our payout ratios closer in class with our peers is another priority.

Speaker 4

Puneet, it's Joel here. I'll just add on a few comments here. We've been working closely with Devin's team as well. With the capital structure, it will be across the term spectrum anywhere from 3 years out to 30 plus years, including junior subordinated notes that will comprise about $1,500,000,000 of the capital structure. So nothing has changed from

Speaker 11

where we were last summer. And more

Speaker 4

importantly at the interest rates, we looked at where we're at today relative to where we were last summer, actually the rates are in slightly. So again, despite the rise in rates over the last 3 or 4 months, on an all in basis, they still remain very favorable to where we were when we first step out for this last summer.

Speaker 11

Got it. No, that's helpful.

Speaker 13

I'm going to go back

Speaker 11

to the AI theme because it's an interesting one. So there's only as you know 2 pipelines that flow right through the heart of Data Center Valley in Northern Virginia. Columbia is one of them. I mean, I know you touched on it, but can you talk about any discussions you've had with utilities that are coming to you requesting or anticipating more gas in preparation for more load growth? And then if so, how easy do you think it will be to accommodate this additional demand in terms of expanding your system?

Speaker 11

Let's say you pick up 1 to 2 Bcf per day of that plus 6 to 7 Bcf of incremental gas demand that you quoted. I mean how much can you handle with compression versus newbuild?

Speaker 3

Yes, Puneet, this is Stan. I appreciate the question. And again just reiterate the overall That is actually tied into our mainline facilities that is actually tied into our mainline facilities. But again, I think that that's a bit of an anomaly in data center growth either directly contracting with power generation loads or behind the LDC. So our strategy is going to be continue to increase our connectivity with the LDC loads.

Speaker 3

If you look at some of the annual plans that the LDCs are filing, you're seeing that they are representing that strong growth going forward. In terms of assets that will take, it's probably going to take more than compression. It's going to be a combination of pipe and compression and back from a liquid supply source. So we continue to be bullish on Appalachian production. As we said in the past, that production is constrained only by takeaway path.

Speaker 3

And we think that when you look at our systems and the path that we can deliver from TECO pool over to these data centers in places like Virginia in particular uniquely positions us amongst our peers.

Speaker 8

Got it. Thank you.

Operator

Our next question comes from Theresa Chen of Barclays. Please go

Speaker 12

ahead. Good morning. Thank you for taking my questions. Stan, I wanted to follow-up on this theme and just go back to that 6 Bcf number that you highlighted earlier. How did you come to that number?

Speaker 12

What are the assumptions driving that as it relates to your system? In terms

Speaker 7

of the discount, and as

Speaker 12

a follow-up to Praneeth's question, what kind of CapEx should we think about as this evolves?

Speaker 3

Yes. With respect to the 6 Bcf a day number, again, I look at that as not anything that's analyst summaries that were done by parties like WoodMac and EIA and others. And again, we're seeing estimates as high as 10 Bcf, which I think are a little bit aggressive given the fact that there's likely to be some supply chain challenges with associated build out. It's going to take a little bit longer. I don't have specifics for you with respect to capital investments.

Speaker 3

Again, I think this is going to play out over the next several years through the end of the decade. I can tell you that we are in discussions with various entities to get these types of loads attached to our system, but it's going to play out. What I'd add

Speaker 2

to that Teresa, it's Francois, is while we remain very focused on living within our means and that the lower end of that $6,000,000,000 to $7,000,000,000 range. What this means is that after giving effect to our maintenance capital of roughly $2,000,000,000 a year and we've got about $1,000,000,000 a year committed to Bruce, We've got $3,000,000,000 a year approximately of discretionary opportunities to deploy capital. And that long term trend presents us with a very high degree of confidence of being able to attract very high return attractive investment opportunities and continue to be able to deliver a very healthy spread between earned returns on projects and our cost of capital.

Speaker 3

And maybe one last thing I would add Theresa is even though we're going to compete for and win our fair share of the data center load, there's another way to serve it indirectly, which is by getting increased deliveries to the power generators. And do keep in mind that there's about 10 gigawatts of coal fired power generating facilities that are scheduled to retire here by the end of 2,030 that are within 15 miles of our assets. So I think we're well positioned to capture that part as well.

Speaker 6

Thank you.

Operator

Our next question comes from Robert Kwan of RBC Capital Markets. Please go ahead.

Speaker 9

Great. Good morning. If I can start with Southeast Gateway, there's a you had some updates on that, but I'm just wondering if you can compare where you are versus Sur de Tejas just in terms of some of the productivity? And then if you can also just comment on some of the major remaining critical path items or basically what keeps you up at night on the rest of the project?

Speaker 3

Yes, Robert, this is Stan. Thanks for the question. We're in a really good place with respect to the project right now. As we noted earlier, 70% of the offshore pipeline is completed, which includes 100% of the northern segment. We recently brought the vessel into port for some scheduled maintenance.

Speaker 3

It's going to be going back out to complete the about 189 kilometers of the southern portion of the deepwater pipe later shortly. We're also progressing on the nearshore work as well as the facilities work, which is adding compressor stations at 3 landfalls. And the fact that we have all three of our drills completed is a big deal for the team. So we're excited with respect to where the project is right now. In terms of challenges for the future, really it boils down to weather risk and maintaining the productivity that we've seen both with the vessel offshore and the work that the team is doing onshore.

Speaker 3

When I think back to some of the lessons learned against Sur de Tejas we're going to be implementing here is we're going to do the subsea tie ins below the waterline rather than on the waterline and that takes a lot of this weather risk out of place. So the team is well engaged. We're in a good position. And I'm excited that we're remaining on track, both with respect to scheduling costs for the project.

Speaker 9

That's great. Thank you. If I can just finish on the asset sale program, you've noted you've got multiple processes ongoing. But just due to the Butterfly divestiture limits, post spin, does that cause you to focus a little bit more on the processes that you can close quickly and or are you thinking about trying to monetize a little bit more than $3,000,000,000 just to take out or derisk the 2025 program?

Speaker 2

Thanks, Rob. It's Francois and appreciate the question. Based on the timelines we have on our various processes, we see us being able to close sufficient amount of additional transactions prior to the spin such that the 10% limit that's included in the CRA order, if you will, is not going to impair our ability to complete our deleveraging program, whether it's all in 2024 or some of it leaks into 2025. So, we're very comfortable with our ability to establish achieve that below our upper limit of 4.75% in 2024 and then remain there as we go forward. And I will also point out that not only is 2024 an anomaly with us retaining a portion of the liquids EBITDA for a part of the year, So is 2025.

Speaker 2

We're putting $9,000,000,000 of assets into service in 2025, but only have a partial year benefit there. Starting in 2026, we're going to have the full year benefit for all of those assets. And that in itself is going to continue to accelerate our deleveraging below the 4.75 percent upper limit.

Speaker 9

That's great. Thank you very much. And Joel, all the best this year.

Speaker 3

Thanks, Robert.

Operator

Our next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead.

Speaker 14

Thank you and good morning everybody and congratulations on the strong operating results. I wanted to go back to the capital structure questions starting with South Bo. Right now TC Energy has the benefit of enviable maturity profile. I wonder what you see as the average maturity profile for South Bowl. What's your vision for that?

Speaker 11

Yes, Rob, we'll access the full stack, but on average you should use 10 years as a good rough guideline of the maturity profile that we'll be seeking. But we'll be putting from 3s, 5s, 10s, 30s all in the stack as we go out.

Speaker 14

Okay. That's helpful. And then I have sort of the same question for TC Energy. Basically when that capital stack is stood up at South Boulton and that $7,900,000,000 makes its way back to TC Energy. It sounds like you're very determined to stay at the 4.75 leverage or below.

Speaker 14

But is there do you have any thoughts on the term? Can you afford to shorten that term of 17, 18 years as you redeem debt to manage your interest rate exposure there?

Speaker 4

I'll start here and Sean if you want to chime in. Great question Rob. A couple of reminders here. The weighted average term of our debt is 17 years. Over 90% of our debt is at fixed rate.

Speaker 4

So when we think about $7,900,000,000 coming back to TC as it relates to Southbow, part of those funds will be used to just fund our capital program for this year. Part of the funds will be used to reduce some of our long term debt. In the grand scheme of things, it's not going to change the weighted average. We'd rather have a longer term to maturity with our debt and have a very manageable maturity profile. So we've always managed the capital structure within TC Energy, such that we average about $2,500,000,000 per year of debt maturities and that will continue going forward.

Speaker 4

So when we look at the money coming back here, again, part of it will be for the funding of this year's capital program, part will be to reduce our debt And it should have a negligible impact on our weighted average term to maturity of our debt.

Speaker 14

Okay. Great. And last one for me. I just wanted to go back to the NGTL potential sale there. My understanding was that the amount you could sell there is practically limited by the indigenous loan guarantee programs.

Speaker 14

And I just wonder whether or not that's changed with the federal budget announcement for more loan guarantees?

Speaker 2

Robert, it's Francois. To the extent we can avail ourselves of indigenous loan guarantees beyond the one that the AIOC is generously providing. We would certainly consider that, but I would highlight that we have a number of processes competing with one another at this time. And I think given the commercial sensitivities of our discussions, I won't comment further.

Speaker 14

Okay. That's fair. Thank you.

Operator

Our next question comes from Keith Stanley of Wolfe Research. Please go ahead.

Speaker 15

Hi, good morning. The South Pole results another really strong quarter. Just curious how much of this you view as sustainable for the as a run rate and how much is some of the spread oriented upside on Keystone that's a little harder to predict in the future?

Speaker 11

Keith, it's Devin. Yes, we first thing is operational excellence. We achieved 96% of system operating factor in the Q1, having our systems available to capture the ARBs, our strategic franchise connecting Northern Alberta down to the Gulf Coast, making that corridor available can attract barrels and having a system operating factor that high allows us to attract more barrels. So the 1st quarter, we had outstanding results both on Keystone, but also on Market Link where we were able to add some additional contracts this year. So year over year on Market Link, we've strengthened our contract profile on Market Link adding around 200,000 barrels.

Speaker 11

So when you think about our system and our corridor just strengthening that franchise is just attracting barrels because that's where the barrels want to go is the Gulf Coast. We want to temper our outlook though. We have we do have TMX line fill coming. It's starting right now. And so we already have seen some narrowing of that ARP on the Keystone system.

Speaker 11

But I want to remind everyone that our Keystone contracts are effectively are 94% contracted with an 8 plus year term. So only 6% of that volume on Keystone is subject to spot or variable tolls. But our ability to continue to move spot barrels on our system is what we anticipate. But I don't anticipate us being as strong as the Q1.

Speaker 15

That's helpful. Second question, just a follow-up on Southeast Gateway. It sounds like it's going very well. If it did come on early in 2025, would you expect to start collecting the contract fee early as well? Or is that not necessarily the case?

Speaker 15

I'm just curious how that would work under the contract if you are early?

Speaker 3

Yes. This is Stan. Under the contractual terms with CFTR counterparty, they will pay us upon in service date in summer of 2025 and not necessarily earlier.

Speaker 8

Thank you.

Operator

Our next question comes from John McKay of Goldman Sachs. Please go ahead.

Speaker 13

Hey, good morning. Thanks for the time. I wanted to circle on just some of the leverage comments around 25. Certainly understand the amount of EBITDA coming online midyear. But I guess are you guys still targeting necessarily hitting 4.75 by the end of 2025 as well?

Speaker 13

And if so, last call you talked about needing some incremental EBITDA or maybe some incremental asset sales, just how we should frame that up? Thanks.

Speaker 2

The short answer, John, is yes. With respect to filling any gap, the gap because of the partial year in 2025 is about 0.2. There are 3 sources of deleveraging that can fill that gap. The first is outperformance from an EBITDA perspective. You've seen us here in the Q1 deliver results that were above plan.

Speaker 2

That's come from excellence in operations. Our focus initiatives where we're reducing cost, FX has provided a nice tailwind for us here in the Q1. Secondly, to the extent we're able to deliver on our projects below plan that will also have positive impact on our credit metrics. And then if and only if the gap is not filled by the first two, we would consider additional asset sales to remain below that 4.75 percent. And we're going to let the year play out a little bit before we make that kind of decision, because again, I think we're performing very well right now and we see line of sight to being able to address that gap from all three of those different levers.

Speaker 13

All right. That's very clear. Appreciate that. Maybe just one more for me. On the $6,000,000,000 to $7,000,000,000 of kind of outer year capital that you're committing to and more recently your language has kind of been holding to that lower end.

Speaker 13

I guess just how much of that if we're looking forward a couple of years is already spoken for existing projects? And then how much would be in there for some of these incremental opportunities, data centers, etcetera, that you could still add to the backlog without going above that level?

Speaker 2

I appreciate the question. Look, our bias to the lower end of that $6,000,000 to $7,000,000 is really important to us. We value the option value of performing the plan. So if we stay at the lower end of the $6,000,000,000 to $7,000,000 in terms of the planned capital, if we perform to plan on time and on budget, that gives us up to an incremental $1,000,000,000 every year to either accelerate debt repayment or eventually perhaps even undertake some share buybacks. One of the beauties of our business is we have very predictable line of sight to allocating our capital in the future.

Speaker 2

I can tell you that in terms of our internal plans, I have visibility to where the capital is going to go down to specific projects with specific returns virtually till the end of the decade. That's the beauty of the predictability of our business. We do have an opportunity to add incremental projects at attractive returns, going forward with some of the positive dynamics we're seeing in data centers and other demand growth, but that's more middle of the decade and beyond. I will point out that it took us a couple of years to respond to the Wisconsin request to harden the infrastructure from extreme cold that came from winter storm Yuri. And so the data center and other electricity and natural gas demand increases we're seeing across the board are going to take a couple of years to materialize.

Speaker 2

So we do see an opportunity for us to crystallize some of those, but more in 2026, 2027 and beyond.

Speaker 13

Thanks very much for the time.

Speaker 8

You bet.

Operator

Our next question comes from Patrick Kenny of National Bank Financial. Please go ahead.

Speaker 8

Thank you. Good morning, everybody. Just on Coastal GasLink, can you remind us the scope of work to be done to support Cedar LNG And what sort of EBITDA build multiple you might be able to achieve there? And then any thoughts on any work that might be needed to prepare for a potential Phase 2 from LNG Canada or perhaps any other floating LNG projects that might come down the road into next year and beyond?

Speaker 2

Thanks, Patrick. It's Francois. I'll take this one. Look, on Cedar, first of all, we're having a very close relationship with the Heislain Nation. We're very excited and very happy for them to be making positive progress on the project.

Speaker 2

It's going to create wealth for the nation and advance their socioeconomic goals. This is a project that we are contractually committed to proceeding with. We are in the process of advancing our development of the project cost and execution plan. So we're not at this time able to share a build multiple. But I will tell you that the allocation of risk between parties commercially is considerably different from what we experienced on Phase 1.

Speaker 2

We're very comfortable with the quality of our estimate and the allocation of risk between parties such that if we do allocate capital and it would be modest capital from our perspective given that we own 35% of CGL and there will be project financing to fund a significant component of the project cost. We're very comfortable in our ability to fit that equity capital within our $6,000,000,000 plan.

Speaker 8

Okay, got it. Thanks for that. And then maybe just back to your asset sale process. Just in light of the recent rule changes here announced to the Alberta power market. I know it's not a huge part of the portfolio, but any thoughts around, A, how you think your gas fired power assets are positioned to perform once these new rules take effect?

Speaker 8

And then B, your overall desire to remain a key participant in the Alberta power market going forward just in light of these changes?

Speaker 6

Thanks very much. It's Ansley and I'll take the question. So with respect to the changes to the Alberta electricity market that has been announced. We do not anticipate any direct impact to our cogen fleet in Alberta. It could be that as a result of the changes, there are some indirect impacts to the longer term outlook for power prices.

Speaker 6

But we have already considered this in our outlook and so don't anticipate any material changes there. With respect to the overall strategy, again, our focus is really on maximizing the value of the cogen assets that we have in Alberta, which really comes down to ensuring really good operations, strong operational excellence will lead to maximum availability, particularly during peak pricing.

Operator

Ladies and gentlemen, this concludes the question and answer session. If there are any further questions, please contact Investor Relations at TC Energy. I will now turn the call over to Gavin Wiley. Please go ahead.

Speaker 1

Well, thank you, and thanks, everyone, for participating this morning. If we didn't get to your question or if you have any additional questions, obviously, the Investor Relations team is always at your disposal and happy to help out where we can. Send us a note and we'll get back to you. Once again, thanks for your interest in GC Energy and we look forward to

Speaker 8

our next update. Thank you.

Operator

This brings to close today's conference call. You may disconnect your lines.

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Earnings Conference Call
TC Energy Q1 2024
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