TC Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 16 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the TC Energy Second Quarter 2024 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 I would now like to turn the conference over to Gavin Wiley, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks very much, and good morning. I'd like to welcome you to TC Energy's 2024 Second Quarter Conference Call. Joining me are Francois Poirier, President and Chief Executive Officer Sean O'Donnell, Executive Vice President and Chief Financial Officer, along with other members of our senior leadership team. Francois and Sean 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'll 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 may include forward looking statements that are subject to important risks and uncertainties. For more information, please see the reports filed by TC Energy with Canadian Securities Regulators and with the U.

Speaker 1

S. Securities and Exchange Commission. Finally, during the presentation, we'll 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 the presentation.

Speaker 1

With that, I'll pass the call to Francois.

Speaker 2

Thanks, Gavin, and good morning, everyone. Before I dive into our results, I just want to acknowledge the natural disasters that have impacted individuals and communities across our footprint. From Hurricane Beryl in Texas to the current devastation being caused by the Alberta and BC wildfires, our thoughts remain with those affected. During these events, our teams face the monumental task of keeping our operations running smoothly and their dedication to maintaining safe and reliable operations is nothing short of extraordinary. It's this dedication across our company that drove another strong quarter while making exceptional progress on our strategic priorities for 2024.

Speaker 2

Our continued focus on safety and operational excellence allowed us to set multiple records while growing comparable EBITDA by 9% as compared to the Q2 of 2023. We also advanced multiple strategic initiatives aimed at maximizing the long term value of our assets, including a successful shareholder vote on South Bow and reaching unanimous support from customers for a 5 year settlement agreement on our NGTL system. Our secured capital program continues to track both cost and schedule with our major projects, Southeast Gateway and our Bruce Power Unit 3 MCR. We've already placed $1,200,000,000 of projects into service and remain on track to place approximately $7,000,000,000 of assets into service in 2024, including Coastal GasLink. And as we look to 2025, this represents an important inflection point for TC Energy with plans to place an additional $9,000,000,000 of assets into service at an average build multiple of just over times.

Speaker 2

In combination with our announced asset divestitures that now total $2,600,000,000 strong year to date EBITDA performance and capital expenditures that are trending to the low end of our $8,000,000,000 to $8,500,000,000 outlook, we are well on track to reach our 2024 year end debt to EBITDA target of 4.75 times. We're proud to announce that we've entered into Canada's largest ever indigenous equity ownership agreement that will enable ownership of the NGTL and Foothill systems. This historic agreement is made possible by an equity loan guarantee provided by the Alberta Indigenous Opportunities Corporation in support of a newly formed indigenous owned investment partnership. The transaction creates a pathway for equity participation ownership that delivers long term, low risk and stable revenue for local indigenous communities, creating a lasting and meaningful legacy. We thank all rights holders and stakeholders involved in making this agreement possible.

Speaker 2

It is an example of what's achievable when indigenous communities, governments and industry come together. Never have I seen such strong prospects for North American natural gas demand growth. We are seeing natural gas demand reach record highs and this is expected to grow by nearly 40 Bcf per day by 2,035. The outlook for our business has never been stronger. Our assets are strategically positioned to meet growth and demand underpinned by 5 key pillars that give us visibility to attractive in corridor opportunities through the end of the decade.

Speaker 2

Based on capacity projects under various stages of development, we have line of sight to 5 plus Bcf per day of next wave LNG growth that will feed exports from Canada, the U. S. And Mexico. And we are the only company to have major assets in all three markets. In the U.

Speaker 2

S, we are delivering approximately 30% of LNG feed gas. In Mexico, we expect to see the 1st LNG cargo this month from Ultomero's liquefaction facility. And in Canada, CGL remains ready to deliver gas when called for. 2nd, we're seeing continued demand and reliability requirements from our utility customers. We have one of the largest natural gas storage systems in North America and that further bolsters energy reliability across the continent.

Speaker 2

3rd, power generation demand is expected to increase significantly, driven by wide scale electrification, coal fired retirements, as well as emerging power needs from AI and data centers. As an example, we see around 300 data centers at various stages of development, 60% of which have proposed locations within 15 miles of our systems, namely Colombia. Additionally, within 15 miles of our Colombia and ANR systems, we estimate approximately 9 gigawatts of coal fired generation is set to retire by 2,031. From a capacity project standpoint, these drivers represent approximately an additional 5 Bcf per day of high quality opportunity. 4th, our assets strategically connect the lowest cost supply to the highest value markets.

Speaker 2

These basins continue to see significant growth potential and our customers continue to look for additional connectivity. And finally, we have approximately $7,500,000,000 in our secured capital table for recoverable maintenance and our modernization projects that support the safe and reliable delivery of record volumes. Our role is to execute the opportunities that maximize risk adjusted returns, while adhering to our net capital expenditure limit of $6,000,000,000 to $7,000,000,000 per year to create incremental value for our shareholders. In Mexico, we achieved critical milestones in the construction of Southeast Gateway and remain on track for commercial in service by mid-twenty 25 at our expected cost of US4 $500,000,000 Progress on the offshore pipe installation has reached over 98% completion. The deepwater offshore section is now installed and there is approximately 3 kilometers of shallow water installation remaining.

Speaker 2

We anticipate the shallow water installation to be complete in the Q3. Onshore, we have completed construction at all three landfall sites and construction of the onshore facilities and final pipe as well as the tie in activities continue to progress on schedule. To further illustrate the continued demand for natural gas, again, we saw continued high utilization of our systems. You can see on this slide that our NGTL system in Canada, our U. S.

Speaker 2

Natural gas pipelines and our Mexico pipelines all set new all time records for receipt or delivery volumes with several daily records achieved in July. We reached unanimous support from customers for a 5 year negotiated revenue requirement settlement on NGTL that extends from 2025 to 2029. This continues our 20 plus year track record of collaboratively working with our customers to address evolving needs while maximizing the value of our assets. The settlement is expected to result in approximately $150,000,000 to $200,000,000 per year of incremental EBITDA through increased depreciation rates and incentive mechanisms. The settlement supports competitive tolls for our customers and it incentivizes emissions reductions.

Speaker 2

The settlement also enables an investment framework to allocate approximately $3,300,000,000 toward a new multiyear growth program that will serve continued growth from the Western Canadian Basin. The projects comprising the growth plan have targeted in service dates between 2027 2030 aligning with our net annual capital expenditure limit. In our Power segment, Bruce Power continues to reliably provide emissionless, low cost electricity in Ontario. We achieved 78% availability in the 2nd quarter, taking into account planned outages on 4 of our units, Units 8 through 5. The availability outlook for 2024 remains in the low 90% range now that all planned maintenance is complete for 2024.

Speaker 2

Unit 3 MCR continues to progress on plan for both cost and schedule and the Unit 4 MCR is expected to begin in early 2025. In the liquids business, Keystone continued its strong operational performance, achieving 94% reliability in the 2nd quarter. At our annual and special meeting in June, we received strong support from our shareholders to spin off the Liquids Pipelines business with voted common shares at 97% in favor of the spin. We continue to believe that spinning off Southbow will allow both companies to execute their focused strategies while maximizing the value of their respective assets. And now, I'll turn the call over to Sean.

Speaker 3

Thanks, Francois. Good morning, everyone. I am pleased to report that TC's comparable EBITDA grew by 9% this quarter. I'll touch on the growth highlights with the chart on the left. Canada Gas saw increases primarily from system expansions on NGTL and Foothills.

Speaker 3

U. S. Gas placed a number of new pipeline and modernization projects into service and they signed new contracts on ANR and Great Lakes. In Mexico, the main drivers were a new lateral section of Villa de Reyes going into service last September and higher equity earnings at Serde Tejas, primarily from the strengthening dollar over the peso. Power and Energy Solutions saw higher contributions from U.

Speaker 3

S. Marketing and Canadian Power, which combined offset reduced contributions from Bruce Power, which had units in planned outages last quarter, as Francois mentioned. Our Liquid segment was lower in the 2nd quarter from the anticipated impacts of additional WCSB egress coming online and lower contributions from liquid marketing activities, some of which we expect to reverse later in the year. Moving to the chart on the right. Our comparable earnings of $978,000,000 were slightly lower than the Q2 of 2023.

Speaker 3

There's some variances here worth spending a moment on. AFUDC was higher due to the increased capital spending on Southeast Gateway. The FX delta was driven by a peso that strengthened by 5% in the second quarter of 20 23, which was an FX derivative gain for us, but then pivoted sharply to weaken by 10% last quarter, creating an FX derivative loss. As a reminder, we do hedge our FX, which flows through this line item. For an overall net income perspective, we're generally insulated from fluctuations of the U.

Speaker 3

S. Peso and dollar movement. Income taxes decreased by $59,000,000 in the quarter in large part due to the peso FX delta I just mentioned. Lastly, this quarter's deduction for non controlling interests increased primarily due to the sale of the 40% interest in Colombia that closed in the Q4 last year. To conclude our earnings update, our 2024 earnings outlook is consistent with the outlook in our 2023 annual report and that our earnings per common share are expected to be lower this year than in 2023, driven largely by the NCI adjustments from our ongoing asset divestiture program.

Speaker 3

Turning to page 15 and continuing with our 2024 outlook. Due to our continued strong performance year to date and positive outlook for the remainder of the year, we are reaffirming our 2024 comparable EBITDA target of $11,200,000,000 to $11,500,000,000 This year's growth is driven by the full year impact of our 2023 project completions and cash flow from our $7,000,000,000 worth of projects going into service this year. A quick reminder is that we continue to include liquids in our aggregate guidance until the spin off closes. And the trend is similar for liquids. Following a very strong Q1, our liquids performance continues to track its 2024 outlook.

Speaker 3

On the right side of the page, I wanted to echo Francois's comment that we're making meaningful progress on our deleveraging plan and are on track to achieve our 4.75 times leverage target by the end of this year. Each component of our deleveraging strategy is contributing to our success. Our corporate development team has signed up $2,600,000,000 of asset sales at very attractive multiples and we're only in July. That pace makes us feel comfortable about our $3,000,000,000 program target by year end. Our natural gas and power teams are collectively bringing $7,000,000,000 of new capacity and associated EBITDA online this year.

Speaker 3

And our 3rd lever is CapEx savings that Francois mentioned. Our project delivery organization is tracking towards the low end of our $8,000,000,000 to 8 $500,000,000 net CapEx target for the year. Every dollar of CapEx savings contributes to immediate deleveraging and can also be viewed as a dollar for dollar offset to our asset sale target. So our project delivery team deserves a special shout out this quarter for delivering on our EBITDA and trending very well on our net CapEx target for the year. And finally, it bears repeating that we remain committed staying within our $6,000,000,000 to $7,000,000,000 annual net CapEx budget in 2025 and beyond with a bias towards the lower end of that range.

Speaker 3

On page 16, we provide a quick update of our expected timeline to close the spin transaction. Practically speaking, the most efficient closing date from an IT and financial reporting perspective would be the 1st day of the new fiscal quarter, which would be October 1. That is our early target as we begin to work through our closing dry run processes over the next 2 months. So we are refining our target closing window to say early Q4. The only external milestone remaining to close the transaction is raising Southbow's $7,900,000,000 capital structure.

Speaker 3

We have been supporting Bevan and Van's finance team at Southbow who are preparing for the financing this quarter. I'd offer a few quick comments on market tone on ahead of Southbow's inaugural issuance. The fixed income markets remain robust, particularly for investment grade companies with a mix of long term commercial contract portfolios and low risk growth like South Bo. For context, TC completed the largest ever Canadian bond deal at $7,000,000,000 for Coastal GasLink recently. To give you a sense for the market depth in Canada, this deal was nearly twice the size of the next largest deal in history and we were 3 times oversubscribed and tightened our credit spreads considerably from launch to close.

Speaker 3

CGL had terrific execution on largely a Canadian offering whereas Southbow will have the benefit of being able to raise capital in both the U. S. And Canada. That dual market access should provide strong liquidity and pricing leverage to the transaction. I'll conclude this slide with 2 key model data points.

Speaker 3

TC will repay debt with the proceeds from the South Bo offering and shareholders who continue to hold their pro form a TC and South Bo shares are expected to be kept whole on a dividend per share basis going forward. On page 17, we reflect on over 2 decades of continuous EBITDA and dividend growth that TC has delivered. We're cognizant of how important these metrics are to the long standing shareholder value proposition we're committed to delivering. With that, I'm happy to report that TC's Board of Directors declared a 3rd quarter dividend of $0.96 per common share. On an annualized basis that implies a dividend yield of approximately 6.6% as of Monday's close.

Speaker 3

I wanted to conclude my section this morning with page 18 and let our investors know that we just released our 2024 report on sustainability. It's a fantastic report that provides a comprehensive overview of our sustainability performance and progress including highlights such as how TC has reduced absolute methane emissions by 15%, while supporting customer growth and increasing our own cash flow How we're investing billions into the communities where we operate. And how TC is building a diverse leadership team today and training tomorrow's future talent. You can read more about these three vital efforts and many more in the report on our website. With that, I will pass the call back to Francois.

Speaker 3

Thanks, Sean.

Speaker 2

Once again, our team's dedication to maintaining safe and reliable operations to meet growing energy demand allowed us to deliver another strong quarter. The steady progress we're making against our 2024 priorities combined with an exceptional outlook for our business has made me very excited about our future. Our focus for the remainder of the year remains clear and has not changed or wavered in the last 18 months. First, we'll continue to maximize the value of our assets through safety and operational excellence. 2nd, project execution has been exceptional with critical milestones reached on Southeast Gateway and we've remained focused on delivering on time and on budget.

Speaker 2

3rd, with the strong year to date results and with the majority of our $3,000,000,000 asset divestiture plan now announced, we've made significant progress towards achieving our 2024 deleveraging target. Thank you for your attention. And now I'll turn the call back over to the operator for questions.

Operator

Thank you. We'll now begin the question and answer session. First question is from Praneeth Satish with Wells Fargo. Please go ahead.

Speaker 4

Thanks. Good morning all. So a lot of positive developments here recently. You've done about $2,600,000,000 of asset sales and GTL settlement, which adds $175,000,000 of EBITDA, 100 of 1,000,000 of CapEx savings versus the budget and on track to get Southeast Gateway into service early. So I guess the question is when you put all of that together, where do you see leverage shaking out in 2020 5 versus the 4.75 target because it would seem to us that you're pretty close?

Speaker 2

Hey, Puneet, it's Francois. Thanks for that excellent summary of our prepared remarks. Look, we with the $2,600,000,000 of asset sales announced and expected to close here in the Q3 in aggregate and the strong EBITDA performance and trending to the lower end of the CapEx guidance range at $8,000,000,000 we're largely done with being below 4.75 for 2024. Of course, we're all aware of the fact that we only have the partial year benefit in 2025 of the assets going into service and that in 2026, frankly, we are largely done as well. So the question is how do you deal with that interim 2025?

Speaker 2

As I said before, there are 3 levers for us to lean on to address the credit metrics in 2025. The first is continue to improve and exceed plan on our EBITDA performance. That comes from safe and excellent operations. The second is to outperform our plan on the capital spend, which we are optimistic there will opportunities for us to do that. And then thirdly, our additional divestitures.

Speaker 2

We do still have some transactions in market now that we have the luxury of essentially being complete for the 2024 program. To the extent we see attractive valuations, we may consider announcing additional transactions in the second half of twenty twenty four. But again, I'll underscore that it will have to be compelling valuations. I think all three of those levers are available to us, and we're very confident in our ability between all three of those levers to address that interim or partial year in 2025.

Speaker 4

Got it. That's helpful. And then maybe on your asset sale comments here. So you've established a framework now for selling a minority stake in NGTL to indigenous communities. Does this the first question is, does this suggest a template for similar transactions in the future?

Speaker 4

And then if the answer is yes, does this transaction basically set a floor multiple of 12 times for future asset sale valuation? So in other words, if you've got this ability to sell additional interest in NGTL at roughly a 12 times valuation, does that become the hurdle rate for future asset sale valuations?

Speaker 2

So, I guess I would say the answer is yes, but it would be asset dependent, right? I mean, valuations of different asset classes with different risk profiles will vary. Clearly, NGTL being full cost of service regulation has the lowest volatility of cash flows. And so we'll garner a very attractive valuation as we saw with the transaction we announced a couple of days ago. The backdrop is very positive for M and A right now.

Speaker 2

We've got good fund flows back into core infrastructure funds. We've got monetary policy easing in Canada already and soon to be easing is our expectation in the U. S. And there is again strong demand for natural gas infrastructure from private buyers given all of the encouraging dynamics around natural gas demand growth. So all three of those things point to a continued and very robust market.

Speaker 2

And again, adjusting for which asset we might be looking to monetize next, I think we can continue to see fairly robust multiples. Got it. Thank you.

Operator

Question is from Theresa Chen with Barclays. Please go ahead.

Speaker 5

Good morning. Can you walk us through the EBITDA uplift for the NGTL settlement in more detail? And strategically, what does it mean for you to have the indigenous communities as part owners of this asset for growth going forward?

Speaker 6

Good morning, Theresa. This is Stan. I can take the first part with respect to the NGT settlement and maybe I'll just back up and give you a more holistic view in that. We're really excited about the collaborative effort with our customers for the first time in recent memory. This is we had unanimous support for the settlement and that's really special thing for us.

Speaker 6

And the settlement will make sure that the customers maintain competitive tolls and the new market access that they need. And for us, it's going to mean improved cash flow and a stronger balance sheet. So I simply think of the settlement as having 2 parts with respect to the tolls, a 5 year term that will extend through December 2029 for maintaining the 10.1% return on equity on a 40% equity thickness. And this increase of EBITDA that we've talked about of around $200,000,000 really comes in 2 parts. About $150,000,000 of that will be generated predominantly through the accelerated return of capital via higher depreciation rates and another $50,000,000 or so will be generated through incentive mechanisms as those incentive mechanisms are earned on a year to year basis.

Speaker 6

You can also think of the $150,000,000 of increased depreciation as largely being included in our plan with the $50,000,000 in incentives or so representing additional upside again as those incentives are realized going forward. And the second part of the settlement deals with the multiyear build outs. The build outs designed to meet the growing system demand and when completed will increase capacity by about a Bcf a day. So consistent with our $6,000,000,000 CapEx plan for 2025 forward and consistent with what we've included in prior Investor Day materials, We're going to allocate about $3,270,000,000 of capital that primarily will be spent across 2026 through 2,030. So you can think of that as roughly about $500,000,000 a year.

Speaker 6

And that capital will fund a series of projects, each of which are formidable, constructible in corridor projects that will be subject to a final investment decision when they get to a Class III estimate. And Teresa, in terms of what it means to have Indigenous Partners. First of all, this is

Speaker 2

a business transaction that's separate and apart from the rights that indigenous communities as rights holders have to participate in our regulatory processes. Having said that, as our partners, we're going to be sharing with them much earlier than would otherwise be the case, our development plans and our projects. And we'll be able to receive their input into exactly how we design and execute our projects. That is nothing but a good thing in terms of building support for the projects as we advance them through the regulatory phase and just builds a much stronger alignment between us and a key rights holder in our regulatory process.

Speaker 5

Thank you. Turning to the Mexico side of things. So from here, what are the key gating factors in your view of hurdles related to execution on Southeast Gateway and getting that asset online and on time and on budget? And then on the heels of the Mexico presidential election with the U. S.

Speaker 5

Presidential election around the corner, how do you see the political landscape evolving and what potential read through do you see to your assets and business in Mexico as time goes on?

Speaker 6

Yes, Teresa, I could talk to you first about the project and then I'll turn it over to Francois to talk about the political climate. But again, just to reinforce, no change to the project's cost estimate $4,500,000 or to our summer 2025 in service date. We are glad that we've gotten all of the deepwater pipeline done and we have got 3 kilometers of nearshore work to get done, which we think will be completed by sometime in Q3. So progress on that work is progressing nicely. At the same time, we're working to complete the onshore work related to our pipe and compressor stations and we have the expectation of that being mechanically complete sometime around year end.

Speaker 6

CFE is continuing to make really good progress with the construction of their power plants, which are ready to go in service sometime around Q4 of this year and then another one early in 2025. And I was down in Mexico just a few weeks ago and they again reinforced the need of gas from SGP to fuel these plants going forward. Our team is really laser focused on getting the project placed in service on time and on budget as safely and efficiently as possible. And right now, we're in a really, really good position to do that. We have had initial discussions around what would need to be true for early in service take hold, but haven't landed anything definitive just yet.

Speaker 6

So give us

Speaker 2

a little more time to finish out some of the offshore work in those discussions. We'll get back to you thereafter. And Teresa, as to the political landscape, President-elect Scheinbaum being elected was not a surprise to us. We see a continuation of supportive policy for natural gas transmission. Again, we were the first ever partnership formed with the CFE with a private sector party.

Speaker 2

The President-elect has made very supportive statements publicly with respect to natural gas transmission being important to achieving their socioeconomic goals and has also made very supportive comments with respect to the project. We have continued to see excellent support from the staff at the CFE to advance all of the development aspects of the project throughout construction. And with respect to the pending election in the United States, we will see how those unfold. Our perspective is that adding egress for U. S.

Speaker 2

Natural gas from the Gulf Coast into Mexico as a market to compete with LNG exports is a little bit agnostic to which party forms government after the election. That's one of the benefits of adhering to our natural gas strategy and principles. And so we view the outcome of the election in the U. S. Not having any kind of significant impact on our prospects for our business in Mexico.

Speaker 5

Thank you.

Operator

The next question is from Ben Pham with BMO. Please go ahead.

Speaker 7

Hi, thanks. Good morning. With the ENCHTIL now behind you, I was just in the month. What are your next focus on with respect to rate filings? And is there anything across your network where you can also flex depreciation rates and bring forward cash flows?

Speaker 6

Well, as part of the NGTL settlement, we're doing exactly that by increasing depreciation to the tune of around $150,000,000 And amongst other things, that's going to allow us the ability to potentially redeploy that in other jurisdictions where we can get higher returns for that capital investment. Any other rate cases? We have about 70% of our revenues in the U. S. Come from Colombia and the ANR pipeline systems.

Speaker 6

On Colombia's last settlement, we have an obligation to file for new rates to be effective no earlier than April of 2025 and no later than April 2026. So our team is working through that right now. And on the ANR rate case, you could think of that as likely to take effect, the rates to take effect sometime end of this year or early in 2026. Those are the next two biggest opportunities in terms of filings. I will note that particularly in the U.

Speaker 6

S, we have a long standing history of settling rate cases. And we are really close to, if not at the doorstep of settling the ongoing rate cases that we've had on the GTN system and both the Northern Border system. So more good news to come there.

Speaker 7

Okay. And then let me just to go back to my question on the depreciation. Is that going to be more limited to the Canadian side then? Yes. Just like the depreciation we're looking.

Speaker 6

Yes. For the most part, yes. The mainline system has a settlement that's in effect for another two and a half years and that system is already highly depreciated. So there's probably not a lot more to get out of this. But with respect to the U.

Speaker 6

S, we'll look to other optimization paradigms with respect to our rate case filings.

Speaker 7

Okay. Got it. And maybe the second one on the data opportunity you mentioned and mileage and location. Are you able to the CapEx opportunity for that? I mean 15 miles of steel, I mean that's is that more of a $500,000,000 operates per each data center?

Speaker 6

Obviously, each project is unique. But when you think just an average rule of thumb somewhere maybe $5,000,000 to $10,000,000 a mile maybe something that you could use. So we're talking well below $500,000,000 and couple of $100,000,000 But again, all things equal depends upon the specifics of the projects.

Speaker 7

Okay, got it. Thank you.

Operator

The next question is from Robert Kwan with RBC Capital Markets. Please go ahead.

Speaker 8

Great. Good morning. I just want to confirm some things, Stan. You mentioned just around the NGTL settlement. So is the $150,000,000 of increased depreciation something that was already incorporated in the guidance you gave at the November 2023 Investor Day just in terms of future EBITDA?

Speaker 8

And then on the incentives, I just wanted to make sure that that $50,000,000 is that additive to the incentive framework that was already in place?

Speaker 6

So yes, to the first part of your question, the $150,000,000 in increased depreciation was largely baked into our existing plan. And then you could think of the incremental upside is being recovered through the incentive mechanisms. Now there's no cap on the incentive dollars that the mechanism is very similar to what it was last time and that there's 2 different tiers that will go through. Tier 1 has a fifty-fifty sharing, Tier 2 and eighty-twenty sharing. But when we look at things, we think that there is a reasonable expectation that we should be able to generate around $50,000,000 or so of these incentive earnings going forward and that would be incremental to plan.

Speaker 9

Yes. So is that sorry, but

Speaker 8

that is that incremental to what you are you have already been earning

Speaker 3

on this system? Correct.

Speaker 8

Okay, perfect. Okay. Just the final one here, strategically Francois, you've talked a lot about your payout ratio strategy and then overall I think trying to get that down over time to screen favorably against regulated utilities. So this is really more the earnings payout ratio. Can you just talk a little bit more about how you're feeling about that and how you expect to kind of achieve that, and possibly over what timeframe?

Speaker 2

Yes. Thanks, Robert. That's an ambition we have, I would say, to start focusing on in the second half of the decade. Right now, we have we're laser focused on one very important task and that's to put $16,000,000,000 of assets into service between 2024 2025. As I talked about with respect to one of the prior questions, we may have an opportunity or we may decide to accelerate some additional divestitures here in the second half of twenty twenty four to make further progress against our 2025 leverage metrics.

Speaker 2

So what I would say is I would rather get that work done and see where we fall out on what our go forward run rate leverage is and payout ratios post all of these transactions and these assets be put into service before we start giving you a little bit of visibility around what we might be looking to do with incremental free cash flow and the impact on payout ratios going forward. But as you said, the trend over the long run is for us to be looking to reduce our payout ratios, both from a distributable cash flow per share as well as earnings per share going forward.

Speaker 8

Okay. That's great. Thank you. Thank you.

Operator

The next question is from Jeremy Tonet with JPMorgan. Please go ahead.

Speaker 10

Hey, good morning. This is Ratan Reddy on for Jeremy. On the data center opportunity specifically, could you elaborate, I guess, on how you see opportunities in Canada specifically and maybe how that compares to what you're seeing in the U. S?

Speaker 6

Sure. I could do that for you. Big picture wise, there's somewhere around 8,000 data centers that are operating in the world today, about a third of them are located in the U. S. And a majority of those are located in Virginia.

Speaker 6

As we sit here today, there is around 300 or so data centers that are currently under construction or contemplated in the U. S. And when you look at where they're being built, more than 60% of them are being built within 50 miles of our pipes, which really uniquely situates us to compete for and win this load. If you think of an average data center as consuming about 150 megawatts of power, which is about enough of power to fuel 77,000 homes by the way. These 300 new data centers are going to need somewhere around 45 to 50 gigawatts of power to operate.

Speaker 6

And then if you apply just an average heat rate to that, that's how we get this notion of around 6 to 8 Bcf a day of capacity that's going to be needed to serve them. So in our discussions with various entities, what we're learning is that while power costs represent a relatively small portion of the overall cost to operate a data center, the access to reliable power could be a roadblock towards the autonomy build out. Given that, we're seeing a shift in siting preferences from regions where big telecom infrastructure is in place to regions where energy and supply infrastructure is in place. And as an alternative to siting these data centers behind LDCs, we're now seeing a much greater potential for data center operators to seek laterals off of our mainline and to use that gas supply to fuel on-site power generation that they would build and or own themselves. So in the U.

Speaker 6

S, we tend to build projects at around a 6 to 8 times build multiple and I would expect that to continue going forward respect to data set opportunities. The other part of your question is actually very good actually in that. Our best in class footprint doesn't limit the opportunity set just to the U. S. Now in Canada, there's around 300 data centers that are in operation today.

Speaker 6

We could see that load increasing by 1 to 2 gigawatts before the end of the decade. In Mexico, there's about 150 data centers in operation today. Most notably in the state of Queretaro, it's ranked 13th in terms of data center demand usage currently and 2 of our pipelines, Via de Reyes and the town of Don Charlie pipeline serve the state of Queretaro. So there's opportunities for expansions there. So while entities like Google and Amazon and Microsoft are both talking about expansion plans across all three of the geographies, I think the last thing I would leave you with is while data centers are unique opportunity and we're going to pursue them, our portfolio effect is much more than that and that we have growth opportunities with respect to the next wave of LNG, with respect to LDC reliability, with respect to growing power generation and electrification as well as supply access in addition to the data center opportunity.

Speaker 10

Got it. Thank you for that. For the second one, I just want to ask, I guess, on how you guys are progressing towards those productivity and cost effectiveness initiatives you guys laid out within the last year?

Speaker 6

Yes. I think you're talking about what we called our focus project, which is around fundamentally changing the way we do our work on safety, productivity and capital. And what we mentioned to you previously was we set a target of $750,000,000 of synergy savings by 2025. At this point in time, we are well on our way to meeting that goal, having generated somewhere around $410,000,000 of synergies as of last month and look to get the balance taken down in the next year and potentially maybe come in a little ahead of our schedule there.

Speaker 10

Great. Thank you.

Operator

The next question is from Keith Stanley with Wolfe Research. Please go ahead.

Speaker 11

Hi, good

Speaker 12

morning. Curious once as you're getting towards completion of Southeast Gateway, how you think about growth in Mexico within your $6,000,000,000 to $7,000,000,000 dollars per year CapEx budget. Are there material new opportunities you could pursue in the country? Or is it more likely smaller scale opportunities?

Speaker 2

Thanks for the question, Keith. It's Francois. 1st and foremost, we're very bullish on the role that Mexico is going to play in North American gas markets, both in terms of growing demand in country, but also the potential for LNG exports from Mexico. So that will drive additional investment opportunities for us to consider. I would I always believe that it's important for you to be the incumbent that builds the backbone of the infrastructure.

Speaker 2

That's what we're doing right now with completion of Villa de Reyes as well as Southeast Gateway. And from that comes very attractive low build multiple, low risk ancillary lateral opportunities that tend to come your way as the incumbent. We are starting to see a number of those opportunities present themselves. But as we said, we are also focused on managing our aggregate exposure from Mexico as a percentage of the whole. And pro form a for the spin and Southeast Gateway going into service, we will be at approximately 15% of consolidated EBITDA.

Speaker 2

And prior to contemplating any additional investment in the near term, we would need to see some progress in either bringing in a joint venture partner or growing ahead of plan our other franchises such that the percentage is lowered. But again, the backdrop, the macro backdrop around demand growth will present us with more investment opportunities in the future, albeit a bit smaller.

Speaker 13

Got it. That makes sense.

Speaker 12

Curious if there's anything notable to update on the Coastal GasLink litigation? I think there were a couple of settlements that came through. Is that all going according to your expectations? And any meaningful cash inflows or outflows you're expecting as part of that?

Speaker 6

Yes, this is Stan. With respect to CGL, we continue to work on the post construction reclamation activities, which we should have completed by the end of this year. We did have one settlement with respect to cost recoveries. We're going to percent continue to pursue the other and really no change in our guidance that at the end of the day we expect to be in a net recovery position.

Speaker 8

Thank you.

Operator

The next question is from Robert Catellier with CIBC Capital Markets. Please go ahead.

Speaker 11

Hi, good morning everyone and congratulations on the progress towards your deleveraging goals. Thank you.

Speaker 2

I have some

Speaker 11

follow-up questions there. Yes. Just wanted to follow-up on how the U. S. $400,000,000 verdict in the Columbia acquisition case impacts your deleveraging plan?

Speaker 11

And then I'll have a follow-up question.

Speaker 2

So we I think have publicly disclosed our intention to appeal the court's decision. We expect that the adjudication of the appeal process will run well into 2025. And we will react accordingly. And again, our plans were able to accommodate any judgment or cash outlay that is required at the end of that process and continue to meet all of our objectives around deleveraging. We are also optimistic based on the merits of the case that we will get a different outcome based on appeal.

Speaker 11

Right. So how is the $400,000,000 treated though currently until there's a final verdict? Does it increase your burden or is it treated as contingency that doesn't add to the leverage?

Speaker 3

We do not have an accrual for that, Rob, in our plan. Right.

Speaker 2

It's just

Speaker 3

based on confidence and legal review, Rob, but we'll know in the Q1.

Speaker 11

Got it. And then on a more positive note here, just given the substantial progress you've made with SGP, I think I heard Stan mention the potential for being mechanically complete late in 2024, possibly having an earlier in service date. How does that change your approach to deleveraging? And do you have any insight as to how the rating agencies would view early mechanical completion in terms of how they treat the partial year of 2025?

Speaker 2

So I'll start, Robert, and then I'll pass it over to Sean to comment on rating agencies. As we said before, we feel like we've got our goals achieved around achieving an upper limit of 4.75 debt to EBITDA for 2024. So now we're looking to deal with the partial year of 2025. We've got 3 levers to pull to deal with that partial year. First is executing on our capital projects under budget.

Speaker 2

The second is having EBITDA performance that is ahead of plan. And one of the potential ways to do that is to bring assets into service early. Our plan right now has Southeast Gateway coming into service approximately in mid year. As Stan mentioned, to the extent we're contemplating the art what's the art of the possible for bringing that asset into service early. It's very early days in our conversations with the CFE.

Speaker 2

Our job, 1st and foremost, is to excel on the

Speaker 3

schedule. EBITDA is a mid year, right? And you will have seen all 3 agencies reaffirm TC, right, family wide and that was a major update and focal point as you can imagine for each of them. So and a rule of thumb, we've done this before, but round numbers Canadian 800 $1,000,000 worth of EBITDA and SGP. If you annualize that, that's an extra $400,000,000 that's our 2025 GAAP is that half year.

Speaker 3

So there's a lot as Francois said, a lot of focus on seeing what the art of the is commercially to help the customer and help ourselves along the way next year. Thanks.

Speaker 11

Okay. Excellent. Just last question for me. Just on the storage, one of your competitors reported today and has indicated they're seeing both term and higher rates on their storage renewals. I wonder if you can give us an outlook for how you see the commercial development of your storage assets, understanding you might have more of that in rate base?

Speaker 6

So we are one of the largest storage owner operators in North America and see tremendous value in storage across our systems. And in the aggregate across all of TC Energy, we operate around 650 Bcf, which is about 532 Bcf being here in the U. S. We're in our 8th consecutive year of having our storage capacity 100% contracted for it. So really strong demand continues and our storage is heavily weighted in the market area and over 80% of our storage is subscribed by our LDC customers who really rely on it as a source of reliability to make sure that they're meeting their peak day needs.

Speaker 6

So we don't see that changing going forward. Any storage that we seek to develop will be along those lines of rate regulated, integrated into our systems to provide additional reliability to our LDC customers.

Speaker 11

Okay. Thanks very much.

Operator

The next question is from John McKay with Goldman Sachs. Please go ahead.

Speaker 9

Hey, thanks for the time. I wanted to maybe just go back to the NGTL piece and the commentary around adding 1 Bcf a day of capacity through the back of the decade. I guess, is there room I guess first question is, is that incremental to kind of existing expected growth in the system? And then 2, kind of is that locked in or is there upside there? Just how to think about that kind of piece from a capacity standpoint?

Speaker 6

Well, that one Bcf represents the expected incremental growth that's to come over the next 5 to 7 years or so. Again, the project is made up of a series of smaller bite sized expansion projects and should we see or should the customers see changes in market needs over the next several years, we have the ability to tweak those projects accordingly.

Speaker 9

Okay. Maybe staying up there, we're pivoting to the Cedar Extension. You guys have talked about working on CGL to kind of improve those returns net to you, Understand this is a pretty small dollar amount versus the kind of $1,200,000,000 of overall project capital. But can you talk about how this might end up looking like from a return standpoint on that pipe and maybe just next steps to getting to Central Phase 2 expansion of the mainline?

Speaker 6

Yes. With respect to Cedar, we were very pleased to see the Heisla and Pembina announced their FID last month and we have indeed started construction on the project. Think of it as having a P50 capital cost of about $1,200,000,000 which will increase capacity by the $400,000 a day when it's in service in 2028. Now with respect to the project's returns on an after tax unlevered basis, you can think of it as having basically a modest upside to our regulated Canadian businesses with further upside potential if we deliver the project at a lower capital cost. On Phase 2 of CGL, really no new updates.

Speaker 6

We've continued to progress work related to the project scope, the timeline, the engineering assessments and to assess this expansion including discussions about how we could further de risk the project execution should it ultimately reach FID.

Operator

The next question is from Zack Van Aelven with TPH. Please go ahead.

Speaker 13

Perfect. Thanks guys for taking my question. Just going back to the U. S. Power demand side of things, understanding that even laterals with the FERC environment can take a few years to plan, develop and build.

Speaker 13

Do you guys have existing space on your system today that can kind of act as operating leverage as power demand grows in the near term?

Speaker 6

So it really depends where the opportunity arises, but most of the power gen growth that we're seeing is along the Columbia and ANR systems. For the most parts, there are isolated capacity pockets that we could use to incorporate into a project. But in many instances, it's going to require looping and or compression to capture these loads.

Speaker 13

Makes sense. And then maybe one on the CGL with LNG Canada Phase 2. Can you remind us of what that project consists of it, mainly just additional compressor stations?

Speaker 6

Yes, the project essentially is that it's a condition compressor station that's going to provide additional capacity going forward. I think it's 1 station, 3 different units, if I'm not mistaken, 5 different units.

Speaker 13

Okay. That makes sense. Thank you guys so much.

Operator

The next question is from Patrick Kenny with National Bank Financial. Please go ahead.

Speaker 14

Yes, good morning. Just back to the rise in natural gas demand here across North America. I think Francois, you mentioned 40 Bcf a day incremental by 2,035. Yet it already appears that we're seeing relatively full storage capacity in several markets, which is good for spreads, of course, but perhaps you can just comment on the need for adding additional storage capacity on both sides of the border over the coming years to help enable this higher demand profile?

Speaker 6

I think what we're seeing right now, particularly in the U. S. Is the need for additional storage, particularly in the Gulf Coast to handle balancing opportunities associated with LNG. And again, that tends to be not physically integrated into our systems It tends to have a degree of merchant risk or shorter term contracting that comes with it. And for us, we're going to get back to ensuring anything we do around the storage assets are to be integrated, so we can provide better services to our LDC customers in particular.

Speaker 6

Same thing with respect to Canada, we're in a situation right now where we have a low pricing environment. Our storage capacity is roughly 80% full, which is above the 5 year average for this time. And to the extent that there are opportunities to use stores to help balance arbitrage either with respect to weather or price, we'll look to take advantage of those. But I don't really see us doing a whole lot of new storage development going forward. Anything we do likely will be in the U.

Speaker 6

S. And again integrated back into our customer mix.

Speaker 14

Okay. Thanks for that, Stan. And then just maybe on the power demand side, I know it's still early days for fluency, but Q3, but wondering if you had just an update on how the impact assessment process is going or any other developments related to the potential timing of the project?

Speaker 15

Thanks for the question. It's Ansley here. So Bruce Power continues really to be primarily focused on continued operational excellence and the life extension of the existing fleet. As you've highlighted, the impact assessment process has started for potential new build at the site Bruce C. It is still very early days for that project.

Speaker 15

And so while we are happy to see there's extremely strong support for new nuclear in the province and we are happy to participate in that process. It will be years before we will end up at the completion of even just the impact assessment stage.

Speaker 14

Okay. That's great. Thank you.

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 hand the call back over to Gavin Wiley. Please go ahead, Mr. Wiley.

Speaker 1

Thanks very much. And first wanted to thank everybody for joining us this morning. If we didn't get to your question, the Investor Relations team is always here to help. Please just reach out, and we'd be happy to get back to you. We always appreciate your interest in TC Energy and we look forward to your our next update with Q3.

Speaker 1

Hope everybody has a good summer to finish off.

Operator

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Earnings Conference Call
TC Energy Q2 2024
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