Q2 2022 TC Energy Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the TC Energy second quarter 2022 results conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
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 then zero I would now like to turn the conference over to Gavin Wylie, Vice President Investor relation.
<unk>. Please go ahead.
Yes, thanks, very much and good morning, everyone I'd like to welcome you to TC Energy's 2022 second quarter conference call on the call. We have Francois Poirier, President and Chief Executive Officer, Joel Hunter, Chief Financial Officer, along with other members of our senior management team Francois enjoyed will begin today with some 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 in the Investor Relations section under events and presentations. Following their remarks, we will take a few questions from the investment community in order to provide everyone with an equal opportunity to participate we ask that you limit yourself to two questions. If you are a member of the media. Please contact Jaimie Harding after this call.
I would 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 the Canadian Securities regulators and with the U S Securities Exchange Commission.
Finally during this presentation, we may refer to excuse me.
Certain 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 our youth use.
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.
Yeah.
Thank you, Kevin and good morning, everyone and thanks for joining us today.
Despite market volatility an ongoing global events.
<unk> value proposition remains constant and we made important progress during this quarter.
We continue to deliver strong operating and financial results from our high quality long life assets and this reflects the strength of our utility like business model.
Our focus on safety and operational excellence.
The value of our long term relationships and partnerships.
And of course, north Americas, increasing demand.
For our essential services.
In addition, we're pleased to announce that coastal gas link LP has achieved a significant milestone with the execution of revised agreements with LNG, Canada that settled all outstanding disputes.
And allows us to continue the safe and timely completion of the project.
Now given coastal gas link will be on everyone's mind.
I'll start by discussing the importance of the revised agreements before moving to a few operational highlights from the quarter.
Joe will then provide more detail around our revised funding plan and why we remain confident.
And our ability to deliver our 5%, 21% to 2006 EBITDA compound annual growth.
Our 3% to 5% dividend growth rate.
As well as achieve our debt to EBITDA target of $4 75.
So I'll start by saying that a lot has changed over the past 10 year life of the CGM project.
We've seen additional regulatory and stakeholder requirements scope increases.
Impacts from Covid inflation weather and other extraordinary events.
But what hasnt changed.
Is our commitment to delivering a competitive LNG solution.
For the Western Canadian sedimentary basin.
The basin is globally competitive.
With fundamentals aligning with our strategy and our long term value of our CGM and NGL system assets.
Our revised agreements with LNG, Canada establish a better framework for project advancement and one that further strengthens our long term partnership.
Our agreements mitigate project funding and execution risk.
Provide a revised and expedited dispute resolution process and it will allow us to work with LNG, Canada on CGM phase III, if and when the project is sanctioned.
More specifically, we have reduced our capital recovery risk on the project by resolving uncertainty over specific and anticipated costs that now incorporates a new estimate of $11 2 billion.
This settlement will enable an increase in our project level credit facility to $8 $4 billion and together with our equity contribution we can step down on our balance sheet subordinated loan over time.
Now I want to reaffirm that we continue to see the coastal gasoline project as economically viable and we anticipate mechanical in service by the end of 2023, followed by commissioning and commercial in service.
Finally, these agreements create a solid foundation and a clearer path forward.
For the potential development of coastal gasoline phase III that if and when sanctioned.
Could enhance TC Energy's project returns.
This is the success of this project is not only important for TC energy and for LNG, Canada. This is a nation building project that contributes to global climate change goals and creates tangible social and economic benefits for numerous stakeholders.
<unk> will be the first direct path for Canadian natural gas to reach global LNG markets, providing additional egress for some of the most competitive and responsibly produced natural gas in the world.
Importantly, our resolution allows us to continue the safe and timely execution of the project, which is now approximately 70% complete.
More than $1 $4 billion has been awarded and contracting and employment opportunities to indigenous in local communities and up to 6000 people will be employed at peak construction. This summer.
Moving forward. This project also reflects the commitment we made to partner with indigenous communities and one of Canada's largest resource projects. This is one of the ways. We continue to advance reconciliation.
We have agreements with all 20 of the first nations along the project route and have signed historic option agreements to sell at 10% equity interest to two indigenous groups, representing 16 of those nations.
And together with LNG, Canada, the project could reduce global greenhouse gas emissions by 60 to 90 million tons per year by displacing coal fired power.
Now on the slide you can see a section of pipe being transported to the mountaintop.
This specialized one four kilometer long cable crane.
Transport 16 tons of materials and was engineered specifically for this project. This is innovation in action.
This is the first of its kind for Canada, considering the slope classification and I am proud of the work our team has accomplished.
The execution of the CGM project, clearly aligns with rising North American and global demand for affordable reliable and low cost energy.
Now depending on which forecast you look at global LNG demand is anticipated to grow from 50 Bcf a day to approximately 75 Bcf a day by.
By the end of this decade with North America, playing an increasing role.
This growth is largely underpinned by heightened energy security concerns and the reordering reorientate in of the energy mix in Europe , along with strong demand from growing economies in Asia.
Combined European and Asian, LNG demand is forecasted to increase over 40% or 20 Bcf a day by 2030.
This next wave of LNG demand is creating significant opportunities that align with our strategy.
TC Energy's unparalleled asset footprint will play a critical role in securing global energy supply.
Our updated forecast shows North American LNG exports growing by over 90% from 13 Bcf a day to 25 Bcf a day by 2030.
With a number of world class LNG export facilities on the Gulf Coast. The U S is now the world's largest exporter of LNG.
This represents over a quarter of the global market and is expected to increase over the coming years.
Now we are safely and reliably connecting about 25% of the volumes destined for U S. LNG exports and are well positioned to compete for and win our fair share of this growing market.
We continue to advance our portfolio of LNG projects at a steady cadence Grand generic Express went into service in January Louisiana, Xpress is already delivering partial volumes and it will be fully in service by the end of this year.
Construction is underway on Alberta, Xpress with targeted in service by the end of 'twenty two.
Additionally, north Baja Xpress is slated to come online in the spring of 2023, and we expect customer <unk> on the east lateral xpress to follow later this summer with an in service date in late 2024.
Combined these projects represent three three Bcf per day of new capacity and a capital investment for TC energy of over $1 billion.
Now Canada is also ideally situated to support future LNG growth as discussed CGM will connect one of the most prolific and low cost sources of natural gas supply in North America.
When complete CGM phase one will facilitate over two Bcf a day of LNG exports off the west coast with a potential to expand to approximately five Bcf a day, if and when phase III is sanctioned.
So with 94000 kilometers of existing natural gas pipelines throughout the continent.
Tc energy.
Unparalleled asset footprint is core to north America's LNG success today.
And in the future.
And we continue to see tremendous opportunities.
Okay.
Now I want to shout out to our operating teams across our entire platform. They had they did a phenomenal job operating our system in the second quarter utilization remains high across our diversified portfolio of high quality long life energy infrastructure assets underpinned by increasing demand for energy.
Flows on our 13 U S natural gas pipelines averaged $25 four Bcf a day up over 3% compared to the second quarter of 2021.
Our NGL system had total system deliveries, averaging 12, eight Bcf a day. This is up 9% compared to the same period last year, continuing to demonstrate our ability to deliver reliable market access.
At Bruce power execution continues to be exceptional.
Planned outages were completed ahead of schedule with results further augmented by the approximately $10 a megawatt hour increase in contracted power price received in April related to the ongoing major component replacement program.
Asset management work and other adjustments.
And on our Keystone pipeline system, we safely reached nearly 610000 barrels a day as we placed about 30% of the 2019 open season contracts into service.
Once again this highlights the essential role our infrastructure plays in North America.
Okay.
Now as we look at our 2022 priorities I am very pleased with the overall progress.
Safety is our top value and that is a constant it is embedded in our culture and it is my commitment that we conduct all of our business safely and reliably.
Executing on our secured capital program and increasing the returns on our existing assets are also key priorities.
As I mentioned, just a minute ago, we're increasing long haul volumes on Keystone.
And we're also working to increase Utilizations on market link.
And our power and energy solutions business, we've now finalized contracts for a total of approximately 820 megawatts.
That is 580 megawatts of wind and 240 megawatts of solar energy respectively.
This renewable energy will provide the required electricity for the U S portion of Keystone to become one of the first net zero liquids pipelines in North America.
It will also supply renewable energy solutions.
Two industrial and then corridor demand that we've been very successful in aggregating.
We continue to evaluate the proposals received through our RFP process and expect to finalize additional contracts in.
In 2022.
Now year to date, we've placed $1 $6 billion of assets into service and are working towards our goal of sanctioning $5 billion of high quality low risk growth opportunities each year.
As Joe will discuss in more detail, we are funding our capital programs prudently to ensure we maintain our financial strength and flexibility.
And we're also progressing our <unk>, our ESG commitments this year Tc energy joined the UN global compact the world's largest corporate sustainability initiative.
And the T and ft for them.
We will continue to identify innovative and viable energy solutions, we are energy problem solvers.
And our commitment is to do so safely and sustainably while building on our long track record of delivering superior total shareholder value.
Thank you very much I'll now hand, it off to Joe for a few comments on our second quarter results.
Good morning, everyone and thanks Francois is Francois mentioned, our assets continued to deliver strong results in the second quarter, while reliably and safely meeting the growing demand for energy.
Comparable earnings for the second quarter were $1 billion or.
A $1 per common share compared to $1 billion or $1 six per common share in 2021.
Comparable EBITDA and comparable funds generated from operations were $2 4 billion in.
And $1 6 billion respectively.
Compared to $2 2 billion.
And $1 8 billion for the same period in 2021.
Net income to common shares was $889 million or <unk> 90 per share in the second quarter 2022, compared to net income of $975 million or dollar per share for the same period in 2021.
Certain specific items are outlined on the slide and discussed further in our second quarter 2020 to report to shareholders.
Overall second quarter comparable EBITDA from our operating segments is up 5% year over year in part driven by a stronger U S dollar to $2 4 billion.
Mexico natural gas pipelines comparable EBITDA increased primarily due to lower interest expense associated with repayment of our peso denominated loan with the subsequent issuance of a U S. Dollar denominated loan which was entered into on March 15th 2022, it's sort of talos.
Liquids pipelines comparable EBITDA decreased due to lower contracted volumes and market link partially offset by higher long haul contracted volumes on the Keystone pipeline system as we placed approximately 30% of the 2019 open season contracts into service effective April one 2022.
Liquids marketing achieved higher margins in the three months ended June 32022, due to improved arbitrage opportunities compared to the same period in 2021.
Natural gas storage EBITDA within the power and storage segment increased as a result of the active management of our natural gas positions in the second quarter 2022.
By bringing sales forward from fourth quarter into second quarter. The gas storage team was able to capture favorable albertus spreads and reduce future operating costs.
It is worth noting while we have locked in an overall gain for 2022, we expect the second quarter realized gains to be partially offset in the second half of 2022, it's a corresponding purchases are recognized.
Power and storage results were also impacted by positive contribution from Bruce power, primarily due to higher contract price that was partially offset by lower volumes, resulting from greater planned outage days.
For all of our businesses with U S. Dollar denominated income translation of results in the Canadian dollars occurred at an average exchange rate of 128 in the second quarter 2022, compared to $1 23 and 2021.
And as a reminder, our U S. Dollar denominated revenue streams are in part naturally hedged with U S. Dollar denominated amounts below EBITDA and the residual exposure is actively managed on a rolling basis of up to three years.
Interest expense increased primarily due to long term debt and junior subordinated note issuances net of maturities a stronger U S dollar and higher interest rates on increased levels of short term borrowings.
It is important to note that approximately 85% of our long term debt has a fixed rate and an average term to maturity of 20 years.
Comparable interest income and other decreased primarily due to realized losses on derivatives in the second quarter used to manage our net exposure to foreign exchange rate fluctuations on U S dollar denominated income.
Okay.
We continue to progress our industry, leading $28 billion secured capital program and have placed $1 $6 billion of projects into service this year.
This program is expected to deliver a weighted average unlevered after tax IRR of approximately 7% to 9%, which remains in line with our targeted range.
Further our targeted $5 billion of projects sanctioned each year must adhere to our strategic capital allocation threshold.
We will not compromise our value proposition.
Projects must meet our risk return requirements and return preferences and decisions will be made with per share accretion as a priority.
Now we remain opportunity rich.
Our capital program not only focuses on growing our business, but also on modernizing and advancing projects aimed at reducing emissions and offering low carbon energy solutions.
We reiterate our outlook for comparable 2021 through 2026 EBIT growth of 5% importantly, our EBITDA outlook is largely underpinned by long term take or pay contracts or cost of service regulation.
Now this visibility to future cash flows continues to position us to grow our dividend per share by 3% to 5% per annum.
Now turning to our funding program.
As you heard we are pleased to announce coastal gas link LP and LNG, Canada have reached revise agreements that addressed and resolved all outstanding disputes over certain incurred an anticipated cost of the project.
Capital costs have increased from the original cost estimates made in 2012 and the revised agreements incorporate a new cost estimate for the cost of gasoline project of 11 2 billion.
In recognition of the revised project agreements with LNG, Canada and in accordance with a binding commitment subject to the execution of definitive agreements with our coastal gas link LP partners, we will make an equity contribution to coastal gas link LP of $1 9 billion.
Which will be paid in installments commencing in August of 2022, with no resulting change to our 35% ownership.
This contribution will be included in recoverable project costs and will earn a return on and of capital.
Any additional equity contributions will be initially funded through our amended 2021 interest bearing subordinated loan agreement between Tc energy and coastal gas link LP.
Outstanding amount will be repaid by the coastal gasoline partners, including us falling in service and final cost determination.
Now I want to reiterate francoise remarks, we continue to see coastal gas link is economically viable in the agreements create a solid foundation and clear path forward for the potential development of phase III that ethane when sanctioned could enhance TC Energy's project returns.
Importantly, the agreements reached reduced our project financing risk by supporting a $1 6 billion expansion of the existing project level credit facilities to a total of $8 4 billion.
Our commitment under the subordinated loan agreement between TC energy and coastal gasoline LP will be stepped down from the current $3 8 billion overtime as capacity under the project level credit facilities is increased and we make installment payments associated with our equity contribution.
Now in terms of 2022 capital spending we now expect to invest approximately $8 5 billion as.
As a result of increased costs in the NGL system, and our equity contribution associated with coastal gas link of approximately $1 3 billion.
The graphic illustrates our updated forecasted sources and uses of funds for 2022 through 2024, including these revisions.
Now starting in the left column, our total requirements over the three years are projected to be approximately $29 billion.
Reflecting capital expenditures, including maintenance capital of $18 billion.
And dividends of $11 billion.
The second column highlights expected internally generate cash flow of $21 billion.
And proceeds from the U S $800 million hybrid issued in March.
This leaves a residual need of approximately $7 billion.
<unk> in the far right column that we expect to fund through a combination of commercial paper Inc.
The incremental debt hybrids, the dividend reinvestment plan asset sales and Keystone XL project recoveries.
To continue to prudently fund our capital commitments, while maintaining our leverage targets, we have reinstated issuance of common shares from treasury at a 2% discount under our dividend reinvestment plan commencing with the dividends declared on July 27 2022.
The dividend reinvestment plan is intended to be short term funding mechanism that we anticipate will be activated for four quarters based on historical participation and as we bring additional project into service. So.
So in summary, we will always utilize the most optimal funding tools to maintain our financial strength and flexibility while delivering per share value.
Given the strong year to date performance of our base business, we reiterate our 2022 comparable EBITDA outlook to be modestly higher than comparable earnings per share to be generally consistent with last year.
We reaffirm our industry, leading capital program of $20 billion.
<unk> is expected to deliver 2021 through 2026 comparable EBITDA growth of 5%.
And we have strong visibility to incremental growth that leaves us comfortable with our ability to meet our leverage target of $4 75.
Lastly, we expect to grow our dividend by 3% to 5% with sustainable growth in earnings and cash flow per share and strong coverage ratios. When you combine our enduring business model unparalleled asset footprint and organizational capabilities, we are differentiated and our potential to capitalize on.
The opportunity rich environment before us.
Overall solid execution will allow us to continue to deliver superior long term shareholder value.
At the end of my prepared remarks, I will now turn the call back over to Gavin for the Q&A.
Yeah. Thanks, Joe So just a reminder, before I turn it over to the conference coordinator for questions from the investment community. We ask that we just limit yourself to two questions. Thank you.
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 Youll hear 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 Q, we will pause for a moment as callers join the queue.
Our first question comes from Linda <unk> of TD Securities. Please go ahead.
Thank you.
I'm wondering if you could just give us some more context around.
The coastal gas link updated cost.
For the prospective cost how much have you actually locked in and have you provided for any sort of additional contingency or maybe you can provide some sort of.
Our confidence level and your cost estimates.
Yes, Linda this is Kevin.
So as we mentioned 70% of the project has already been completed all the materials that we need to complete the project or on site.
We've completed.
Some two out of two out of the eight sections are completely solved and finished in terms of mechanical completion in all our contracting strategies have already been tendered and less so the confidence that we have in building up our new estimate is high.
Inclusive of that estimate of the 11.2 is a contingency for what we see as the remaining potential risks and moving forward to conclusion, but we have high confidence that we'll meet our mechanical completion date by the end of 2023.
So.
Right now we sit with.
Tremendous amount of.
Confidence given that we have a settlement in place with our partners and customers.
With LNG, Canada, and so we are well positioned to deliver on our commitments of 11 to end of 2023 mechanical completion.
Thank you and just as a follow on.
Are you in active discussions with LNG, Canada phase two and.
What in your mind would be kind of the optimal.
Timing to ensure for.
Minimizing any sort of this.
Dismantlement and reconstruction of labor camps et cetera from a from a.
Presumably from our cost savings initiatives and provide some context around that.
Yes, so we're in active discussions with LNG, Canada around phase III and the feasibility doing.
Appropriate front end work to establish what the scope and scale of that project will be.
The project looks very different than phase one.
Not a linear development it is compression.
Facilities, and so that changes the risk profile to our benefit.
In terms of the timing that is one where our customers' LNG Canada are in control of determining when they are prepared to bring a final investment decision and we're supporting them in that in that evaluation right now.
There's a tremendous amount of work that needs to be accomplished but it's important to do that work today. So we have a high confidence decision in going into that.
Thank you and just for my second question more broadly for your for your capital spend plan.
You've identified 18 billion and your funding plan is that all up to date with any sort of inflationary pressures are appropriate.
Tien tsin fees or might we see some projects potentially embedded in that going up in cost or deferred.
You have some discretion around that.
Hi, Linda it's Joel here. So we are up to up to date with the capital spend that you referred to you may recall back in Q1, we did revise our cost estimates for the NGL system expansion projects.
So that's where we're really seeing obviously most of the cost pressure within the portfolio. We're very encouraged by what we're seeing at Bruce Power unit six MCR program is on time and on budget, we're not seeing any inflationary pressure on our capital investment in the United States right now, but it's really coming from.
Alberta as you well know it's a huge market here, we've got the <unk> project going on Theres Trans mountain going forward, along with obviously the expansion of <unk>. So we don't expect to see any material changes to our cost estimates going forward and what you see is most reflective of our current estimates.
Thank you I'll jump back in the queue.
Our next question comes from Ben Pham of BMO. Please go ahead.
Hi, Thanks, Good morning, I wanted to go back to.
That.
That's great.
Category on your funding program and more specifically curious around with asset sales, how how do you think that ranks and that that overall growth.
Shaded area and Theres anything logical that that stands out and is it is it really appealing to sell assets in this environment when you're looking to reduce debts at the same time.
So Ben it's Joel here.
When we look at our capital program and how we fund. It obviously, we're always trying to look for the optimal capital structure that really minimizes or our cost of capital and maximizing shareholder value and really meets our leverage targets. Obviously, we're very judicious with our share count we want to maximize our earnings per share and cash flow per share. So.
So when we look to the financing it really is in all of the above strategy.
And what you've seen that gray box to the extent our balance sheet permits we do use debt, we do maximize our utilize utilization of hybrids at 15% of our capital structure and then we look to internal equity, which is joint venture partnering sale of non core assets and then obviously external equity through the dividend reinvestment plan and if needed.
Discrete equity so that's kind of the stack that we look at but we do have a number of non core assets in the portfolio that we could look to monetize but again, what we're trying to achieve here is what it maximize our shareholder value what is the lowest cost of capital alternative for funding our capital program.
Okay. Thanks, Thanks for that and then when you.
Updated this this funding.
Our plan, obviously youre, putting in coastal gas link that impact in <unk> you are thinking about some of the Mexican pipeline developments as well when you think about turn on a drip for for this year.
Ben I'll start here with regard to the drip as we outlined the drip is really in connection with higher spending that we're seeing on <unk>, along with with coastal gas link.
We just deemed it to be prudent at this point in time, obviously your core tenant for US is to preserve our financial strength and financial flexibility have a strong balance sheet and therefore, we determined that turning on the drip for four quarters and what we're trying to achieve here is about $1 $25 billion of common equity based on a 35% historical participation rate.
The 2% discount.
Is appropriate to fund our capital program at this point in time.
Okay. So I'll comment on in Mexico, then.
No comment that I have on Mexico, maybe turns into that Stan Ben This is Stan I could tell you. This much that we've made very meaningful progress in the negotiations around the definitive agreements with Cfe, both with respect to the settlement and the potential project, but we're not done just yet.
We've been in Mexico for over 30 years, we are still very very much committed to our strategic alliance that we have with the Cfe and just ask you to give us a little bit more time to you to close out the negotiations.
Alright sounds good.
So Ben I would just offer one last comment here that as I mentioned and you think about what's in that grade blocks in our funding plan right now that we have a number of levers at our disposal here.
If we were to move ahead with a project in Mexico as I mentioned again, we are very judicious around our share count and we'll try to find the lowest cost of capital that ultimately maximize shareholder value and really meets our leverage targets. So it is a bit of an all of the above strategy.
Not only with our current capital program, but also obviously if anything goes ahead with Mexico.
Okay I appreciate it thank you.
Okay.
Our next question comes from Robert Kwan of RBC capital markets. Please go ahead.
Hey, good morning.
If I can start back on coastal gas link.
And returns like can you talk about how much lower the base returns are relative to the originally anticipated returns, which I think were pretty low.
<unk> and then as you think about the potential phase III expansion.
The cost and return framework.
Oh defied as part of your new agreements and if Theres no. Further liquefaction expansion is there a mechanism and the current agreement to improve the returns on <unk> are you just.
And if not you just kind of sitting here with the low returns.
So Robert this is Kevin.
So phase I clearly didn't achieve.
Its initial return objectives, but as we indicated.
Coming to a settlement puts the project and the best.
<unk> to move forward and primarily our priority was to ensure the toll competitiveness to support the project and support the ongoing phase two development that would subsequently follow if LNG C chooses to.
Our returns are not linked between phase one and phase two.
Terms of our settlement are confidential.
But we're confident that the return profile that would exist in phase III.
Which is well advanced in our discussions with LNG, Canada as well as our settlement delivers a strong project for for our shareholders.
Okay. So this phase to get you back to where you originally anticipated.
Phase two.
Has the same carrier brings the combination of phase one and phase two brings us back into a very competitive return scenario for the entire project.
Okay.
If I can just finish here then on funding and specifically the drip.
You've talked about being judicious with your share counts and so can you just talked about the decision to turn the drip on at the most optimal funding tool.
Versus say the asset monetization.
While you have state you'll leave it on for a year if you have very similar.
The current market conditions persist.
The calculus to turn on the drip now mean that you see for equities being the best source of funding, if youre able to add things like Mexico or other projects in the portfolio.
Yes, Robert it's Joel here first of all we're really looking at here with the additional creases that we're experiencing on <unk> and coastal.
This is over kind of a tight period of time, we're talking really 2023.
Where we saw our metrics being a little bit elevated based on our internal forecast and we still had turning on the drip for four quarters.
It's really important for us what we like with <unk>.
Is it is really shape nicely with the capital spend profile.
When we look at drip relative to discrete equity, it's much cheaper to the 2% discount versus an all in discount of say, 7% to 8% that you would see on discrete equity.
Obviously, we have the ability to turn off quarterly.
As we move forward here and we see maybe further expansion of our capital program. Obviously, we will look to again non core assets that we can monetize and again, we evaluate that against other forms of capital. So as we get to maximize shareholder value and really manage our leverage but again I just want to reiterate that we're looking for.
At 2023.
And to get our leverage down to where we're comfortable with this.
This is a quick way of getting there on a very cost effective basis, and again really well shaped with their capital spend profile.
Okay. That's great. Thank you very much.
Our next question comes from Robert <unk> of CIBC capital markets. Please go ahead.
Hi, good morning.
First of all congratulations on getting the coastal gas link build.
I know that was a priority for both you and the industry could not have been easy.
I was wondering if you could speak more to.
Any changes to the revised.
Well agreement mitigate risk I think you mentioned that the opening comments so.
What specific changes can you tell us about that mitigate your risk going forward.
Okay.
Rob Thanks for the question and I appreciate the acknowledgement of getting to the settlement.
It was.
A good long discussion with our with our customers and we've.
Reached a really good outcome.
The key mitigation components, our transparency and clarity of how we resolve matters going forward accelerant graded dispute mechanisms ensuring that we maintain proper alignment through the final delivery of the project.
Which gives us high confidence and transparency not only to us, but our equity partners and also.
Our indigenous partners that provides them clarity on the path forward as well so the mitigation or just increase alignment.
More transparency in the process of how we deal with challenges are changes in the project going forward and just.
Strong alignment between ourselves and our customer LNG, Canada.
And then I would add.
It's Francois Robert.
In the absence of a settlement, we would be carrying on our balance sheet, a fairly sizeable amount of capital.
Achieving this settlement allows us to upsize the credit facility.
<unk>.
<unk>.
Not have to carry a substantial amount of capital for what could ultimately have been many years into the future.
Okay.
So that answer.
And just.
As you pointed out in the U S has become the largest.
Export in the first half of the year.
Can you provide a little bit more color on some of the.
The postal ways of bringing about addressing.
The projects that you've listed but.
Projects that might be available to the industry in the future.
It simply just a question of leveraging your existing transmission network continuing to participate or is there some way that you could.
A benefit from enhancing what you already have through M&A or other asset acquisitions.
So Robert this is Stan I can start and tell you that our unparalleled asset footprint is what the basis is my statements in the past around.
Given the size and the breadth of these assets, we should be originating about $1 billion a year of new growth projects and LNG is right at the forefront of that and it really is more driven by organic growth and I'll look at it from this perspective, given the geopolitical events right now Europe needs to find about 20 Bcf a day of natural gas to displace what.
They have historically relied on or Russian supplies.
Assuming about two thirds of that comes from the U S. That's an increment of about 13 Bcf out of the U S. Predominantly from the Gulf Coast today, we transported about 25% of the LNG in the U S and I expect us to at least maintain if not grow that market share going forward. So you can think of us having opportunity set over the next.
Two to three years Thats somewhere in the three years to four Bcf a day range.
I can't get into details now due to the market sensitive nature, but suffice it to say that we're well aware of these opportunities have with respect to LNG growth in LNG demand and are actively engaged with various counterparties for offerings that really leverage our competitive advantage, which is our footprint not only in the.
Gulf Coast in Louisiana, but also in other parts of the country like <unk>.
Our north Baja system and opportunities in <unk>.
Okay. Thank you very much.
Our next question comes from Jeremy Tonet of Jpmorgan. Please go ahead.
Hi, good morning.
Good morning.
Just wanted to look at Mexico, a little bit more if I could here and as it relates to the BTR delay just wondering what line of sight do you have just the completion on the timeline that you said.
In early 'twenty three there and would you move forward with another Mexico project before you reach full completion on BTR.
Jeremy I'll start and of course, Dan and I have been in deep conversations about these questions for some time, so I'll ask him to supplement with what we're seeing specifically on <unk>.
And as I've said.
Publicly in the past.
We've been in Mexico for 30 years, we have a very positive in construction a constructive relationship with the Cfe.
From a from the perspective of allocating incremental capital into the country. We do feel it is critical to resolve any remaining <unk>.
Our actual disagreements.
Ed or simultaneous with.
Any incremental capital decisions.
So that would be the way, we would think about it in that over to you yes. Jeremy This is Stan.
As you know we've already put into service or ready for service I should say, both the north and the lateral segment for the Villa de Reyes project and right now, we're focusing intensely on the southern segment, which if.
If we can get some issues resolved some of the heat OS would be ready for service probably sometime in early 2023.
Got it that's helpful. Thanks for that and just come back if there isn't large Mexico pipeline project approved later this year early next year and if that pushes capex over $5 billion a year in 2023 or later.
How should we think about the timing of incremental portfolio rotation or equity issuance should the capex rise in that fashion.
So Jeremy it's Joel here as I mentioned earlier.
Anything that we do when we evaluate capital investment in particular, when we're over that $5 billion threshold that you've indicated.
<unk>.
We try to find the optimal capital structure that really minimizes our cost of capital again thinking about being very judicious around our share count and to maximize our earnings per share and cash flow per share. So as mentioned it really isn't all of the above strategy.
Again to the extent that we can use that we will to the extent that any.
Capital project comes with hybrid capacity, we will use that we will then look to internal equity with partnering sale of assets.
And if need be external equity with the drip and discrete equity. So again, it's an all of the above strategy, we make that determination at that point in time, when we're making the investment decision as to what's the best.
Path forward here as relates to our cost of capital.
Got it I'll leave it there thank you.
Our next question comes from Matt Taylor of Tudor Pickering, Holt <unk> co. Please go ahead.
Yes, Thanks for taking my question here a bit of a longer dated one.
In your targeted EBIT growth of 5% through 2026, I just wanted to get a sense of how you are.
Factoring in the rising cost of carbon obviously, you have plants reduced emission profile using whether it's renewable power on Keystone are more pumped storage portable.
Those emissions that needs to be reduced.
Not disclosed plan in place I guess, what I'm getting at is as the government.
Over time increases those.
Those cost of carbon are you currently including some of the costs of that rising carbon as youre trying to offset it whether it's using offsets or other projects or are how are you triangulating tier emissions reduction targets longer term.
Thanks for the question Matt.
We are absolutely factoring.
Cost.
Offsets or mitigation and those are incorporated in our EBITDA.
Our growth outlook.
As a matter of fact that dynamic is going to be a driver of future growth going forward because it's embedded in our strategy is actually.
Reducing our emissions and helping our customers reduce their emissions, which is why we continue to be opportunity rich.
Emission reductions is going to be a catalyst for growth for the company.
Look in various jurisdictions, we have the ability to pass through those costs.
And in others, we need to find a way to mitigate for our own account all of those are factored into the growth estimate.
That we've provided to the extent they are visible and been passed into law.
Okay.
Excellent. Thanks, Francois and then one more if I may just.
We've heard several times about potential opportunity in Mexico, but can you just speak more high level on Mexico, we've seen LNG projects that are picking up steam some floating LNG just a general sense of how you're viewing that market you've been there a long time, obviously any comment.
With the backbone infrastructure there would.
Good time to crystallize value or do you see similar opportunities in terms of some some things we've heard about previously about helping the industrial power stack transition over to gas and some of those opportunities longer term.
I'll start at a very high level in terms of what I see is.
Government policy and support for gas transmission, and then I'll ask Stan to provide some color around some of the things that we're seeing.
I think the government in Mexico, and the Cfe is learning.
And.
Developments.
Over the last few years indicate that they realized gas transmission as an enabler and supporter.
<unk> ambitions to lower power costs and address <unk>.
Social and economic disparity between different regions of the country.
So in short <unk>.
Increasing access to natural gas around the country is a very powerful.
Socioeconomic tool for the country and they see partnership with the private sector in gas transmission as an essential tool to.
Operationalized policy over to you Stan.
Yes, Matt This is Stan <unk> from my perspective again this goes back to our asset footprint in Mexico. We currently deliver about 15% of the gas is transported today along with the strong demand strong demand in the context.
Mexican imports from the U S are going to increase from eight Bcf to 12 Bcf over the next several years. So that tells me a couple of different things, one theres going to be the need for greater capacity.
Capacity into Mexico, which could be an opportunity for us to expand our <unk> pipeline at some point in time, which can be done relatively efficiently with compression we're going to focus extensively on building out our backbone system across the central part of Mexico, particularly as power loads in industrial load growth continues to materialize.
And then lastly, you brought up the.
Opportunity around LNG, particularly on the West coast of Mexico, perhaps tied to the transition efforts that.
Mexican government is advancing but right now at least for the short term our focus is on the potential project opportunity, we have with the Cfe and closing out those negotiations.
Great. Thanks for taking my questions.
Our next question comes from Brian Reynolds of UBS. Please go ahead.
Hi, Good morning, everyone. Just curious as a follow up on some of the capital equation capital allocation questions. If you could give a comment on about how management is thinking about a potential suspension of dividend growth over the near term as one of the leaders to support the balance sheet over the long term.
I'll take that one Brian that is not in the cards.
Plain and simple we.
Our confident in our ability to grow EBITDA at that 5% range and do you have earnings per share and cash flow per share growth.
Underlying growth that support.
A dividend growth in the 3% to 5% range.
As well as.
Lowering our leverage to the $4 75 level in that five year window. So we're able to balance all of those various interests.
Maintain our capital discipline.
Maintain our priority of deleveraging as well as delivering a stable and growing return to our shareholders. So there is no plans to moderate dividend growth.
Given the.
The richness of the opportunities that are before us.
Great. Thanks for the color and as a follow up you talked about asset sales is another lever earlier.
Can you provide some additional color into what those noncore assets look like and then just given the resolution around coastal gas link what is the interest in first nations to join in on the project at this time during phase one or is it fair to assume that they would like to see increased returns from CJR expansion before ultimately participating in their equity interest. Thanks.
So Brian it's Joel here, we're not going to specifically call out what assets that we're looking at but what we can tell you is that when we look across our footprint that there are a number of assets maybe smaller nature, but that are non core that we could look to monetize over time, if need be but at this point in time, we are.
Not going to call out to anything that we're looking at.
As far as the portfolio management goes.
And.
This is better than all other foundations, yes, yes. This is <unk> on the first nations.
Terms of their option agreements are not affected by the settlement in there their participation in the and the project remains at 10% as as per the original deal. So there are no changes.
For the indigenous option agreements and that but the settlement does provide clarity and a path forward for them.
Great I appreciate it.
The rest of the market.
Thank you.
Our next question comes from <unk> Satish of Wells Fargo. Please go ahead.
Hi, good morning, so at a high level Youre looking at asset sales and the drip to help fund the current capex backlog and Youre still juggling some larger projects like.
Mexico pipeline pumped hydro among others.
I guess my question is not on funding, but is there any thought to try and seek a higher return on the future projects that you do.
It's higher than the 7% to 9%.
Corporate return basically to kind of match. The fact that your cost of funding cost of incremental funding might be starting to creep higher.
Thanks for the question <unk>.
Because we're opportunity rich we have.
Lots of options before us one of the.
Critical capabilities that we bring as a company is capital discipline and the opportunity to high grade to the highest returning projects.
You didn't mention risk.
And your question, but im going to.
That risk return.
Relationship is very important.
Our historic risk preferences are.
Are unchanged and we're confident in our ability to bring projects forward with a low risk profile underpinned by long term contracts or regulation that deliver that 7% to 9% Unlevered after tax IRR.
To the extent, we're looking at incremental capital beyond.
Our $5 billion run rate.
Thats supportable with free cash flow.
You have to look at the marginal cost of capital to fund those and our job as a management is to maximize the spread between earned return and in that case, the marginal cost of capital, which may include asset sales or equity, which is at the highest cost end of that stack.
And our calculus is that there must be a reasonable spread between the earned return in that cost of capital too to make that capital allocation decision.
But again risk.
Managing to a conservative risk profile and not.
Changing our value proposition is always top of mind for us.
Got it thanks, and just switch sorry did you want to continue.
No. Thank you Okay. Just switching gears just curious if theres an update on the potential bison project in the Bakken I think you'd launched an open season, just curious how that's progressing I know theres been some where.
Other related disruptions in the Bakken, So I'm not sure if that's impacted anything.
Yes. This is Stan again go back to our best in class footprint in this opportunity rich environment that we have here.
The supply push projects or just another opportunity for growth for us. We did have a non binding open season that closed in May we were very pleased with the results of that open season, and suffice it to say that we're going to take the second half of this year to turn those negotiations into precedent agreements.
Look forward to sharing more with you in coming weeks and months.
Great. Thanks.
Our next question comes from Matthew Weekes of IAA capital markets. Please go ahead.
Hi, Good morning, Thanks for taking my question I just wanted to quickly ask you too.
Any update on the open season that you talked about last quarter for a market like and looking to increase.
Volumes, there a little bit and what the outlook might be going forward here.
Sure.
Matthew Thank you this is bevin.
We ran two open seasons in the past quarters, certainly market link but also.
For our important interest lateral both were successful in completing that.
Getting getting contracts in place our strategy is to as the contracts had been rolling off on market link was to reestablish both short and long term contract profiles.
Cognizant of the volatility that's in the market right now and some of the headwinds that we're facing at least currently in the short term, but our mid to long term outlook is that the market link asset will return to perform.
Going from a headwind situation to kind of tailwind and so.
With support and anxious Lynn.
Link.
The open season that couples with that project, which is coming in under budget and ahead of schedule with.
Enhancing deliver.
Deliveries into Motiva refinery, which is the largest refinery in North America, so providing increased delivery points to our customers has been a key component of our strategy. So both of those open seasons were very successful.
Okay. Thank you I appreciate the update I'll turn the call back thanks.
Our next question is a follow up from Rob Hope at Scotiabank. Please go ahead.
Hello, everyone just wanted to circle back on the Mexican projects. So when you take a look at the relatively full.
Capex backlog you have relative to the mobile classifiers.
Attractive risk adjusted returns.
How do you think about adding a partner there, which will lessen some upside but make the project easier to finance if it is.
To move forward similar to what was happening at certain Texas.
Rob It's Francois thanks for the question.
It is.
In the context of our views on.
How much Mexico.
EBITDA, we want in the consolidated portfolio, we think of.
10% ish.
Contribution to consolidated EBITDA from Mexico as an appropriate.
Near to medium term target for the company and.
Prudent portfolio management, and sharing diversification et cetera, So certainly to the extent, we see attractive opportunities.
To earn a premium return.
To the extent, bringing in a potential partner for a portion of that helps us prosecute and make the value of the entire franchise more valuable.
We will certainly consider that and so the short answer is.
Potential for selling a minority interest down the road is something that we would be open to but again more within the context of prudent portfolio management and proper diversification.
Alright, I appreciate that and then just as we take a look at 2023.
Any flex in the capital plan.
Just.
To help scale by this.
And we will call it tightness on the balance sheet could we see you less willing to invest.
Money in some of the renewable projects towards the end of the year or could we see some deferred.
Capital from 23 into 'twenty four.
<unk>.
I think there is somewhat limited opportunity for us to defer capital is as you can well imagine it sometimes takes two or three years from the time, we sanction a project to receiving regulatory approvals and permits.
We've made commitments to contractors, we've ordered long lead equipment and so deferring spend.
Can be a bit challenging.
Our view is if a project is accretive to value.
We can be creative around rotating capital, we can be creative around.
Bringing in partners to be able to deliver the.
Long term value for our shareholders and.
More more likely that you would see us doing that.
Rather than deferring near term capital projects.
Thank you.
Okay.
Ladies and gentlemen. This concludes the question and answer session is there any further questions. Please contact investor relations at TC Energy I will now turn the call back over to Vince Webb.
Please go ahead Mr <unk>.
Thank you very much I appreciate everyone's time and attention today.
Just wanted to remind everybody.
Capital discipline.
Discipline around our risk profile and deleveraging our key priorities for the for our company.
We are opportunity rich energy transition is going to continue to be a catalyst for growth.
Our incumbency.
Through our unparalleled asset footprint is going to continue to bring us.
A very healthy flow of opportunities.
<unk>.
We have.
High quality franchises that will bring that forward.
No.
We are well positioned to prosper, regardless of the pace and direction of energy transition and we will.
Always balance growth.
Risk.
And maintaining balance sheet strength, thanks, very much for your attention today.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.