Q2 2021 TC Energy Corp Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the TC Energy second quarter 2021 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 to join the question queue. You May Press Star then 1 on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing star Zero I would now like to turn the conference.
So David Moneta, Vice President Investor Relations. Please go ahead.
Thanks, very much and good morning, everyone I'd like to welcome you to TC Energy's 2021 second quarter conference call joining.
Joining me today are Francois Poirier, President and Chief Executive Officer, Don Marchand Executive.
Since over incident, and Chief Financial Officer, Tracy Robinson, President Canadian natural gas pipelines, President coastal gas link Stan Chapman, President U S and Mexico natural gas pipelines Bevin worse for executive Vice President strategy, and corporate development and President liquids pipelines Jorge.
<unk>, Preston President power and storage and Glenn Menu's, Vice President and controller for them.
<unk> and Don will begin today with some opening comments on our financial results and certain other company developments a copy of the slide presentation that will accompany their remarks is available on our website. It can be found in the investors section under events.
Orientations following their remarks, we will take questions from the investment community. If you are a member of the media. Please contact Jaimie Harding after this call.
In order to provide everyone from the investment community with an equal opportunity to participate we ask that you limit yourself to 2 questions. If you have additional questions. Please reenter.
And present Q.
Before friends, while it begins I'd like to remind you that our remarks today will include forward looking statements that are subject to important risks and uncertainties for more information on these risks and uncertainties. Please see the reports filed by TC energy with Canadian Securities regulators and with the U S Securities Exchange Commission.
And finally during this presentation well refer to measures such as comparable earnings comparable earnings per share comparable EBITDA and comparable funds generated from operations. These and certain other comparable measures are considered to be non-GAAP measures. As a result, they 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 with that ill turn the call over to Francois.
Thanks, David and good morning, everyone and I know, it's a busy morning with lots of companies reporting so.
Thank you very much to all of you for joining us today.
As outlined in our second quarter report to shareholders, our diversified portfolio of high quality long life energy infrastructure assets continue to meet North America's growing demand for energy.
Utilization levels across our network remains strong during this.
Half of 2021 and that despite energy market volatility weather events and the ongoing impacts of COVID-19.
Of note our U S natural gas pipeline network moved an average of 26 Bcf per day, an increase of 5% over the same period in 2020, while field.
Receipts on N G T L, where 12.2 bcf per day.
And our power and storage business Bruce power continued to produce solid operating results, while our Alberta co gens benefited from increased output due to increased availability and the return to service of our Mackay River facility.
Facility.
Once again this highlights the essential role our infrastructure plays in the well being of people across the continent and the functioning of the North American economy.
We take this responsibility seriously and as always.
We conducted our business in a safe and reliable manner.
Safety is 1 of our core values and is embedded in the culture of our organization.
During the first half of the year, we invested $765 million and maintenance capital as part of our ongoing commitment to pipeline integrity.
And our focus on operational.
For once and the strong demand for our services is also reflected in our financial performance.
Through the first 6 months of the year comparable EBITDA comparable earnings per share and comparable funds generated from operations all exceeded last year's record results.
This.
Excellent very good outcome, considering the significant decline in the value of the U S dollar relative to the Canadian dollar, which negatively impacts our reported EBITDA as well as the loss of 1 time sort of Texas fees in the first quarter of 2020 and the loss of capitalized interest during construction of K S. L.
And looking forward, we expect the solid operating and financial performance of our existing assets to continue.
Contributing to our performance is Columbia gas, which recently notified the FERC that it has reached a settlement in principle with its customers addressing all remaining issues related.
Is it to its section for rate case.
We're very pleased that we were able to reach an agreement.
While more details will be available once the settlement is filed we expect 2021 revenue on the system to be generally consistent with the estimates recorded to date.
Turning to.
Related to the program, where we remain focused on advancing our now $21 billion of secured growth projects that are expected to enter service by 2025.
As is our custom they are all underpinned by cost of service regulation or long term contracts, which gives us visibility to the earnings and cash.
Capital they will generate.
A substantial portion of this growth portfolio is linked to our irreplaceable natural gas pipeline network, which now includes the VR project on our Columbia gas system.
This U S $700 million project referenced earlier today in our quarterly report includes the installation of.
Cash flow trick compression that will meet growing demand and reduce emissions. This.
This is another great example of our vast network playing an important role in the transition to a lower carbon world by delivering natural gas that will be used to displace coal fired power and provide a backstop to.
The intermittency of renewables.
Now a few words on coastal gas link.
Following the macro events of the past 16 months, including the public health order that limited our project work force at the beginning of 2021 construction.
<unk> activities have resumed and we are making good.
<unk> with close to 50% of the project completed.
However, as we've shared previously costs are expected to increase and that has resulted in a dispute with LNG Canada.
While commercial discussions are ongoing and we remain committed to successfully completing.
Leading the project we are nearing a critical stage that requires a resolution of the outstanding issues.
Looking beyond our secured capital program over the mid to longer term, we expect numerous other opportunities to come to fruition as the world both consumes more energy and transitions.
To lower carbon energy future.
We have significant additional initiatives that are aligned with our strategy organizational capabilities risk preferences and return requirements in various stages of development.
These include system expansions extensions and modernization.
<unk> 2 grams across our north American natural gas pipeline footprint.
Electrification opportunities throughout our network.
The refurbishment of another 5 reactors at Bruce power.
2 pumped storage projects in Alberta, and Ontario, as well as the Alberta carbon grid.
Grid now our goal is to build on our long history of disciplined growth, while being agnostic to the form of energy that will ultimately lead to a low carbon energy future.
Whether it's renewables and firming resources needed to manage their intermittency electrifying, our fleet or other.
<unk> printing technologies, our existing asset base technical capabilities innovative approach and financial strength. All mean that we are well positioned to prosper irrespective of the pace or direction energy transition takes.
As I've mentioned before.
Other emerge ultimately our goal is to sanction $5 to $6 billion annually to deliver on our long term growth plans, including $1.5 billion to $2 billion per year of maintenance capital across our extensive network.
And based on the project sanction to date in 2021 and various.
Other initiatives in late stages of development, we expect to achieve our goal this year.
More specifically in addition to the Columbia's VR project and ongoing maintenance on our regulated businesses, we expect a continuation of Columbia gas modernization program.
For Bell as the Bruce Power unit, 3 MCR project, which is under consideration to be added to our backlog by the end of this year.
And through requests for information, we are identifying potential opportunities in wind solar and energy storage projects that could generate 1000 megawatts of zero carbon energy.
As with the electricity needs for a portion of our U S pipeline assets.
This is an important step in advancing our plans to leverage the power and storage business as a platform for sustainable future growth.
While lowering emissions across our natural our north American footprint.
To meet and longer term the opportunity set is also encouraging.
We are engaging with various stakeholders in Ontario to advance the myford pumped storage opportunity.
The project is designed to store emission free electricity and provide backstop to the intermittency associated with the energy per.
Provided by renewables.
Earlier. This week, we reached an agreement with the department of National Defense, that's subject to conditions and regulatory approval allows for the development of the multibillion dollar 1000 megawatt clean energy storage project on federal lands.
Moving forward, we will continue.
Continue to consult with the soggy Ojibwe nation, and other indigenous rights holders and communities.
And we will engage with local communities and other interested stakeholders to assess the potential impacts and economic benefits of the project.
And finally, we recently announced the partnership with Pembina to jointly.
Joining me develop the Alberta carbon grid, a carbon transportation and sequestration system.
When fully constructed it would be capable of transporting more than 20 million tons of Sidoti <unk>, providing Alberta based industries with an ability to manage their emissions and contribute to a lower carbon economy.
Stuart I expect we will be opportunity rich and have to allocate capital to those projects that are best aligned with our capabilities risk preferences and return requirements.
Based on the continued strong performance of our base business and our organic growth.
With plans, we expect to continue to grow our dividend at an average annual rate of 5% to 7%.
As always the growth in dividends is expected to be supported by sustainable growth in earnings and cash flow per share and strong coverage ratios.
I am confident that the future opportunity.
<unk> set combined with our capabilities will continue to deliver superior risk adjusted total shareholder returns well into the future.
I'll now turn the call over to Don who will provide more details on our second quarter financial results John.
Thanks, Francois and good morning, everyone.
It.
As outlined in our results issued earlier today net income attributable to common shares was $982 million or $1 per share in the second quarter of 2021.
<unk> to $1.3 billion or $1.36 per share for the same period in 2020.
Second quarter results included a combined 18 million.
A after tax charges associated with Keystone XL preservation and other costs, along with a small net revision to the asset impairment taken in quarter, 1 as well as a $13 million after tax recovery associated with the Ontario gas fired power plants sold in 2020.
The corresponding period in 2020 also included.
Certain specific items as outlined on the slide and discussed further in our second quarter 2021 report.
These specific items as well as unrealized gains and losses from changes in risk management activities are excluded from comparable earnings.
Comparable earnings for the second quarter were $1 billion for $1.7 per common.
Care compared.
$863 million or <unk> 92 per common share in 2020.
Turning to our business segment results on slide 10 in the second quarter comparable EBITDA from our 5 operating segments of $2.2 billion was similar to 2020, despite strong currency translation headwinds.
Common share Canadian gas pipelines comparable EBITDA of $684 million was $63 million higher than second quarter 2020, primarily on account of increased rate base earnings as well as higher flow through depreciation and income taxes on the NGL system.
Coastal gasoline development fee revenue, which commenced in mid second quarter 2000.
And a modest net increase from the Canadian mainline.
NGL system net income rose $16 million year over year, mainly due to a higher average investment base, resulting from continued system expansions and reflects an ROE of 10, 1% on 40% deemed common equity.
Net income for the.
20 mainline increased $14 million largely due to higher incentive earnings and the elimination of the $20 million after tax annual TC energy contribution included in the previous <unk> 2014 decision.
U S gas pipelines comparable EBITDA of $717 million U S. In the second.
Quarter was higher by $122 million U S compared to 2020.
This was driven by a net increase in earnings from Columbia gas following its application for higher transportation rates effective February 1.2021 subject to refund upon completion of the rate proceeding.
Along with greater capitalized pipeline integrity.
Canadian <unk> 21, compared to 2020, partially offset by higher property taxes.
Yesterday, Columbia notified FERC that it had reached a settlement in principle with its customers. While definitive terms are still being finalized 2021 revenue is expected to be generally consistent with estimates recorded to date.
In addition.
And for earnings across our U S gas pipelines for generally higher following the cold weather events of first quarter 2021, which impacted many of the U S markets we serve.
Mexico gas pipelines comparable EBITDA of $134 million U S gross $4 million U S versus last year, primarily as a result of increased.
Earnings on Guadalajara, following implement implementation of flow reversal completed in 2020.
Liquids pipelines comparable EBITDA declined by $66 million to $366 million in the second quarter due to lower volumes on Keystone, partially offset by increased contribution from liquids marketing activities.
<unk> is mainly attributable to higher margins and volumes.
Power and storage comparable EBITDA in the second quarter rose by $22 million.
Primarily due to increased Bruce power results, driven by higher volumes, resulting from fewer outage days and higher contract price, partially offset by increased operating expense.
Activities.
Natural gas storage and other also contributed to the increase as a result of our November 2020 acquisition of the remaining 50% ownership interest in Tc turbines and higher realized Alberta natural gas storage spreads.
For all our businesses with U S dollar denominated income, including U S. <unk>.
Expense gas pipelines and parts of liquids pipelines EBITDA was translated into Canadian dollars using an average exchange rate of $1.23 in second quarter 'twenty, 1 compared to $1.39 for the same period in 2020.
While overall U S dollar denominated comparable EBIT it comparable EBITDA increased by <unk> 1.
Mexico $5 million the year over year weakening of the currency was a conservative considerable drag on Comparatives 2021, Canadian dollars reported EBITDA.
That said the corresponding impact on comparable earnings was not significant due to offsetting natural and economic hedges.
As a result, our U S dollar denominated.
100 revenue streams are in part naturally hedged by U S dollar denominated in amounts below comparable EBITDA within depreciation and amortization interest expense and other income statement line items.
We then actively manage the residual exposure on a rolling 2 year forward basis with realized gains and losses on this program.
Graham reflected in comparable interest income and other.
Now turning to the other income statement items on slide 11 depreciation.
Depreciation and amortization of $633 million was in line with second quarter 2020.
Interest expense of $577 million was $16 million higher.
Year over year, largely due to the net effect of lower capitalized interest due to cessation for the Keystone XL pipeline project.
The change to equity accounting for our coastal gas link investment in second quarter 2020.
Long term debt issuances net of maturities lower.
Lower interest rates on reduced levels of short term.
Wings and the foreign exchange impact from a weaker U S. Dollar on translation of U S dollar denominated interest.
<unk> decreased $17 million compared to the same period in 2020, principally due to the suspension of recording it on Villa de Reyes effective January 1 of this year, partially offset by increase.
<unk> capital expenditures on Anr, and a higher balance of NGL system expansion projects under construction.
Comparable interest income and other rose $151 million from the second quarter, mainly due to realized gains in 2021 compared to realized losses in 2020 on derivatives used to manage our net exposure.
Borrower and exchange rate movements on U S dollar denominated income.
Income tax expense included in comparable earnings was $175 million from second quarter 2021, compared to 125 million for the same period last year with the $50 million increase mainly due to higher flow through income taxes.
On Canadian rate regulated pipelines and increased earnings.
Partially offset by higher foreign income tax rate differentials.
Excluding Canadian rate regulated pipelines, where income taxes are a flow through item and thus quite variable along with equity <unk> income in U S gas pipelines, we continue to expect our 2000.
As you to <unk> full year effective tax rate to be in the mid to high teens.
Comparable net income attributable to Noncontrolling interest of $6 million decreased by $57 million relative to the same period last year, primarily as a result of the March 3.2021 by end of TC pipelines LP.
And.
'twenty, 1 we preferred share dividends of $32 million were $8 million lower than second quarter 2020, mainly due to the redemption of series <unk> preferred shares on May 31.2021.
Now turning to slide 12.
During the second quarter comparable funds generated from operations totaled $1.
$8 billion, and we invested $1.4 billion and our capital program.
As noted at the end of May we redeemed all of our issued and outstanding series <unk> preferred shares using proceeds from our junior subordinated debt offering completed in March 2021.
In June we completed a 3 tranche offerings.
And final MTN in Canada comprised of $750 million of 3 year floating rate notes $500 million of 10 year notes at 297% and $250 million, a 26 year notes at 433%.
Also in June the U S 840 million.
Outstanding on the Keystone XL project level credit facility consolidated on our balance sheet was fully repaid by the government of Alberta under the terms of their guarantee and the facility terminated.
We also repurchased their ownership interest in cash cell and issued securities entitling the government to certain project liquidation proceeds.
<unk> is realized.
Collectively this resulted in an after tax net recovery of approximately $1.1 billion being recognized which was credit or directly to equity and served to partially offset the $2.2 billion after tax impairment charge recorded in the first quarter.
Now turning to slide.
Slide 13.
This graphic illustrates our forecasted sources and uses of funds for 2021 through 2023.
Starting in the left column, our total requirements over the 3 years are projected to be approximately $29.5 billion.
Reflecting dividends of $11 billion capital.
Expenditures, including maintenance capital of $16 billion.
2 billion attributed to the TC pipelines LP acquisition completed in March and the series <unk> preferred share redemption of $500 million in May.
The second column highlights expected internally generated cash flow of $21 billion.
2.
A common shares issued pursuant to the pipe LP buying $1.5 billion of Mtn's issued in June and the $500 million Junior subordinated notes offering completed in March.
That leaves a residual need of approximately $4.5 billion depicted in the far right column and we expect to fund that through.
Through a combination of incremental debt commercial paper and Keystone XL project recoveries.
The program excludes the normal course refinancing and scheduled debt maturities and is consistent with our goal of maintaining debt to EBITDA in the high fours and <unk> to data for 15%.
Now turning to slide 14.
<unk> in closing our solid operational and financial results once again highlight our resilient diversified low risk portfolio.
Criticality of our irreplaceable infrastructure as.
As well as the contribution of new high quality assets from our ongoing capital program.
With our enduring business.
Model financial strength organizational capabilities and unparalleled footprint.
We are poised to tap a vast opportunity set that is thematically aligned with both today's needs in the world shifting energy mix.
As well as being consistent with our longstanding risk preferences and return requirements.
This.
<unk> to perpetuate our multi decade track record of prudent value creation.
And support annual dividend growth of 5% to 7% into the future.
That's the end of my prepared remarks, I'll now turn the call back over to David for the Q&A.
Thanks, Don just a reminder, before I turn it over to the conference coordinator for questions.
<unk> from the investment community, we ask that you limit yourself to 2 questions. If you have additional questions. Please reenter the queue and with that I'll turn it over to the conference coordinator.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then 1 on your telephone keypad Youll.
You will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any Keith to withdraw. Your question. Please press Star then 2 we will pause for a moment as callers join the queue.
Our first question comes from Robert Kwan of RBC capital markets. Please go ahead.
Great Good morning, Mike.
My first question relates to the VR project, but more so taking a step back you've got 700 million U S for that business just Colombia have you looked at how big these types of opportunities could be.
Cross your entire system and.
The trigger for this going forward or is it really more so about the capacity expansion are you seeing from your shippers of real demand.
To electrify the system. So they can reduce their scope 3 emissions.
Hey, Robert This is Stan I could take a stab at that and I would say, it's really multi factored.
Is incremental volumes and incremental need this particular project.
At the same point in time are focusing on our emissions and reducing our ambition for a while we're providing additional throughput through our customers for something that's important for us and we think that we can do that not only by installing electric compression across our system, but also doing getting.
In conjunction with core each team and making sure that he is providing the power and most likely green power at the end of the day in terms of how big this could be going forward. It is part of our overall.
Drive to reduce our emissions footprint both across the country in the continent, and we have a 13 pipelines that we.
Owner, operator here in the U S and my expectation is that in any given year in any given pipeline. We can have 1 or 2 of these projects and that's what we're going to challenge ourselves to be.
We successful in reducing emissions going forward.
Okay. So just sorry, when you say 1 or 2 of these projects you are talking about an announcement.
It was something about 700 million U S range, well again, the dollar amount is going to fluctuate depending upon the specifics of the case, but.
The expectation would be 1 or 2 projects per year over the next several years now what pipeline. That's on is gonna be determinative of many things including note.
I meant for the additional load is going to come from.
Where we have the best opportunity to add electric compression with respect to proximity to poles and wires and the like.
Okay. That's great just on the second question here for the coastal gasoline dispute can you just talk a little bit more elaborate on the nature and the scope and maybe more.
Were made to you is there anything in the the sell down agreement, where there could be a clawback of.
The proceeds you received.
Hi, Good morning, it's Tracy here I'll.
I'll take that 1 I know that there's likely to be a number of questions on the dispute status for the project and what the potential.
Cancel impact may be let me say this we are in a disagreement with LNG, Canada over the alignment of cost and schedule. We've been in discussions for some time now in those discussions do continue they are confidential we.
Do have our equity partners involved.
Because they are all confidential we're unable to.
Share any details at this time I can say that they are progressing but if we're not able to reach a resolution in the near term then there will be some implications to our construction is an important project coastal gas link you know we're in full execution now we have more than 5000 people working on the corridor execution is going well, we have a strong safety.
50 record, we want to continue to sculpt them construction and I. We do remain I think very hopeful that well have a fair and reasonable outcome and at that point in time, we'll be able to share a few more of the details that you mentioned.
Okay. That's great. That's all I havent done hopefully you're happy to get this last 1 out of the way I'll let.
EBIT.
Robert Thanks for the notice was the highlight of the week again here.
Thanks Robert.
Okay.
Our next question comes from Linda <unk> of TD Securities. Please go ahead.
Thank you before I ask 1 question.
John all the best in his retirement and a big congratulations for a very successful career.
Thanks Linda.
Uh huh.
The Ontario pump storage project.
From developments recently on that front can you talk a little bit about the steps and.
And time line, and what sort of commercial attributes and ownership.
You would be looking for and as well as how it might be financed from a from a capitalization.
Exploration as well.
Hi, Linda this is Cory Hudson.
A couple of things number 1 we're very very pleased that we were able to reach an agreement.
Recently with the Dnb on the first step to gaining <unk>.
Site access so we have some technical steps that will follow here in the coming months in order to meet.
And there needs to ensure that the site remains operational for the dnb in parallel with that happening we will be working with our counterparts.
For parties to secure the commercial underpinnings for this particular facility. So we're really running a 2 pronged approach for the <unk>.
The next coming months as we continue the development of this project and as we go forward, we will be working collaboratively as well with our partners.
The local stakeholders and the Sun, who are all active participants in the process as far as your question was concerned.
Regarding the.
Capital structure, it's a little early days for us to have thought through that entirely we have to understand more clearly what the commercial underpinnings will be and once we understand understand that more clearly we will be able to work diligently with our external partners to figure out a structure that works for everyone involved.
Yes, Linda it's Don I'll just supplement.
The core of his remarks from the financing again early days.
But we can see first nation ownership here. This is a project whether it's a finance for the project level or up above here.
Rend itself for Green bond financing.
And there were significant tax.
Benefits introduced in the most recent Canadian federal budget, so that all have to be taken into account as we figure out where and how to finance. This.
Yeah.
Thank you.
I'll follow on question given all the opportunities you are facing in terms of energy transition.
Session.
And beyond considering your earnings.
Earnings and cash flow growth, which should support the 5% to 7% dividend growth I'm, just wondering how other considerations might factor into the cadence of dividend growth potentially shifting over time.
Time, including if there's if there's tax changes investor preferences might change et cetera.
Linda I'll take that 1.
Our goal as always as we think about our value proposition is that we deliver oh, a moderately growing and stable.
For dividend underpinned by a commensurate growth in earnings and cash flow.
We've targeted a payout ratio of.
80 to 85 per cent of earnings and 40 to 45 per cent.
Our cash flow per share and that.
That in turn delivers.
People balance sheet and Hum.
<unk> allows us to have the dry powder to be opportunistic to the extent any.
Acquisitions become available so I don't see any changes in that are in that our value proposition going forward.
As you perhaps into.
<unk> and in my prepared remarks, we are seeing an acceleration in the opportunity set.
You've seen the fruit of that here in our announcement.
With the VR project, you can expect additional projects to be sanctioned as per my comments throughout the balance of the year and.
To the extent of the opportunity set continues to grow as our expectation is that it will over time.
Perhaps we'll.
Consider opportunities to re look at capital allocation, but for the time being it's a you know a.
Business as usual here and they know the tried and true capital allocation framework that you're.
Accustomed to seeing from us.
Thank you.
Yeah.
Thanks Linda.
Our next question comes from Jeremy Tonet of Jpmorgan. Please go ahead.
Hi, good morning.
Good morning, Jeremy.
And Dawn you will be missed I hope Joe has the same good sense of humor as he did but best.
Best of luck going from.
Sure.
But you know maybe I just wanted to start off with the L for Alberta carbon grid and wondering.
Obviously very early days here, but.
What you might be able to stay as far as stakeholder reaction when you put out that announcement.
What type of conversations you are happening.
What do you think is possible.
Hi, Jeremy it's Ben here.
We've had we're very pleased with the customer engagement that we've had to date and Ah.
For feedback, obviously without being able to clarify exactly what the carbon hub will look like or will evolve to you know there are a lot of.
Proponents and industry advancing their own pursuit of energy transition and so right now we're working in partnership with.
The interest customers and with industry to advance.
Since our initial announcement of the carbon grid, we have been progressing our engineering and scoping work as well as filing our applications under the government of Alberta sequestration process, but I think the you know the project itself is a great example for their.
I'll answer this question on taking taking our existing asset base and seeing how it can be utilized or repurposed as we pursue energy transition opportunities in the portfolio.
Got it that's helpful. There.
And just wanted to maybe.
Maybe touch on capital allocation, a little bit more you're talking about you know new opportunities kind of materializing here.
And just wondering how you think about you know the payout ratio was within the context of these new opportunities.
<unk> and I guess no need for equity overall do you feel that the stock is getting credit.
To limit the 5% to 7%.
Dividend growth that you're talking about here would it at any point makes sense to kind of ratchet down the payout ratio or that growth rate.
And kind of these new opportunities as you said just trying to you know.
Put all these things together here.
Yeah I appreciate that question.
You know again.
As I mentioned earlier with respect to Linda's question.
We have a tried and true capital allocation model that's been successful for many decades and allowed us to deliver a 13% annual total shareholder return over that period of time so.
The stability and predictability in terms of our approach to capital allocation is important.
If we see an opportunity to earn an outsized return and create more value for our shareholders by retaining our additional cash flow, it's something that we would give consideration to.
We think the balance.
Of 40 per cent.
40% of our earnings going back to our shareholders in the form of a dividend and 60% being reinvested in the business is there a reasonable balance and.
Having said that to the extent opportunities arise for us to invest beyond our free cash flow.
We hope.
Hold share count very jealously, but to the extent those opportunities occur.
We would we'd consider issuing equity or perhaps retaining a greater portion of our cash flow, but as I said.
The model has.
Has served us well over the last couple of decades and our.
Our expectation is that we will continue along this line.
Yeah ill, just clarify 40 per cent of cash flow not earnings Oh pardon me being paid out so.
Thank you.
That's helpful I'll leave it there thank you.
Thanks, Jeremy.
Our next question comes from Ben.
Sam of BMO. Please go ahead.
Hi, Thanks, Good morning, I had a question on the renewable energy are high as you go through evaluation.
Even though share maybe any sort of qualitative thoughts there youre seeing from the.
Net interest levels or anything that surprises so far.
Yeah.
Hi, Ben this is Corey.
I give you some quantitative feedback I think which is a pretty interesting and shows the level.
And the size of the opportunity that's available to us at TC energy as part of the energy transition.
Transition.
As you know we had sort of 2 components to the RFID..1 was a wind component and 1 is a solar plus storage component.
Total ing about 1 gigawatt of requests.
We had 54 individual projects totaling 60.
<unk> 6 gigawatts of bid submitted.
For wind, which is about 27 times, the the request and on the solar and storage side. We had 66 individual projects totaling about 12, 4 gigawatts of bid submitted which is about 40 times the amount of demand that we went.
We are currently at a phase where we are down selecting those projects and entering definitive negotiations with the projects that best meet the criteria.
For our customers, our stakeholders and our shareholders and we expect in the coming months.
We will be able to announce those projects that we have chosen to move forward with.
[noise] [noise] asking kind of a 90 day, okay. Thanks for the update on that.
And then on.
Maybe on your liquids.
Segment EBIT.
To comment on your thoughts on the short term outlook on the volume then maybe mediates important longer term.
Look relative to some of that May just on the guidance.
Flights to and from that.
In the liquids segment.
Ben Thank you add 7 here.
Our pipeline ex hardisty down to the Gulf Coast.
<unk> has been at capacity leaves.
Leaving the supply base and here in Western Canada.
As we pick up volumes in Cushing to take to the Gulf coast or into the Midwest. We've seen a continued.
Our compression between.
The Midwest.
In the Gulf Coast, as we saw supply volumes increase out of the Permian.
And really a compression in the export markets and so we see that that outlook persist here over the balance of the back half.
Half of this year and likely into early next year.
We have seen producers increase supply with the run up of commodity prices in various basins.
However, our liquids segment is really driven by the.
The arbs between ex Hardisty and.
Cushing into our refining markets.
Okay, that's great thanks for that.
Okay. Thanks Pam.
Our next question comes from Robert <unk> Italia.
CIBC World markets. Please go ahead.
Alright, thank you.
Just wanted to follow up a little bit telling a powerful gosling understand limitations away from say Budd.
Clearly an important product for the industry and I'm curious as to when you believe you have to have this dispute resolved in order to avoid having a work suspension.
And.
Just following on that thought it sounds like they're still using commercial means to resolve the dispute but is the idea of mediation or arbitration a possibility here.
Thanks for that and happy to take that question. You know we are as you say in discussions in commercial discussions.
And right now we're focused on that as a mechanism to resolve from the disagreement between us.
There's a number of.
Details going across the table on that but.
You know as I said before it is the subject of some confidential dialogue with our customer.
Our main focus we're focusing really on 2 things.
1 is resolving the disagreement on cost and schedule as quickly as possible and the others and ensuring that the pipeline is constructed in a safe and cost effective manner and that it's in service on a timeline that aligns with you know.
The current schedule for the facility and in Kitimat.
So we're pretty.
Cash interest on that.
And we're hopeful that we're going to get a you know a reasonable and fair outcome here and in the near term.
Okay fortunate to Bruce.
The same type of question, if you could provide a little bit of color on the.
The return to service day for Bruce 3 understanding that part of that is probably not in your control.
Do you have a rough rough estimates for the timeline as to when that can be resolved.
Hi, Robert it's Corey.
We are in process of responding to the July 20, <unk> order.
C N S. C. So we will be following the process and the procedures as laid out by the C. N S. C and once we received the first bit of feedback from the C. N S C.
Regarding our response, we will be able to provide more color, but what I would say is the plants.
From the operating safely reliably effectively unit 3 is offline right now and we are in process. Following the CNS 6 order that's due to the letter and expect a positive outcome.
Yeah.
Okay. Thank you.
[noise].
Thanks, Rob.
Our next question comes from Rob Hope of Scotiabank. Please go ahead.
Good morning, everyone first.
First question on the Columbia settlement not for how much you can kind of talk here, but can you just maybe highlight some of the key issues that you.
Receives from a resolution as you expected and then.
Can you remind us how much of a revenue uplift you have been booking so far this year.
Yeah, Rob This is Dan I'll tell you what I can which is obviously you heard that.
Notify FERC yesterday of our plans to suspend the procedural schedule, which is the way retail for that we have a settlement in principle with our customers.
The actual details I really can't get into until we filed a settlement that will be some time most likely in September and October October but are all issues that were addressed in the settlement in the rate case have addressed in the settlement.
<unk> things like rate levels, and the continuation of our modernization program.
Again, I'll tell you that the settlement is in line with our expectations that the revenue and the earnings are very consistent with the estimates that we have reported and reported to date, but again I can't give you hard numbers just yet.
But with respect to the modernization program I can tell you that it is.
Generally consistent.
<unk> with our prior programs both in terms of structure and size and there really is a great example of the value of pipe in the ground and how it can be optimized.
The settlement process took a little bit longer than we would have liked for 2 reasons..1. This was our first rate case in 20 years and there were a myriad of issues.
Program to be addressed and then secondly, given the pandemic, we had to do all of our negotiating virtually which was a bit inefficient. So again, if you just bear with me until we get to sell them on file maybe we can get some of those questions answered then but.
Really I'm thankful to our customers and FERC staff for their contributions in making the settlement.
I appreciate that and look for the some additional details in September.
Okay pivoting over to the RFP for the renewable projects as well as how youre looking at kind of your cost of capital and kind of the attractiveness of projects. When you take a look at the you know the vast amount of progress that came in how much for what percentage of that could.
We see Tc energy invest capital into rather than just contract for energy.
Hi, Rob it's Cory I'll take Oh, I'll take a an opening shot at this and if Donner Francois Wanna comment though.
I'll speak to them as well, but the way we're thinking about.
It is each individual project in each individual jurisdiction is being measured on its own merits.
So as we think about jurisdictions and.
And we think about how the ISO operates in each of those jurisdictions, it's going to have a bearing on our view of how.
We can participate in that market that being said we.
We see ourselves as the long term owner and operator of assets, we've been doing it for.
For a very long time, and we take great pride in being a industry leading operators. So I think that we will have a blend of both.
But it's a little premature until we evaluate each individual project on its merits.
To sort of.
Decide what that mix might be but I'll cede it over to Francois Don if you have any additional comments.
And perhaps the only point I'll add to that Corey is that.
Obviously, we have an obligation to deliver the lowest cost.
The acquisition of power as part of our agreement with our shippers and we see an opportunity here to lower those costs and that as you know.
In addition to or an opportunity for us to lower.
It is an opportunity for us to lower our variable cost for our customers. So we're very very excited about that.
Excellent I appreciate the color and Don all divested been fun over the years.
It has rob thanks very much.
Our next question comes from Andrew Kuske of credit.
Credit Suisse. Please go ahead.
Thanks, Good morning.
Obviously, the topic of claims for fuels is a big 1 and it's pretty broad based and I'm just sort of curious on your thought process on how this Tc energy set into the investment theme you across your value chain is it across the entire value chain.
Of your assets really from Wellheads for mother's day, so in some cases with customers.
To syndicate, a burner tip or do you view it in a more targeted fashion.
I'll provide some high level comments and you know on the question of renewable natural gas I'll ask Stan after my remarks to maybe provide a couple of.
You know thematic points.
And I think Andrew the the short answer is it's across our entire asset base. What we've learned is we look at them.
Carbon capture and storage.
As we look at at hydrogen as we look at renewable natural gas for.
1 day mental aspect.
<unk> of being a participant in those markets as they develop is the ability to store and transport a molecule, which is of course, our core business. So when you look at our footprint the basins, we serve and the markets. We serve we actually see opportunities across the entire footprint for us to.
So now in some instances.
You know those opportunities are many many years away I would say from the perspective of hydrogen for example.
We're still at the stage, where we are investigating are the technologies and the potential from a safety standpoint for safety is our number 1 value and we wanted to make sure.
Sure that.
The injection of hydrogen into our pipelines will not cause any embrittlement issues.
And it can be safely transported across our systems, but Ah you're exactly right.
Our footprint on a broad based basis will present opportunities for us.
Across the board.
Yeah, maybe just this is Stan just to tag on to that no clean fuels come in many different sizes and shapes and colors that 1 of them being renewable natural gas and you may recall that we had a goal this year to double the amount of renewable natural gas, we're taking into our system from 2 Bcf a day.
For Bcf into double it again next year from 4 to 8.
We're actually on track to exceed that exceed it in a very big way I think by the end of 'twenty..2 early 'twenty 3 we'll have about 30 Bcf of renewable natural gas coming into our system and we're doing this by by overlaying our pipeline footprint against.
And Phil operators for example, where the renewable natural gas biogas is actually created so I think that there is a significant opportunity to continue to take advantage of things like renewable natural gas and in the end.
It really reinforces our thoughts that our future is 1 of natural gas and renewables and that we can work together.
Yeah.
That's very helpful. And then maybe just a bit of an extension of the question.
But maybe a particular focus just in what's called old style for hydrocarbons and we're aware we're ways away from budget season coming up for most of the producers, but what's the sentiment from.
Really your clients on drilling activity and outlook, obviously commodity.
Lapses are elevated but how do you think about that is probably more a question for per standard for Tracy.
Yeah.
Go ahead go ahead go ahead sorry.
I'll go ahead and start with respect to what's going on in the U S. Note..1 thing if you're watching a nymex prices of lately youre seeing that there's a lot of for dollar prints.
Commodity price over the next step for 5 or 6 months, which is something that's news to all things equal that's an incentive for producers to continue to drill and what we're seeing is that producers doing exactly that Appalachian production is up to around 34 Bcf a lot of them focusing on what they would call. It responsibly sourced natural gas, that's becoming more and more of a theme. These days so.
So I think that Youll continue to see production growth, particularly out of the Appalachian Basin and I think you'll see it done in a responsible way with a focus on emissions and again I'll just get back to this theme I think that we can do this in a way that natural gas and renewables can work together.
And I'll follow up on that Andrew same kinds of things are going.
Canada and of course, we have the added element here of the prospect of.
Carbon tax pretty significant carbon tax and so we do see industry focused on emissions reduction carbon tax would drive incremental kind of operating costs.
We are as well said and knee chipset that nature of the dialogue, it's pretty consistent and in front.
Non interest between us so we have methane reduction program going on and we're investigating.
Since potential to reduce emissions through electrification, we see investments in those those types of things.
It is important to note that.
They're focusing on it we're focusing on at this energy transition provides meaningful opportunities for investment in our CIS.
And as we go forward, whether it's 2 reduction of emissions for the transition to a new energy. We are focused on doing that in a manner that preserves the competitiveness of <unk> in our case for WCS being the continental market and ultimately into the LNG markets.
But the best way to mitigate that impact and carbon price is through inverse.
<unk> that lower emissions since we go forward.
That's very helpful. Thank you.
Thanks, Andrew.
Our next question comes from Patrick Kenny of National Bank Financial. Please go ahead.
Hey, good morning, everybody I just wanted to touch on this recent.
Trend of Canadian gas producers looking to secure long term market access to the Gulf Coast and international pricing.
Of course, you know contracting with yourselves down the mainline and Anr just curious how meaningful this trend could be in terms of financial upside for.
For you and then.
I guess on the flip side, how you might be thinking about mitigating any impact on your eastern mainline system from perhaps less Alberta gas flowing into Ontario overtime.
Having to take that Patrick So again, what we do know as natural gas demand.
No it's forecasted to continue to grow in the coming.
Decades globally in LNG, Canada's going to our LNG, there's going to be an important component of global energy demand and transition. So North America is positioned really well.
To participate in that growth, whether it's through the Gulf coast or whether it's you know what.
It's off the West Coast of Canada, we have a.
So a very strong portfolio of highly integrated interconnected assets across Canada U S Mexico.
So we sit and talk for the W. CSP in the Marcellus positions us well to participate we can get to the Gulf coast through the U S assets, we can get to the west coast.
And what the opportunity is for US this evening for we want.
Wanted to direct.
Provide direct access to LNG facilities, but there's also opportunity to fill the void left by gasoline. The the continent. So we are looking to provide as much access as we can.
To any global market as we go forward I would say the opportunity to go down south to the U S right now with available.
Capacity the opportunity to do more somewhat limited, but we'll continue to work with our customers for Stan and I are to take advantage of whatever capacity and whatever market opportunity we see.
Okay. That's great. Thank you very much.
Thanks Pat.
Our.
Question comes from Matt Taylor of Tudor Pickering, Holt <unk> co. Please go ahead.
Yeah. Thanks for taking my question here I wanted to start first on your focus on the U S. For renewable development can you explain what needs to change in Canada on the regular regulatory side for you to start focusing.
Next clarification of compressor stations of looking at renewable opportunities tied into energy T. L. A.
Or the mainline, which I believe you said, you're really just focus for me right now.
Perhaps I'll start and then Corie.
Corey can can provide additional comment.
With.
With respect to electrification.
Of of compression within our Canada gas system, our obligation with a prescribed rate of return is to deliver the lease cost alternative.
Currently that lease cost alternative.
In most instances.
Is.
To deliver for it to build gas turbines to deliver the service.
As the.
The carbon tax potentially escalates over time.
We would be reassessing, what technology meets the standard of lease cost alternative and we do believe that.
Hum.
That inflection point is somewhere around 50 or $60, a ton where there would be a clear economic advantage to to.
Ah designing an increased amount of compressor stations with electric Motors, we also have to factor in.
Our ability.
We also have to factor in proximity to.
Poles and wires to supply power to 2 electric motors at compressor stations.
And of course to the extent there are other regulatory accommodations.
2 perhaps even include some of the generation.
For lighting into rate base.
That would also I think helped accelerate that development. So those are the 2 things that I see on that question, Matt and Corey is there anything else you want to add to that.
Yeah, Matt the only thing I would add is that you had to pick a place to start and in the U S. We have you know.
Really a significant opportunity with the current financial models in place and so we are taking the lessons we're learning about the process in the U S. And then we will actively apply those lessons learned to our opportunity set in Canada.
Yeah.
Yeah.
That's great.
<unk>, maybe 1 follow up for you Francois you mentioned that it's tied to the lease cost alternatives. I was just curious on your thoughts whether or not you know educating government here or even lobbying if Canada is serious about meeting our carbon emission objectives. Yes. If in fact that is the right way to be looking about this looking at this.
Great thing so we can make the argument carbon taxes could still be viewed very politically so perhaps.
Maybe not just looking at the least cost alternative is the right way to be looking at this longer term.
So we are in conversation.
Either directly or through industry associations.
I mean, if you know.
Our regulators to the extent it's appropriate.
Of course outside of specific project conversations as well as various levels of government are I can tell you from my perspective.
Policy landscape is evolving very rapidly and.
These are very complex questions that.
With him time to implement and.
In a thoughtful manner, all participants whether they are our customers ourselves and the regulators and governments all have the same objective in mind, which is to deliver energy reliably and responsibly minimized our emissions and.
And do it at a in an affordable fashion at the lowest possible cost, but it will simply take some time because of the velocity of policy change for for that to be implemented in a practical manner.
Yeah.
That's great thanks for that.
That's it for me.
Thanks, Matt.
Yeah.
Take our next question comes from Becca Followill of U S Capital Advisors. Please go ahead.
Good morning, guys, just following up on that issue of reliability and electric compression for gas pipelines.
Most battery storage is about 4 hours and so how do you handle the reliability.
The ability to issue on gas pipelines and putting in.
Electric compression.
Hey.
Yeah, Yeah, I can take that well actually what we're doing with the VR project. For example is putting in a dual drive that is both the gas and electric driven so for example.
You have electric power to the station the electric motor will spin if you have a lost of electric power than the gas unit will kick in and effectively there's a there's a clutch that will then drive the electric motor. So you have 100% for liability with respect to these dual drives that we're putting in it's not just an electric.
When that makes sense.
That makes sense to you, but that's what most of them for doing.
This week I was like Oh, maybe that's not good for our pipeline.
And then just.
Just to clarify this is independent investment. This is non investment that you would put in rate base.
Under the current compact in all of our jurisdictions.
Unit.
Investments in terms of renewables would be in our unregulated affiliates that are our power and storage business that Cory runs and enter into arms length commercial arrangements with the regulated affiliates.
Gotcha. Thank you and then.
On the Alberta carbon grid just is that dependent.
What is that dependent at all on the Pembina pipeline merger with some of the pipelines from in our pipeline from Houston that and how does that.
Termination.
And for our contract.
Yeah. Thanks for the question this is bevin.
With.
US as partners with Pembina, we remained focused in.
Developing this world scale carbon transportation system.
And both of US as partners have an extensive network of pipelines that can rely on the project and it's not just specific pipelines, but its core doors and interconnections and so we believe that we can.
Leverage are our both of our asset bases as well as work with other industry partners to fulfill the development of the full grid.
So it's just the inter pipeline merger breaking apart has no impact on the project.
At this.
It wouldn't you know we're still in very early stages of pulling together all the pieces of the lines that would contribute.
And in a way.
There if I'm in the.
And the outcome that Brookfield is successful with the enterprise acquisition, we will definitely look to.
Time with them as well to see if they can also be part of this industry solution.
Great. Thank you.
Thanks, Patrick.
Our next question comes from Michael <unk> of Goldman Sachs. Please go ahead.
Hey, guys. Thank you for taking my question.
To work real quick commentary in the release was the detail about unit 3 on Bruce and the hydrogen pressure levels and I know you mentioned that you didn't think it was material to your cash flows.
Just curious what are you seeing technically right now that gives you that conviction.
Just thinking about the history of North America.
Last 10, or 15 years, when some of the other plants on the U S side of the border or had a pretty major issues that actually started with what people thought were pretty minor things when they were undergoing outages I'd.
Love to know just.
What at this early stage gives you that insight to think it's not something more.
More serious at unit 3.
Yeah.
Okay.
Hi, Michael It's Corey you know I don't want to speak for the.
The executive management team at Bruce power about technical issues, but what I can say is that the issue was identified and that.
We are following a systematic process as identified by the CSC on how to manage this effectively and we have done a fair amount of R&D at the site and amongst all the candy operators to.
Resolve the issue and so until the <unk> the <unk>.
C N S.
S C process is complete.
I I don't want to comment on exactly what the technical resolution is I'm really not qualified and I don't think anybody on our team is really qualified in a way that's meaningful to to answer that question.
Got it okay, and but you're confident at this point that it's something that's just isolated to unit 3 and it doesn't impact.
The other units there.
Yeah.
What I would say is that the unit 3 design is EBIT different than the other units and so the impact on unit 3.
Is different than what it would be on those other units.
Got it thank.
Thank you much appreciate it guys.
Okay.
Thanks, Michael.
Our next question comes from Alex Kania of Wolfe Research. Please go ahead.
Great. Thanks, I just had 1 question I know I guess the theme from a lot of new investment opportunities are.
<unk> an easy transition.
In terms of fee harmonization, and just trying to make the product cleaner, but just thinking about you know your history with respect to portfolio management.
Are there any assets or whatnot that are in the existing portfolio today that you feel like.
It could be could be it could be sold or divested to maybe improve.
For the overall kind of footprint as you kind of think about that long term long term credit transitional strategy.
And also helped fund the rest of the other vessels.
Hi, Alex its dawn here I think you've seen us.
Recycled capital here over the past several years I think we're showing a willingness and an AR.
Deafness at that.
Whenever we start looking at our growth versus our internal capacity we are.
We look to minimize share count growth and we look for the cheapest source of funding.
2.
For the new projects here so.
We will continue to scour the portfolio.
Look for for asset sale opportunities.
To fund anything beyond our internal capacity, which is probably in the $5 billion to $6 billion per year range.
That said, where we're into the pretty good stuff now.
So we have to be cognizant of the tax consequences.
The optionality embedded in our assets from the network value that Tracy alluded to and standards alluded to earlier, where you've got.
It doesn't have to have pipelines across across the system and taking a piece out or for certain components of.
G.
The tracks from the overall network value there so something we'll look at but there is nothing jumping out of any magnitude right now where.
Where we think it's a it's a candidate for that but anytime we're looking at investing beyond internal capacity, it's something we are.
And we'll evaluate.
Great. Thanks best of luck.
Thank you.
Thanks, Alex.
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 Francois.
Please go ahead.
Yeah.
Thank you.
So in summary during the first half of 2021, our commitment to operational excellence and a strong demand for our services.
<unk> into record financial results as we advance our $21 billion secured capital program and numerous other.
Swap organic growth opportunities, we expect to build on our long track record of growing earnings cash flow and dividends per share with.
With an irreplaceable asset footprint extensive technical expertise substantial internally generated cash and a solid balance sheet, we are well positioned to prosper.
Irrespective of the peso direction energy transition takes looked.
Looking forward, we'll continue to focus on safety sustainability working according to our values and responding quickly to market signals and sign posts.
Now before closing.
I would like to acknowledge that this is Don last quarter.
Quarterly conference call.
He is stepping down as CFO on July 31, and will retire on November 1 after 27 years with the company.
As a long standing and deeply respected member of our senior management team. Dan has played a significant role in our strategic direction our growth.
Our financial strength.
And our ability to have fun, while we're doing it.
Thank you dawn.
On behalf of the entire executive team and on behalf of our board of directors.
On August 1st Joel Hunter will be assuming the role of executive Vice President and CFO.
Joe has been.
With TC energy for 24 years, working closely with Don and making a significant contribution to the company's success in raising capital executive executing on key initiatives and navigating major market events and industry shifts.
I am confident he will maintain the.
Both wind approach to our financial strength risk preferences and capital allocation decisions as we continue to execute on our vision to be North America's Premier Energy infrastructure company now and in the future.
That concludes my remarks, and thanks very much for joining US today, we really appreciate your ongoing.
Disciplined and support and look forward to speaking again with you soon.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.