Q3 2021 TC Energy Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the TC Energy's third quarter 2021 results conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded after.
After the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing star and zero I would now like to turn the conference over to 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 third quarter Conference call. Joining me today are Francois Poirier, President and Chief Executive Officer, Joel Hunter Executive Vice President and Chief Financial Officer, Tracy Robinson, President Canadian natural gas pipelines.
Coastal gas link Stan Chapman, President U S and Mexico natural gas pipelines, passing worst for executive Vice President strategy, and corporate development and president of our liquids pipelines business, Corey Hudson's President power and storage and Glenn <unk>, Vice President and controller.
And Joel 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.
Knowing 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 opportunity to participate we ask that you limit yourself to two questions.
Before we begin 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.
Finally during this presentation, we may refer to measures such as comparable earnings comparable earnings per common 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 you with additional information on TC Energy's operating performance liquidity and our ability to generate funds to finance our operations with that ill turn the call over to Francois.
Thank you David and good morning, everyone. Thank you for joining us today I'm I'm told this is the busiest reporting day of the year. So we really appreciate you joining us on this very busy day.
As outlined in our third quarter report, our diversified portfolio of North American energy infrastructure assets continues to perform very well.
Societies unwavering demand for our services and the relentless focus our people place on operational excellence are reflected in our strong financial performance.
Through the first nine months of the year comparable earnings per share of $3.21 exceeded last year's results by 5%.
While comparable funds generated from operations totaled $5 3 billion.
This is a very good outcome, especially considering the significant decline in the value of the U S dollar relative to the Canadian dollar, which had a negative impact on our Canadian dollar reported EBITDA.
Given the strong year to date performance, we now expect 2021 comparable earnings per share to be modestly higher than last year's record results.
We continue to advance our secured program, which now totals $22 billion.
This includes the U S $800 million W. R project announced earlier today, which will improve reliability and expand the anr system.
This project is similar in scope to the V. R project, we discussed in the second quarter and.
And W are well upgrade compressor stations to dual drive electric horsepower, reducing our <unk> emissions, while ensuring natural gas backup in case of a power disruption.
Yeah.
So a manageable in quarter and corridor projects like these are the building blocks in the modernization and de carbonization of North America's energy infrastructure system, while maintaining reliability and we expect to realize numerous similar opportunities in the future.
Also of note as part of its life extension program Bruce Power recently launched an upgrade initiatives focusing on asset optimization.
Innovation and leveraging new technology.
They call. This project 2030, and it has a goal of achieving a site peak output of 7000 megawatts by the end of the decade effectively adding the equivalent of a ninth unit at the Bruce station now.
Now. This is in addition to the major component replacement program, we've been investing in and talking about on units three through eight.
We continue to advance $22 billion of secured projects.
Skus me.
Including $4 billion, we've already added to date in 2021.
When you factor in the continuation of Columbia's modernization program as we call March three.
And the Bruce Power unit three M. C R, which is expected to be sanctioned before the end of the year as well as the project 2030 upgrade initiative, we plan to sanction a $7 billion of high quality growth opportunities by the end of this year.
Completing these projects on time and on budget will generate a weighted average after tax IRR on these new investments the.
The full 7 billion of sanction projects of eight 3%, which is toward the upper end of our targeted range of 7% to 9% for projects that we sanctioned annually.
Our secured capital program continues to be underpinned by cost of service regulation in long term contracts, giving us visibility to the earnings and cash flow. These projects will generate and are consistent with our long held risk preferences.
Now looking to next year and beyond we expect many similar high quality opportunities to come to fruition as we continue to reliably deliver the energy people need while decarbonising our asset footprint.
This includes the ongoing expansion modernization and maintenance of our regulated natural gas pipeline network. The refurbishment of another four Bruce power reactors and plans to use renewable energy to electrify a portion of our pipeline network and you'll hear more detail on that later on.
The RFP process, we began in the second quarter for over 1000 megawatts of renewable capacity.
To electrify our own load has had an overwhelmingly positive response negotiations have begun and we anticipate completing the process in the first quarter of 2022.
Beyond that we're also progressing initiatives, including the Ontario pumped Hydro project. The Canyon Creek pumped Hydro project in Alberta, carbon transportation and sequestration in partnership with Pembina and.
And clean energy projects with Irving oil and also large scale hydrogen production hubs with Nikola Motors.
As a result.
We expect to sanction more than $5 billion of new projects annually over the next several years and we hope to exceed that.
With risk adjusted returns consistent with historical levels.
Our teams origination capabilities were demonstrated quite visibly during 2021 and the opportunity set that lies ahead is vast.
Now.
In order to judiciously fun, that's attractive suite of growth opportunities maintain a strong financial position and enhance our conservative utility like payout ratios, we have modified our near term dividend growth outlook.
We now expect to increase our common share dividend at an average annual rate of 3% to 5%.
While our previous outlook remains affordable.
While our previous outlook remains affordable and supported by the strong performance of our business. We believe this modest change is prudent.
Given the generational opportunity for growth we have before us.
It will allow us to fund a larger portion of our future capital programs through internally generated cash flow moderate our leverage and continue to deliver superior total long term shareholder returns.
As you know we are committed to delivering these returns while growing our business sustainably.
That's why I'm proud that last week, we released our 2021 report on sustainability or ESG data sheet, and our G. H G emissions reduction plan.
Reports outlined the next step in our sustainability journey.
With detail on our 10 sustainability commitments that come with 32 specific measurable targets, we've set to support them.
This includes targets to lower our emissions intensity by 30% by 30 by 2030 and position the company to achieve net zero emissions from our operations by 2050.
We also advanced our commitments in the areas of innovation diversity indigenous reconciliation and safety, which for US includes mental and psychological health.
I am confident that our talented team has the technical capabilities, the innovative mindset and the commitment required to advance our work in these areas.
And I encourage you to read these documents, which can be found at TC energy Dot com to learn how we are holding ourselves accountable to protect the planet empower people and create shared prosperity.
In summary.
Excuse me.
In summary, we are committed.
We are committed to.
So our vision of being the Premier energy infrastructure company in North America, not just now but in the future.
As I've said on numerous occasions, we will achieve that by prospering irrespective of the pace or direction of energy transition.
Our business decisions continue to support our goals to reliably meet societies energy needs, while decarbonising our assets.
Looking forward, our $22 billion secured capital program, which we expect to grow to 25 billion by year's end.
Is poised to grow substantially over the years and as always we will fund our capital programs prudently to maintain our solid financial position.
Ultimately our goal is to continue to grow earnings cash flow and dividends per share and build on our long track record of delivering superior total shareholder returns.
Now I'll turn it over to Joel for some comments on our third quarter results.
Thanks, Francois and good morning, everyone.
Wind in our results issued earlier today net income attributable to common shares was $779 million or 80 cents per share in the third quarter compared to $904 million or <unk> 96 per share for the same period in 2023rd quarter results include an after tax expense of $55 million related to transition payments associated with the one time voluntary.
Time, Inc program offered to eligible employees earlier this year at $11 million after tax charge associated with Keystone XL preservation and other costs.
Corresponding period in 2020 also included certain specific items as outlined on this slide and discussed further in our third quarter 'twenty 'twenty. One 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 third quarter were $972 million or 99 cents.
Per common share compared to $893 million or <unk> 95 per common share in 2020 year to date comparable earnings per common share up 5% supported by the strong underlying performance of our business turning to our business segment results on slide 11 in the third quarter comparable EBIT from our five operating segments up $2 $2 billion.
But similar to 2020, despite strong currency translation headwinds.
Detailed variance explanations in each business unit can be found in our third quarter 2021 report, but I'll comment on a few principle changes year over year Canadian gas pipelines comparable EBITDA of $631 million with $35 million lower than third quarter 2020, mainly due to decreased flow through depreciation following the full depreciation of one section.
The Canadian mainline as well as lower pull through financial charges, partially offset by higher incentive earnings the cessation of depreciation does not impact net income, which increased by $12 million for the Canadian mainline.
U S gas pipelines comparable EBITDA increased by $59 million U S $706 million U S compared to the third quarter 2020, primarily due to an increase in earnings from Columbia gas falling its application for higher transportation rates effective February <unk> 2021 and the resulting settlement that was filed with the FERC on October 29th we.
For approval of the settlement during Q1, 2022 liquids pipelines' comparable EBIT declined by $28 million to $387 million in the third quarter due to reduced contribution from liquids marketing activities, primarily due to lower margins power.
Power and storage comparable EBIT in the third quarter fell by $19 million, primarily due to lower earnings at Bruce power due to greater plant outage days and higher operating expenses, partially offset by higher realized power prices for all our businesses with U S. Dollar denominated income, including U S and Mexico gas pipelines and parts of liquids pipelines EBIT was translated into Canadian dollars.
Using an average exchange rate of 126 in third quarter 2021, compared to $1 33 for the same period in 2020, while overall U S. Dollar denominated comparable EBIT increased by $53 million U S year over year weakening of the currency was a considerable drag on comparative 2021 Canadian dollar reported EBITA.
That said the corresponding impact on comparable earnings was not significant as their U S. Dollar denominated revenue streams are in part naturally hedged with the residual exposure actively managing on a rolling two year forward basis now turning to slide 12, I'll speak to a few of the primary variances below EBITDA depreciation and amortization was $63 million lower compare.
Third quarter 2020, primarily due to one section of the Canadian mainline being fully depreciated.
Interest expense included in comparable earnings was $37 million higher year over year, largely due to the cessation of capitalized interest for the Keystone XL pipeline project comparable interest income and other rose $59 million in the third quarter, mainly due to realized gains in 2020, one compared to realized losses in 2020 on derivatives used to manage our net exposure to foreign exchange.
<unk> rate movements on U S. Dollar denominated income income tax expense included in comparable earnings for the third quarter was so much in 2020, excluding Canadian rate regulated pipelines, where income taxes are a flow through item and that's quite variable along with equity a few D. C income in U S gas pipelines, we continue to expect our 2021 full year normalized tax rate to be.
In the mid to high teens comparable net income attributable to noncontrolling interests decreased by $61 million relative to the same period last year, primarily as a result of the TC pipelines LP buying completed early this year now turning to slide 13 during.
During the third quarter comparable funds generated from operations totaled $1 $6 billion, and we invested $1 $7 billion in our capital program in October we issued a combined $2.25 billion U S of senior unsecured notes comprised of one point to $5 billion U S. A three year fixed rate notes at 1% and $1 billion of U S. A 10 year fixed rate.
Notes at two 5%.
Now turning to slide 14, this graphic illustrates our forecasted sources and uses of funds for 2021 through 2023, starting in the left column. Our total requirements over the three years is projected to be approximately $30 billion, reflecting dividends and the other of $11 billion capital expenditures, including maintenance capital of $16 $5 billion to build.
Dollars attributed to the TC pipelines acquisition completed in March and the series 13 preferred share redemption of $500 million in May the second column highlights expected internally generated cash flow of $21 billion $2 billion of common shares issued pursuant to the TC pipelines buying approximately $3 billion Canadian equivalent of senior unsecured notes issued.
On October $1.5 billion medium term notes issued in June and the $500 million Junior subordinated notes offering completed in March that leaves a residual need of approximately $2 billion to pick in the far right column that we expect to fund through a combination of incremental debt commercial paper and Keystone XL project recoveries. The program excludes normal course refinancing.
Scheduled debt maturities and is consistent with maintaining our strong financial position now.
Now turning to slide 15 in closing our strong operational financial results continued to reflect a resilient low risk business strategy and demonstrate the criticality of our extensive asset footprint along with our robots growing capital program, our enduring business model financial strength organizational capabilities and unparalleled.
Work of assets position us to capitalize on a vast opportunity set which will allow us to serve todays needs as well as the evolving energy mix of the future looking forward as Francois mentioned in order to fund our sizeable capital programs. During this period of growth maintain a strong financial position and enhance our already conservative utility like dividend payout.
Ratios, we have modified our near term dividend growth outlook, we now expect to increase our common share dividend at an average annual rate of 3% to 5%, which will allow us to fund a larger portion of our future capital programs through internally generated cash flow moderate our leverage and continue to deliver superior long term total shareholder returns.
At the end of my prepared remarks, I will now turn the call back over to David for the Q&A great. Thanks, Joel Just a reminder, before I turn it over to the conference coordinator for questions from the investment community. We ask that you limit yourself to two questions. If you do have some additional questions. Please reenter the queue with that I'll turn it back 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 one on your telephone keypad, you will hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
We will pause for a moment as callers join the queue.
Our first question comes from Ben Pham of BMO. Please go ahead.
Yep.
Our next question comes from Robert Kwan of RBC capital markets. Please go ahead.
Good morning.
If I can just start on the dividend rate change and recognizing what you've got to start somewhere but on an absolute basis, it's not really that much dollar saved a fun thing so.
Or do you just think about the stepped up plan can you just confirm that.
Discrete equity has or drip ATM has no role in that but as you step it up what is the role of asset monetization as well.
Just to take advantage of private market valuations out there.
Hi, Robert It's Joel here. So first answer your question with respect to the need for equity or ATM, we'd say there is no need given our $22 billion capital program, along with us you're announcing today and we sanctioned $7 billion of projects. This year. So far this year and we expect.
Could you at least $5 billion annually in the coming years, So we see no need for common equity.
If there are opportunities in excess of this we would consider equity. However, we have to look at everything through a per share lens. So we'd have to be accretive to shareholders and add long term value.
I think to add to that excuse me Robert.
Your question with respect to monetizing our assets.
Assets as an alternative we look at all sources of of our equity capital, whether they are internal or external and they have to compete with one another and to the extent, we can monetize the mature asset and rotate capital into growth.
You've seen us do in the past through funding the Columbia.
Our growth program and something we would absolutely consider and be prepared to do in the future.
Okay. So just to clarify because Joel your answers it sounded like it was maybe just a little bit more of an absolute test of accretion, but France. Why are you trying to say, though that you've got these different options and they're all gonna get weighed against each other and the best option.
Is how youre going to proceed.
Yes, I think the way you characterized it Robert is exactly that we're gonna way all of our options and that's how we're going to make the choice as to how we fund our program going forward I think where Joel was going with this is we we always retain the option to issue equity, but it's it's you know.
We guard our share count are jealously and to the extent, we have an internal option to rotate capital I think that will always be our preferred course of action.
Perfect and then just yeah DVR project last quarter, you got the W. R project this quarter.
Just a little under U S $1 billion, you've got lots of other systems that are full.
Full with with compressor stations can you just talk about the the total potential opportunity and look you've had kind of one each quarter here what type of a pace you know can we expect to see additional announcements.
That's a great question, Robert I'll give I'll give that to start and then I'll ask Stan to provide some some proof points and add some color as we talked about and published our <unk> reduction plan last week.
We identified five levers for us to achieve our objectives and one of them was modernizing our existing infrastructure and assets and I think the WR project ended the VR project, which if memory serves me are about 1 billion and a half dollars of sanction projects are really good examples of that.
And I think we will see more of those going forward. So over to you stand for the additional color.
Thanks for that floor, Hello, Robert and team I would start by saying this now given the size and breadth of our assets in the U S. I've said before that in any given year. My expectation is we should be originating about $1 billion of growth capital and I expect that to continue for the next step next several years one way, we're going to look at doing that is by continuing to.
To electrify our compression fleet give you some data points.
Day about 5% of our compression fleet is electric driven all things equal that probably drives down or reduces our C. O. Two emissions by about 500000 tons, here's the opportunity set going forward, though about 24% of our compressor fleet today is what we call older slow speed units are these units could be up to 70.
Years old so as we continue to mine for other like for like compression liability projects like we've done with our Elwood project, Wisconsin access VR and W. Are we're going to look to replace this older inefficient gas compression with that with newer compression that may well be electric driven or this dual drive technology the.
Main driver for all this from a strategy standpoint may very well be linked to the retirement of coal fire generation across our footprint and just to give you a data point as we sit here today. There are 16 coal plants that generate about 15 gigawatts of capacity that are scheduled for retirement between now and 2030.
And these coal plants sit within 15 miles of the a and R are the Columbia system. So that's exactly what we've seen happen with respect to our WR project that we announced today across the Midwest. We've recently seen about 1800 megawatt coal fired generation to be retired a majority of that is going to be real.
Placed with renewables, but a portion of that is gonna be firmed up with new gas fired load and that's what you are project does expand our system to the tune of about 157000 deck of terms.
And gives us the ability to replace these older inefficient units with newer electric drive that not only drive down our emissions and expand our capacity for our customers, but allow us to do it in conjunction with Coreys team, who ultimately will be the provider of.
This green power going forward. So again when you look at the opportunity set I can't tell you specifically how much of that $1 billion a year that we're going to originate in any given year is going to be electric driven but I would say that we're in a bit of a target rich environment right now.
That's great. Thank you very much.
Thanks Robert.
Our next question comes from Ben Pham of BMO. Please go ahead.
Hi, Good morning, I Wonder if that was so check your temperature you different growth guidance to a new range.
Are you reaffirming that that's flat to 7% growth in EBITDA cash flow or more of a longer term business growth rate.
Thanks for that question, Ben I think.
So directionally that's absolutely accurate you know what we said in our in our.
Repaired remarks is that the 5% to 7% dividend growth is affordable.
And that are we.
Considered a moderating the dividend growth for really two reasons, one is to retain more cash flow to invest in our growth programs and the second is to them.
Overtime grow into a slightly lower leverage targets so by definition.
That's what's implicit in that is that earnings and cash flow are expected to grow at a rate that is above.
Our targeted a dividend growth rate of three 5%.
Okay, that's what I thought I just wanted to clarify that any you've.
You've been pretty consistent with some of your payout ratio targets, even cash flow between that 60, 40% I mean is there.
And any.
Any change in that or maybe a more fulsome update at Investor day.
I think we.
We see value and are having you'd help utility like payout ratios, both on an earnings and cash flow basis, and again, given the fact that we see growth opportunity are being very robust going forward are revolving around energy transition and lowering our emissions. We thought it was prudent for us to be retaining.
[noise] more cash flow and by virtue of.
Continuing to grow earnings and cash flow at a rate on a long term basis above that 3% to 5% range. We expect to see our payout ratio is lower over time as well from the level the targeted levels that you mentioned Ben.
Okay, Great that was my two questions okay.
Thanks, Dan.
Our next question comes from Jeremy Tonet of Jpmorgan. Please go ahead.
Hi, good morning.
Just wanted to pick up with kind of some elements of the last question there and just as far as the analyst day is concerned should we be thinking about any other type of new messaging or major developments are as far as how you think about TC energy going forward with the strategy. We have you know new management team in the seat.
Or just wondering if there's anything that you can share with us.
Jeremy I think what Youll see from US is the same consistency that we've exhibited over the last couple of decades, which is we view our value proposition is to provide a stable and steady dividend growth underpinned by growth in cash flow and earnings to maintain a strong balance sheet and and.
Industry best payout ratios and to continue with a set of very.
Disciplined and conservative risk preferences.
What you'll hear from us on Investor day is more detail on the opportunity set that we see going forward again energy transition provides a vast opportunity for Tc energy to prosper.
The opportunity to reduce our emissions will create opportunities for us to invest capital as well and when you combine that with the underlying growth in our existing businesses that Stan talked about and for example in our U S gas business and I'll ask Cory to providing a little bit more detail on where we are with <unk>.
Our RF I hear a program in here just a minute in terms of electrifying our own consumption, what you're going to hear from US is more detail around the robustness of that growth program going forward and Corey if I could ask you to provide that a bit more update on that one. Thank you Francois hi, Jeremy I'm glad to have you calling in today appreciate your.
Taking the time.
As I've mentioned in previous calls we are systematically going through a process to.
To electrify our liquids assets in the U S and we've reached a stage now where we have a we are have exclusive negotiations for as promised 1000 megawatts of.
Renewable generation and we expect in Q1 to be able to announce.
Our selections in our choices and then the schedule and the price of each one of those projects and how they're going to serve our load more specifically.
Got it that makes sense I didn't think Tc energy would be changing a ton, but just wanted to check yeah.
We just wanted to kind of build off of I guess, the Nikola announcement that you had made during the quarter here and wanted to get any more color you're willing to share with regards to I guess the pace of opportunity as it relates to hydrogen going forward are in do you see these type of opportunities are as far as you know more repurposing existing asset.
Or building new logistics, just any color you could share there would be helpful.
I'll start and I'll ask Cory to provide a little bit more detail with using nickel as an example.
One of the things we've learned Jeremy over the course of the last year is how critical are our assets and infrastructure is to moving forward with energy transition.
With respect to hydrogen it's about generating Purdue.
Producing storing and transporting of gaseous molecule, which is exactly what we do everyday primarily through our natural gas transportation in our company.
So our skill sets and our asset base really lend themselves very well to those kinds of opportunities and you're going to see more of these type of joint development agreements that we have with Nicola with other counterparties going forward, but with respect to Nicola perhaps Corey if you could sort of frame up the size of the opportunity for Jeremy.
Yeah that'd be great.
I think the way to think about it is that.
Nicola provides us a unique opportunity to bring our core skill sets our core capabilities to a team as we invest.
Investigate.
How hydrogen can be part of the new energy economy, and so specifically, we think about it from a power and storage point of view that it matches, our view of participating in agenda load match view, a normal 150 ton per day hub.
Requires about a gigawatt of power and so we foresee that or we can participate bye bye.
Building and operating.
Renewable energy assets, which include storage wind and solar to power those Electrolyze yours, and then be able to systematically evaluate our existing infrastructure such that we can participate in the transmission side of those hydrogen molecules from point to point to service the law.
Load, but once again I'd like to reinforce that the most important part of this is a we can bring our capabilities to a wider team and learn together and b, we can leverage our existing asset base to participate with our partners in this opportunity.
Got it that's very helpful. Thank you.
Thanks, Jeremy.
Our next question comes from Robert <unk> of CIBC capital markets. Please go ahead.
Thank you I'd like to go back to the dividend growth announcement for a minute.
Thank you characterized it and Oh those payments as a near term.
Change to the dividend growth outlook and I wonder if there's a specific metric.
Lets us leverage that you'd need to see at a certain level or is it really under constant evaluation.
Sounds like carbon so given this morning is it's really a long term reduction in the leverage and the payout ratio as opposed to really a near term change in our in the growth rate.
Thanks for that Robert I'll get started and I'll ask Joe to provide additional comments.
Certainly we see ourselves.
Growing cash flow and earnings at a rate that's above the 3% to 5% dividend rate.
This is something we're going to constantly evaluate over time, it's a dynamic evaluation process within the company.
We see simply put tremendous opportunity for us to allocate capital above our free cash flow, even through energy transition and emissions reductions over the next several years and wanted to make sure that we're balancing appropriately providing.
Income growth to our shareholders.
But also maintaining a very strong balance sheet, because we think there will be situations, where we can be opportunistic and capture opportunities that others don't to the extent, we have a strong balance sheet and continue to maintain dry powder.
So the idea here is to grow into a stronger.
Stronger metrics and drove I'll throw to you for additional comment yeah. Thanks, Francois and thanks, Robert for the question. His friends, who I mentioned you know we will grow over time into these these stronger metrics in particular, when you look at our leverage.
Over time, we want to get that down I like to see us more in that four and three quarters debt to EBITA range over time I think it's important for US is Francois said to just have that additional capacity that dry powder. If you will.
Further bolsters our balance sheet.
So I think it's really important for us to be focused on that but again, it'll it'll take time and it can add it'll depend really on the cadence of spend as to how long it'll take to get there I would know Robert though like if you think about the last two years our debt to EBITA. We ended the year at $4 nine we were very happy with that so it's not like this is that far out of <unk>.
But it will take some time, but that's kind of a stated target that we have is around that four and three quarters area of debt to EBITDA.
Okay. Thank you that's a helpful color and then my next question is on a cruise power the upright there.
Can you maybe provide a little bit more detail and you know sort of contrast, it to what's going on with the the MCR program and it's the higher capacity you're gonna be achieved through operational means or is there some capex.
Then spend development that you could speak too. Thank you.
Hi, Robert it's Corey.
The way I would think about it is the number one the uprate is a three phase project, that's going to take the remainder of the decade Bruce.
Bruce power refers to as project 2030.
Phase one is under construction right now and we just approved phase two which is approximately $300 million of capital.
The execution is all on what we would refer to as the cold side of the of the of the of the plant, meaning there's no risk to nuclear operations. So it's primarily through improvements in and are the non nuclear side of the facility.
Each phase will has been funded and approved in a phase by phase process.
And we expect that by 2030 the goal of our 7000 megawatts are can be attained based on year to date progress of meeting their goals and objectives for cost and schedule for phase one.
Our next question comes from Linda It's a gearless of TD Securities. Please go ahead.
Thank you I don't want to spend.
Spend too much time belaboring your deliberations on the dividend, but it is of high interest so I'm just wondering.
How much of a factor if any were your conversations with the debt rating agencies, and considering and converging upon an appropriate dividend growth rate and maybe also where there any other factors that were.
Essentially secondary but a consideration as well for example, any sort of pending tax changes in any of your jurisdictions or anything like that.
Thanks, Linda it's Joel here.
First I would say that there was no discussions with the rating a rating agencies, there's no pressure on our on our metrics. This was a decision that we made on our own that we found it was prudent to retain more cash flow to redeploy into our business. So I just want to emphasize there's no ratings pressure whatsoever here.
But we did mentioned to the ratings, we do have never had a regular update call with them, but again.
This is no pressure from them whatsoever as.
As it relates to tax changes I mean, it's early days in that Linda I mean, theres a lot a lot of moving parts here, whether you look at tax changes in the U S. Canada. So it came out it would come out of the OECD well have to wait till the final legislation actually comes through before we can actually make any kind of determination if theres any impact at all on our tax position. So.
Very early days on that and we don't want to speculate but that did not factor into your decision here on the three 5% dividend nor did the radian she's.
Have any pressure from them whatsoever.
I appreciate that context, and maybe I'm moving on to the outlook for inflation and a lot of moving parts there as well, but I'm wondering if you can just remind us what the update is on what percentage of your earnings or EBIT, a might have protections in place and when we think of them.
The net tailwind versus headwinds, we might see next year and beyond if you can provide any context for us that would be very helpful.
Thanks, Linda it's Francois I'll take that one.
As.
As you're very well aware you know we have very little exposure to commodity price risk are volumetric risk and in terms of the rates established are you know in our various jurisdictions, we have a settlement in Canada gas and our mainline for five and six years respectively.
We charge negotiated rates are predominantly on our systems and in the U S on the natural gas side, and our liquids business as well so.
Our exposure in terms of revenues.
To interest rate risk is very low the vast majority of our capital is under fixed rate for from a borrowing standpoint, and so where we see some inflation pressures is on our projects and the cost of our projects going forward.
Something that we manage either through cost sharing mechanisms with our our customers to the extent that those are available, but it's something that we see and.
Take a very close eye on in terms of managing our operating and capital costs going forward. So not really any pressures in terms of allowed rates of return.
In terms of revenues.
Going forward from inflation, but again on our on our O&M in our project, it's something that we watch very carefully, but we don't see that as inflation, that's being really a significant impact on our earnings and cash flow volatility going forward.
Thank you.
Thanks Linda.
Our next question comes from Rob Hope of Scotiabank. Please go ahead.
Good morning, everyone.
Just a first question on the coastal gas link can you update us on the path forward and how you're thinking about capital at risk regarding the kind of.
Slipping schedule, there as well as the higher capital cost.
Yeah happy to do that good morning listen.
You know we continue on course to gasoline to work very closely with our customer LNG, Canada as we advance towards completion.
We worked through this project, we are working very closely with them to ensure that the pipeline comes in in a timeline and that's consistent with their needs on on the facility.
And so you know where we are at 100% aligned with LNG, Canada on the importance of the project and the need to continue to move. This forward. We're committed of course doing that we're more than halfway there with past or 50% completion and with more than I think 5000 people out there working right and right now and <unk>.
Achieving new milestones every day.
So we think this package is on track.
It's going to come in in a timeline that works for our customers and we're committed to making sure that that happens.
So there's no contemplation of any pauses like was previously discussed.
We have right now are all of the authorities that we need to proceed and we are in 100% alignment with LNG, Canada importance that construction is not disrupted so.
Well they are doing it and we don't expect a disruption in construction.
Alright, good to hear and then shifting over to Alberta, Alberta carbon grid T. CS gods, we'll call. It you know high pressure pipelines from the large emitter sources to the potential oh disposition for carbon areas. There. So when you were taking a look at your capital plan and taking a look at how the potential.
Do you see U S opportunity comes along.
Along how are you thinking about your assets and the path forward for this project.
Thanks, Rob its bevan here.
We've.
One great aspect of this opportunity is that it is an industry solution with.
With both our partner permanent ourselves as well as potentially other parties in the western Canadian sedimentary basin, leveraging our long life assets re looking at Repurposing or our assets to provide a more competitive solution for for the industry is what we're focused on but it's early.
Early days, Rob where is this is a multi year effort, we're getting feedback from industry and not only the energy industry, but other point source folks as well that have emissions to deal with and looking at a solution set that.
It could really be competitive for a broader industry approach.
Thank you.
Thanks, Rob.
Our next question comes from Andrew Kuske of Credit Suisse. Please go ahead.
Thank you good morning, maybe just on the growth opportunity that lies ahead.
If you could delineate a little bit of it.
Well, it's in corridor growth and potentially having higher returns versus maybe more competitive opportunities that you really foresee.
I'll I'm happy to start and then I'll ask Stan and Tracy to provide some proof points.
I would say going forward, Andrew that our opportunity set is going to be much more driven by in corridor growth than not.
Simply put.
We find their their risks and managing them you know external processes permitting.
And they liked to be much more manageable and corridor, we have very strong relationships. We're a trusted operator, our employees work and live in the communities in which we operate we have a strong safety record and we have strong commercial relationships with organizations in those areas and with policymakers so from our <unk>.
Aspect of going forward from US you can see much more what I call using a baseball analogy singles and doubles than swinging for the fences and we're very happy to be able to backfill.
You know at the a $8 billion, we lost earlier this year with the permanent revocation a wee bit.
Our job this year, we've sanctioned $7 billion.
Our including projects that'll be sanction before the end of the year, we sanctioned $7 billion of projects with an unlevered IRR of eight 3% that to me is.
Strong execution on our part.
And that's being done with smaller and corridor projects and projects related to energy transition and reducing our own emissions, but that's going to be the trend going forward and I see the execution risk and the permitting risk.
Around our capital projects going forward, reducing because we're going to take that approach.
So, perhaps we'll start with Stan and then Tracy.
Hey, Andrew This is Dan maybe I'll see if I can't paint a little picture for you for my view of growth within the U S natural gas business and I guess I would start by saying the best type of growth. We can achieve is one that doesn't require any capital spending and given the current regulatory environment that we're in where the time and complexity around building new projects is increasing and we.
Truly believed that the value of pipe in the ground is going to continue to grow over time, and therefore, our margins on every deck with them of capacity would be sell are going to increase so whether we're focusing on cost reductions generating new capacity with sales or even taking advantage of artificial intelligence and machine learning like we've recently done with our autonomous pipeline project, we think.
We're gonna be able to grow our margins going forward second thing I would point out too is our modernization program as part of our of our rate case that we recently settled and filed with FERC.
Columbia rate case settlement does include a continuation of Columbia gas modernization program, which we refer to as March three it's a $1 2 billion dollar investment over four years and as with our prior proposals are every bit of capital that we put in service at the end of October I forget.
Your starts to earn recovery effective April of the following year. So theres relatively short period of dead capital. If you will and I should note that if youre trying to trace back to our capital table that we included in our Q3 disclosures. The $1 2 billion dollar modernization program is not included in that just yet, but we will update the capital table when the settlement.
Is approved are expected around Q1, 2022, but third and perhaps really to your question and with respect to new projects again, given the depth and breadth of our system My expectation as we originated about $1 billion of projects each year and these will be largely in corridor compression related expansions that are permissible and can.
Struck the ball and we'll continue to have the five to seven times EBITDA multiple build if you will I should point out that not only are we originating about $1 billion of you'd go into projects a year. We're also putting into service about $8 billion of growth projects per year. This year, we're gonna put in about $900 million of capital into service next year.
We're on track to do about the same just under $8 billion. So again, while it's difficult for me to give you a specific breakout of where the growth is going to come from we're gonna look for continued organic growth amongst utilities and we've had some success in that particularly on the east coast of the U S. The electrification opportunities like VR and W are we've already talked about opportune.
With respect to Covid time, it's again I think our bound LNG growth that that second or third wave is going to come particularly as we see these $50 type LNG prices in Asia and record LNG send outs to places like China and also I wouldn't discount are an element of producer push.
For example, we're seeing increased capacity increased production out of the Bakken higher gas to oil ratios are pressure on reducing flaring all that's going to require additional pipeline capacity and again, we're uniquely situated to do that I think with our bison pipeline all of that I would characterize as traditional growth and on top of that there's all of these transitional opportunities.
That we have around renewable natural gas carbon capture hydrogen and the like so with that I'll pause and maybe turn it over to Tracy.
Thanks, Dan Hey, Andrew Thanks for the question.
Canada as you know we're in the middle of what is a fairly.
Large expansion program.
On the NGL system. It is positioning the NGL system.
Within that Montney area to ensure that the basin and the gas that's up there like some of the most competitive in North America has access to the system and we're increasing the access that gas into market by two this program more than 30%. So you'll see that program come to an end and in 2020 for a beer.
And that we see about 1 billion a billion and half of organic like investments such as we continue to make sure that that the system is positioned properly in the basin.
To help us succeed and you know as we look at opportunities too.
Optimize our system.
Looking at opportunities to Decarbonize as we feed that carbon prices are starting to increase opportunities to electrify and as we look forward and you know.
Our asset since we as we look at all of the activity around energy transition. So this is a tremendous resource base. We have right now are we're starting to see the benefits of the expansion that we've done already if you look at some pretty strong financial results you can see that continue and I think you know as we look.
Forward, we're going to leverage all of that to make sure that the basin is positioned to succeed to drive more gas down our kind of strategic asset on the mainline into eastern Canada. The mid west on a U S pipes and then you know we're participating.
Paid fully in the in the growth that we're all seeing in gas.
I appreciate the Three's company approach on the answering the question. It's very helpful. But maybe my second question if I can.
Is really related maybe it brings it back to the baseball analogy Francois on the singles and doubles and just all the capital comments that standard Tracy made.
You know do you see yourselves in a position where you've got effectively the singles and doubles that are all in corridor that allow you to you know in a certain sense run up the score and really put a lot of capital to work in a short period of time to accelerate on energy transition and just greater off firms to your customers.
And really benefit the overall growth story for T C itself.
Very much so Andrew I think you characterized it well and if you look at the $7 billion of projects that we have sanctions or expect to sanction for the rest of the year. The majority of those projects have a component of emissions reduction or energy transition or.
Emission less energy built into it so from our perspective as we look at our responsibility and the commitments we've made around reducing our emissions as we look at the direction policy is taking as we look at him talking to our customer base about what their objectives are a more and more of our capital goes.
Forward is going to be associated with either reducing our emissions reducing their emissions are moving us along energy transition and as you quite rightly pointed out.
You know a larger number of smaller projects brings less permitting risk for us less execution risk for us and in many instances, where we are the incumbent we are able to attract above average returns for that capital. So all told I think.
As you pointed out very well I think it bodes very well for us going forward in terms of our ability to achieve our targeted 7% to 9% Unlevered after tax IRR on newly sanctioned projects every year and as as I mentioned in my prepared remarks, we're at the upper end of that.
For the $7 billion, we plan on having sanctioned in 2021.
Okay. Thank you very much okay. Thanks, Andrew.
Our next question comes from Michael Lapidus of Goldman Sachs. Please go ahead.
Hey, guys. Thank you for taking my question I'm looking at your sources and uses fun you know your sources and uses of funds for the next couple of years one of the items that stood out a little bit was the expected source of funds from recovery of Keystone XL costs can you just remind us a.
What's the dollar amount that's assumed in that bar b, what's the process for getting recovery of those funds and kind of the timeline for it and see what's the backfill strategy in case that gets pushed out or delayed or where it doesn't get what covered thanks guys.
But we'll start with Bourbon with respect to the recovery and the backfill will go to Joel.
Thank you Michael.
As you as you highlighted we had a great support from our customers to help advance the Keystone XL by supporting us with some of the capital to move that project forward.
The ratification of the permit we've since moved to commercial conversations with our customers that did support us.
And we've made great progress on that front and we hope to resolve.
Any outstanding balances by the first quarter of next year.
With respect to the totals those are fully disclosed in previous disclosure upwards of $800 million, but over to you Joe.
Yes, Kevin Thanks for that and thanks, Michael for the question and to the extent that we.
Couldn't recover that the backfill would be simply through additional debt, we have capacity to do that because it isn't a large amount Michael it's anywhere from $5 million to $800 million is as Kevin mentioned.
And then maybe perhaps I'll add a little bit to that.
Ah the base case outcome is that we will be recovering that capital from our shippers. These are all strong credit worthy parties simply put what we are working towards.
Towards as an alternative is a bit of a win win situation, where we can create commercial opportunities that deliver even more value.
Then they're recoverable capital through commercial solutions that they need and that benefit us as well so.
I view, the risk of not being able to recover that capital in our capital stack to be de minimis to negligible.
We are simply working on trying to find commercial solutions that actually increased the value of Oh.
Of those recoveries.
Got it. Thank you guys appreciate the detailed answer.
Thanks, Michael.
Our next question comes from Preneed Satish of Wells Fargo. Please go ahead.
Thanks, Good morning, I'm wondering if you could comment on the proposal here in the U S to impose a minimum 15% tax on corporations.
If this if this went forward would this have any impact on your cash taxes on the on the U S side of the business or do you have any nols or credits to help offset this.
Thanks, Puneet, it's Joel here, Yeah. So if we went to a 15% tax a minimum tax again as I mentioned earlier, it's still very early days to determine whats. The final impact we have to look at those as the legislation that ultimately will come through we'd have to look at whats. The transition period, we have to look at if there's any grandfathering et cetera.
So if there was a 15% tax.
Not a big impact to us.
Given that especially on a cash tax perspective, because we do have some nols that we can use so again, it's a for us to kind of speculate. It's just too early just given there are a lot of moving parts, but certainly we're not seeing we're not really concerned that if we see you know depending on what the legislation with me as well whether it's in the U S Mexico, Canada OECD.
As I mentioned earlier, we have to determine what the ultimate impact is for a cash versus <unk>.
Current taxes.
Got it.
Wanted to go back to the you know the.
Our comments I know companywide D. The project backlog like you mentioned is going to generate an 8% IRR, but is it the case that the gas projects have higher returns and kind of the five to seven times EBITDA range and then the energy transition projects have a lower IRR than I guess the reason I ask is that overtime I would imagine that the energy transition.
Projects become a bigger and bigger piece of the backlog. So do you see risk there to the 7% to 9% target over time.
But we don't see any risk to the cause.
Outside of that band over time, as we're looking at opportunities through electrification as we're looking at the opportunities with the carbon grid with with Nikola and other hydrogen opportunities.
And even in renewables.
On a weighted average basis, we're very confident that we're going to be able to fall within that 7% to 9% range, what you've seen from us over the course of the last couple of years with the predominance of our capital being spend spent in Canada gas, where the prescribed rates of return based on 10, 1%.
Return on equity on a deemed equity a 40% and that falls beneath our range at roughly 6.25% with incentives, but nonetheless, we've been still able on a weighted average basis.
Fall within that 7% to 9% range. So you know.
Energy transition investments include Bruce power.
The upright and.
Both the M E R and the uprate fall above the 7% to 9% range. So.
You should not presume that energy transition investments.
By default generate and attract lower returns.
We're very disciplined about how we allocate capital and that 7% to 9% range is.
An extremely important part of our capital allocation decisions and based on the forward pipeline of projects that we're developing.
We don't expect to see us falling below that range anytime in the near future.
Perfect. Thank you.
Thanks Penni.
Our next question comes from Matt Taylor of Tudor Pickering, Holt <unk> co. Please go ahead.
Yeah. Thanks for taking my question here and I'll only one for me.
As LNG producers are looking to to offer net zero carbon cargoes are you guys seen any opportunities to partner there to reduce emissions of of where that gas is being transported from them and it's and if theres any conversations there about preference for some of these LNG producers on where they source their gas from my base.
And are customers that might give you guys a competitive advantage.
Yeah.
Hey, Matt This is Dan I'll, maybe I'll take the last part of your question first with respect to is there a preference in LNG customers to source Green gas. If you will the answer is no. We really haven't seen that matter of fact, it's been a bit of a mixed bag amongst producers, whether or not they're interested in and putting forth a product such as that overall no I think R. R.
The value chain is to build out the capacity to be the the LNG terminals and we're quite comfortable with doing that going forward again, particularly in light of the unprecedented demand that we're seeing for LNG right now and this winter where.
Cargoes have traded for over $55. The past couple of weeks record deliveries to China last month and the like so I think we generally like where we are in the value chain all things equal.
Dan if you could maybe on the topic of RMG provides some additional color on some of the initiatives that you've got going.
Yeah, I could appreciate that Francois I think I've mentioned to you earlier that we were on track to double the amount of R&D that we're taking into our system. This year, and we're probably going to exceed that by 50% and perhaps get up to about a 20 to 30 Bcf of RMG into the system by the end of 'twenty to 'twenty two.
So we're trying to do is has worked with some of the larger Atlanta Bill providers. For example, look at where their landfills are relative to our pipeline infrastructure studying the value chain to determine the value propositions, along the digesters component the conditioning component the transportation component and also that we have kind of a unique.
82 to interact at the intersection of molecules and electrons to an extent in the context of chorus team could come in and provide a role in this as well and it could be as simple as buying the gas the buying the renewable gas from the renewable producer or perhaps entering into asset management agreement as well so a lot of exciting.
Steph I think yet to come on the renewable gas Brent we're really bullish on that opportunity.
Yeah.
Great. Thanks for taking my questions.
Okay. Thanks, Matt.
Our next question comes from Patrick Kenny of National Bank Financial. Please go ahead.
Thank you good morning, everybody just.
Just a follow up on coastal gas link and more on the cost side just want to make sure I've got this right in the sense that the worst case of financial exposure for yourselves and your LP partners at this point.
No incremental project financing for whatever reason would be that $3 3 billion.
Your net exposure just being north of a 1 billion yes.
Would also assume that your L. P partners don't have any recourse on you guys as project manager so.
I'm not sure how much you can share at this point with respect to a firming up that incremental project financing or be any legal protection you might have as project manager from the other LP partners potentially making a claim as well.
Hey, Patrick I mean, I'll, let Joel address the temporary financing components that are that you mentioned, but first let me address just a few important points as you know you know this project is critical.
Both to the industry to the country to LNG, Canada, and we're working very closely with LNG, Canada as we advance towards completion, we can of course discuss the details of any discussions on cost and schedule and the issues between us because they're confidential.
But what I can say is that we're very hopeful that ultimately we're going to reach an agreement between us on those issues.
And that of course, you know will lead to two the resolution of some of the temporary financing as well.
We are continuing to work on the pipe more than 50% done lots of people out in the field are progressing that are very aligned with LNG, Canada on the importance of ensuring that that is not disrupted and with that note I will pass it over to Joel. Thanks, Tracy So yes Patrick.
You saw us disclose that.
There is a commitment up to $3 $3 billion that would be temporary if necessary for us to lend into the project I think it's important to note, though if that were required that we would earn a return on that that our investment. If you will that would be temporary we fully expect that over time that C. G L will be.
Able to increase its predict credit facility and the likelihood of this up to $3 $3 billion wouldn't be required, but if so again, we'd be viewed as temporary and we would earn a return on it.
Okay, Great. That's very helpful. Thank you and then maybe as a follow up as you think about say the pumped hydro opportunity.
Obviously, a very different project in the context of design and construction challenges but.
It's still quite similar as it relates to capital intensity.
Long lead execution risk. So just curious how this C. G L experience might be influencing your strategy around mitigating and diversifying our risks during the build out.
Just in order to maximize your risk adjusted returns.
Hi, Patrick it's Corey Thanks for the question I think that [noise].
Your question really amplifies what it means to be a part of TC energy and the fact that we have a diversified business and we everyday create opportunities to have learnings from other parts of our business and so.
What we would learn and apply and what we have learned and applied to this process as is number one understanding.
How our partners want to operate and because on the Myford.
Project, the Ontario pumped storage project, we will have partners that include local constituents are it will include the celgene.
Soggy Ojibwe nation and it will include potentially other investors and so we will definitely be thinking about how we include them early on in the process to make sure. We're aligned on our contracting strategy and execution strategy and secondarily, we are very focused on.
On making sure that we have the.
Right contracting strategy with our actual construction.
Construction partners, our OEM partners and our supply chain, so that as we move along in this process. We all are very clear on on the roles and responsibilities.
And I think I would just sort of close with the fact that [noise].
The the pumped Hydro project is also an excellent opportunity for us to leverage our.
What we have in our partnership with Bruce power and all of their excellent work that they have done and to be able to help and guide us through this process as well just because it both we both serve the same jurisdiction the same customers the same province, and so that's really a competitive advantage for us for this particular project.
Great I appreciate the color I'll leave it there.
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 Poirier. Please go ahead.
Thank you very much in closing.
Our disciplined approach.
As always emphasizes financial strength and adherence to our conservative risk preferences, that's a critical critical part of our value proposition.
Secondly, as you've seen with our results year to date and the upward revision in our outlook.
Our high quality long life assets continue to produce strong operating and financial results and thirdly, as we think about our strong.
Performance this year in terms of sanctioning $7 billion of projects with an eight 3% after tax Unlevered IRR and we think about our growth prospects going forward energy transition will provide vast opportunities for Tc energy to prosper as I said in our strategy to prosper irrespective of the pace or direction.
<unk> of energy transition transition thanks, very much for your time today.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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