Q3 2022 TC Energy Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the TC Energy's third quarter 2022 results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like to turn the conference over to Gavin Wylie, Vice President Investor Relations. Please go ahead.
Yes. Thank you very much and good morning, everyone I'd like to welcome you to TC Energy's 2022 third quarter Conference call. Joining me today are <unk>, President and Chief Executive Officer, Joel Hunter, Chief Financial Officer, along with other members of our senior leadership team for its one Joel will begin to begin to get it today with some comments on our financial results and operational highlights.
A copy of the slide presentation that will accompany their remarks is available on our website under the investors section. Following their remarks, we will take questions from the investment community. We ask that you limit yourself to two questions and if you remember of the media. Please contact Jaimie Harding before Francois begins I'd like to remind you that remarks. Today will include forward looking statements that are subject to important risks.
And uncertainties for more information. Please see the reports filed by TC energy with Canadian Securities regulators and the U S Securities Exchange Commission finally during the presentation, we will refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on Tc Energy's operating.
Performance liquidity and its ability to generate funds to finance its operations a reconciliation of various GAAP and non-GAAP measures is contained in the appendix of the presentation materials with that I'll turn it over Francois.
Good morning, everyone and despite the economic headwinds facing the broader market Tc Energy's portfolio of North American energy assets remains resilient.
<unk> for our services remains high we continued to deliver strong utilization availability and overall operational performance across our system.
Given the strength of our results year to date, we have increased our 2022 comparable EBITDA outlook, which is now expected to be approximately 4% higher than in 2021.
Our industry, leading portfolio of $34 billion in fully sanctioned capital projects continues to provide long term sustainable growth.
The capital program is expected to be fully funded through increasing cash flow generation and incremental incremental balance sheet capacity.
Under our current outlook, we do expect to deliver our debt to EBITDA target of $4 75 by 2026, even without asset sales.
But being opportunity rich means we expect to sanction additional high quality growth projects that will further differentiate Tc energy as an industry leader.
So there is a need to balance our sources and uses of capital without the reliance on further external equity.
We are executing a divestiture program that will extend through 2023.
With proceeds expected to be in excess of $5 billion.
Through the potential sale of discrete assets.
Or minority interests.
The objective will be to use capital rotation to bring forward our deleveraging targets from 2026.
On new projects and progress longer term portfolio migration.
We will consider a multitude of factors in determining where to rotate capital <unk>.
Including valuation simplicity of corporate structure, delivering on our sustainability goals and profile pro forma impact on per share and credit metrics, along with growth trajectory out to 2026 and beyond.
Now I want to underscore that we have demonstrated over the past decade, our ability to successfully rotate capital following the acquisition of Columbia.
This is for US as you know our core competency.
Now focusing on our strong third quarter results, our U S natural gas business continued to deliver record flows.
We also sanctioned the keyless access project. This is a very strategic investment for us. It will provide a 1.5 Bcf header system that will further connect growing supply from the Haynesville basin to the rapidly expanding Louisiana LNG market.
Year to date, we've placed over U S $1 8 billion of assets into service, including our Grand Cheniere and Louisiana Xpress projects that have increased our market share of LNG feed gas from approximately 25% to 30%.
It's also been a transformative year for our Mexico business in August we executed our first of its kind strategic alliance with the Cfe to jointly develop the U S $4 $5 billion.
Southeast Gateway pipeline.
We're off to a strong start and are already making meaningful progress on the project.
I'll remind you that over 70% of the project costs are secured under fixed price contracts that give us greater certainty around cost and schedule.
In the third quarter, we placed the Villa de Reyes, North and the Tula East sections into service with line of sight to completing the remaining sections.
Our alliance with the Cfe demonstrates how we are leveraging our north American strategy and competitive strengths to deliver clean reliable and affordable natural gas supply to serve the growing in central and southeast regions of Mexico.
Our NGL system in Alberta had another solid quarter with system deliveries up 4% compared to the same period in 2021.
And our system continues to expand and extend the reach of the WCS B.
Year to date, we have grown our NGL system <unk>.
Investment base by 11%, placing $1 9 billion of assets into service. We also sanctioned the <unk> project in November that will connect migrating supply to key demand markets.
As part of our Decarbonization journey. This project will use non emitting electric compression to support lower <unk> emissions intensity for the system.
In the coastal gas link project is now 75% complete the entire route has been cleared.
And approximately 400 kilometers of pipeline had been back filled with reclamation activities well underway.
Now to liquids.
In September our Keystone system safely achieved an average monthly record of 640000 barrels per day.
Looking ahead, our liquids business will continue to focus on maximizing value through operational excellence optimization, and providing cost effective direct market access to the largest refining market in North America.
Our power and energy solutions business produced exceptional results during the quarter and continues to play a greater role in our diversified portfolio of energy infrastructure assets.
Strong availability at Bruce power combined with peak pricing in Alberta contributed to a 41% year over year increase in comparable EBITDA for the segment.
We also progressed several renewable and low carbon projects, including the 81 megawatt Saddle Brook Solar project announced in October which will be the first utility scale solar project to be fully developed and delivered by TC energy, thereby progressing the development of our.
Abilities in that area.
In terms of our priorities and progress this year I am pleased to report that we have made significant positive progress across the mall.
Increasing the returns on our existing assets and executing on our secured capital program are the linchpins of successfully delivering our compound annual EBITDA growth rate of 6% through 2026.
As I mentioned, we resolved arbitrations on the Villa de Reyes and Tula projects and place them into service and have started generating revenue on both projects.
We continued to increase long haul and long term contracted volumes on Keystone.
And we placed $4 $4 billion of assets into service year to date.
Our sanctioned and secured capital program is now an industry, leading $34 billion as we've added $7 8 billion of high quality growth opportunities this year alone.
We intend to proceed with the sale of noncore assets and our minority interests in order to achieve a balance between accelerating our deleveraging targets and funding are opportunity rich portfolio without the need for common equity.
And we also continue to progress our sustainability commitments. We just published our 2020 to report on sustainability or ESG data sheet and our reconciliation action plan.
<unk> reaffirmed our 10 sustainability commitments and key ESG targets from 2021, including a 30% reduction in emissions intensity by 2030.
In 2022, we reached a key milestone by obtaining independent third party limited assurance over our scope, one and two GHT emissions that provides greater rigor to our ghd reporting and our planning processes.
We're making good progress on our key ESG indicators and remain on track to deliver these objectives.
I'd encourage you to review the report and reach out with any questions.
Thank you very much and I'll now pass the time over to Joel for a few comments.
It's Francois has highlighted our results continue to demonstrate the resilience of our portfolio.
Our assets are largely rate regulated or underpinned by long term contracts that provide certainty and stability of our cash flow through various economic cycles.
The solid execution and high utilization across our portfolio led to a 10% year over year increase in both comparable EBITDA and comparable earnings are.
A big factor in our outperformance was the strength in power and energy solutions, driven by 95% availability at Bruce power.
Buddha, we achieve peak availability with record prices above $260 per megawatt hour during the months of August and September .
Canada gas continues to benefit from the 11% increase in <unk> investment base as we have brought $1 $9 billion of assets into service. This year. The <unk> system expansions continue to track growing supply in the WCS B. It is also up over 1 billion cubic feet per day.
Strength in the U S. Dollar has also acted as a tailwind with an average rate of $1 31 versus $1 26 for the same period last year. This benefits approximately 60% of our total EBITDA.
Switching to comparable earnings.
Following the strategic partnership announced with the Cfe in August we began booking AFDC on our Mexico projects under construction.
The ADC amount will continue to grow as we execute our capital program on the southeast Gateway project.
Despite rising interest costs, we will continue to manage our exposure and I'll remind you approximately 85% of our debt is fixed rate and has a weighted average maturity of approximately 20 years, an average pre tax coupon of four 8%.
We actively manage our long term debt exposure to fixed and floating rates. However, a high percentage of our long term debt is fixed rate, which significantly insulates us from rising interest rates.
With the solid year to date results, we are revising our comparable EBIT outlook higher for the full year 2022.
We now expect comparable EBITDA to be approximately 4% higher than 2021.
We are confident in this outlook, despite rising interest rates and inflation.
And we are well positioned to deliver strong results into 2023.
We remain opportunity rich, we expect to grow our comparable EBITDA at a 6% compounded annual growth rate for 2021 to 2026 <unk>.
I will reiterate our EBIT outlook is largely underpinned by long term take or pay contracts or cost of service regulation that provides a high level of certainty around our future cash flows.
Further our outlook provides the ability to achieve a leverage ratio of $4 75 times debt to EBITDA within the same timeframe without the reliance on asset sales.
Our growth is underpinned by our industry, leading 34 billion dollar fully sanctioned secured capital program is expected to deliver an after tax unlevered IRR of approximately 7% to 9%.
As Francois mentioned, our extensive footprint that extends across North America will continue to provide additional growth opportunities.
I'll highlight that not all project sanctioned within the next couple of years will have a material capital spend between now and 2026.
Today, we announced the $600 million.
<unk> project that will reduce our emissions intensity on the NGL system, while connecting migrating supply. The project is expected to be in service in 2026 with the most significant capital spend to occur in 2025.
Additionally, we sanctioned the U S $400 million Gillis access project that is expected to contribute incremental near term EBITDA falling in service in 2024.
The inclusion of the <unk> and give us access projects has had a moderate impact on our sources and uses of funding that was updated in August following the announcement of our southeast Gateway project.
Our sustainable cash flow growth is expected to drive our deleveraging and incremental long term debt and hybrid capacity, while funding accretive growth opportunities.
To prudently fund our current capital program, while maintaining our leverage targets last quarter, we reinstated our dividend reinvestment program and a 2% discount beginning with the dividends declared on July 27.
Participation with our first declaration was approximately 38% and provided $342 million reinvested in common equity.
The discounted dividend reinvestment program is expected to be in place through dividends declared for the quarter ending June 32023.
Being opportunity rich, we will continue to sanction new projects. However, as Francois mentioned, we will use capital rotation to ensure our financial strength and flexibility without the reliance on additional common equity.
Capital rotation provides us with the ability to further accelerate our deleveraging target by up to two years.
We have successfully rotated capital before this is a core competency.
<unk> noted following the Columbia pipeline acquisition in 2016, our debt to EBITDA ratio exceeded six times.
Through a series of successful asset sales totaling over $11 billion, we achieved less than five times debt to EBITDA exiting 2019.
We continue to expect to grow our dividend by 3% to 5% supported by sustainable growth in earnings and cash flow per share and strong coverage ratios from.
From an investment perspective, our dividend has now reached an attractive 6% yield while adhering to our targeted payout ratios.
Overall.
Solid execution will allow us to continue delivering superior long term shareholder value.
That's the end of my prepared remarks, I'll now turn the call back over to Fred swap for the Q&A.
Thanks, Joe just a couple of comments to reiterate our diversified portfolio.
Is resilient and we will continue to produce strong operating and financial results.
Second we continue to see tremendous opportunity ahead to extend and expand our unparalleled network we are opportunity rich.
And third financial strength and flexibility are key priorities and that goes along with that opportunity rich.
Portfolio. So we are including the sale of noncore assets and minority interests in our go forward funding plans in order to accelerate our deleveraging targets and capitalize on those opportunities. So operator, we're ready for questions.
We will now begin the question and answer session. We ask that you please limit yourselves to two questions.
Joining me a question queue you May press Star then one on your telephone keypad, you will hear a tone acknowledging your request if youre 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.
The first question is from Rob Hope from Scotiabank. Please go ahead.
Good morning, everyone.
Two questions on the asset recycling target that was announced today.
Can we dive into the timing of the asset sale program wording in the MD&A is through 2023.
Is the expectation that youre going to get most of this announced in 2023 or could this be a longer term endeavor and I guess finally business, replacing the triple.
Rob It's Francois I'll take those two questions.
First of all.
As we are in conversations with people who may be listening into this call.
I can appreciate the desire to know more today around.
Specific details, we're just not going to be providing that detail. However, I can tell you from a timing perspective, our plan is to announce and close.
Five plus billion dollars of <unk>.
Asset divestitures within 2023.
To the extent, we decided to expand the program beyond there and.
Presents an opportunity for us too.
Turn the drip off earlier, we would contemplate that but at this point. The base plan is five plus billion in divestitures to close in 2023 and the drip will remain on as stated in our in our opening remarks.
Alright, I appreciate that and then maybe as a follow up you mentioned the asset sale.
Sales program would help with the portfolio migration can you further elaborate on what you mean by this does this imply that higher carbon intensity assets can be higher up on the list and lower carbon intensity assets.
As I said before we're not going to delve into.
A great deal of detail on the conversations we're having Rob I'll go back to the criteria.
Or if that can help you.
First and foremost our goal is to accelerate deleveraging and fund growth we are going to consider.
To the extent there are evaluation arbitrage is between private and public markets. We want to take advantage of those we are going to consider impacts on our <unk> emissions going forward.
Simplicity of corporate structure is also very important to us so all of those.
Issues will factor into what we monetize how much we monetize and when that takes place.
Alright, I appreciate the color I'll hop back in the queue. Thank you.
Thank you.
The next question is from Robert Kwan from RBC capital markets. Please go ahead.
Great Good morning.
Just as you did with <unk>.
While a number of those asset valuations the pro forma impact.
Migration structuring sustainability I'm, just wondering can you rank order just by importance.
We are going to be your top priorities and then just as you related mentioned per share metrics. What are the per share metrics that are most important to you.
First and foremost.
Robert our goal here is to accelerate our deleveraging so credit metrics will remain.
The number one criteria.
Secondly, and I think Joel alluded to this.
We want to continue to fund accretive growth projects that come forward any opportunity we have to monetize an asset.
<unk>.
A low double digit low to mid double digit EBITDA multiple and rotate capital into.
An asset with a seven to eight times build multiple we're creating value for our shareholders. So we're going to continue to do that so deleveraging as a first priority.
Sustaining and extending our growth profile is our second priority and then we will balance the other priorities in terms of portfolio migration.
Impacts on our <unk> emissions and maintaining simplicity of our corporate structure.
Got.
A lot of your comments here.
Confined to the 2023 year does that.
Fully get you to where you want to be or do you see this as.
An ongoing strategy, whether it's in that $5 billion range.
Or another level.
This is going to be very much an ongoing strategy for us Robert we remain opportunity rich, we see an opportunity set and all of our businesses that frankly exceeds our free cash flow after dividends any opportunity we have to monetize assets at a high multiple and redeploy in constructing and ask.
But at a lower multiple creates value for our shareholders and so this is a strategy that we are going to deploy on a consistent basis going forward not just in 2023, but beyond and as to how far we want to get in 2023 versus 2024, and later ill pass it over to Joel.
Yes, I think Robert again.
Deleveraging is obviously a key priority for us.
What it does for US is preferred preserves our financial strength and flexibility as Francois mentioned this is a core competency for us and again, having capital rotation.
Is just an important factor for us going forward too to add shareholder value as.
As we think about our deleveraging and we'd look to accelerated by approximately two years that would be our goal here. So as we stated before with our current funding program. We can achieve the $4 75 times. We're on track by 2026 and so the objective here is if we could accelerate that by up to two years began to preserve that.
Add that financial strength and flexibility.
That's great. Thank you very much.
The next question is from Jeremy Tonet from Jpmorgan. Please go ahead.
Hi, good morning.
Good morning.
Hi.
Just to follow up on the questions here.
With regards to asset sales.
Talking about sustainability being part of the criteria here.
Just wondering is that like full scope three.
<unk> emissions as you think about it and talking about GHT intensity, but at the same time I think I'll start.
Capture projects. So are there any assets, where you find it difficult to beat <unk> and maybe they lend themselves.
They kind of differentiate in this manner, just China deals for your thoughts on that side.
Jeremy Jeremy we're going to balance all of those criteria, we focus on scope, one and scope two emissions since.
We set our.
Emission reduction emissions intensity reduction targets on that basis. So that's the basis upon which we will.
Factor.
That topic into what we divest of into what order of magnitude.
We continue to make significant progress on our carbon capture.
Initiative through.
Alberta carbon grid, our hydrogen production initiatives with a number of customers and.
Advancing a divestiture program simply gives us more capacity to allow those projects to proceed on their natural timing.
So we.
We have an opportunity rich environment and divestitures are just going to enable us to continue to accelerate our growth.
Got it thanks for that and then just looking forward to the analyst day here wondering if the format is going to be similar to past years or any differences that we might see this time our themes pop up.
Maybe what we heard in the past.
Jeremy at Central here first of all we're excited to be in person. This year in Toronto on November 29th for Investor Day.
The format will largely be the same this year as previous years again, you'll see the entire management team walking through the various business units and they are opportunities that we see.
We'll talk about today after the <unk>.
Investor Day is completed we're going to have a breakout session, where youll actually be able to have time to meet with various bu leaders to asking specific questions. We think that's something we'll be really value to those that are participating in investor day. So again looking forward to it on November 29th.
Yes.
Again nice to be in person again this year.
Sounds good thank you.
The next question is from Linda <unk> from TD Securities. Please go ahead.
Thank you.
Not to belabor this.
Capital recycling.
Process too much but can you give us some more context, maybe on how you balance the merits of avoiding capital expenditures through selling projects, perhaps theyre not completed.
Servicing maximum value by selling more mature assets.
How did tax considerations factor into your decision making.
And some of your peers have continued.
Continue to optimize their franchise by swapping assets. So also wondering what.
Sort of opportunity that might be too.
Consider asset swaps or partnerships beyond just financial.
Selling a financial interests to two partners, who might bring something else to the table just wondering how that nuance Mike.
Thank you Christina.
Yes.
Thanks Linda.
Clearly, we're focused on and after tax proceeds.
Part three of your six part question.
[laughter].
After tax proceeds are what matter here.
Mature assets versus growth assets, we're here to maximize value for our shareholders.
As I mentioned, we're very experienced.
In Ma.
Managing divestitures, and making decisions on where to rotate capital.
Our focus is on.
Addressing and accelerating our deleveraging.
Maximizing our growth and allowing us to prosecute on the opportunity rich.
Set that we have so that may include some assets that are mature. It may include some assets that have some growth in them I would tell you that given that we're comfortable in funding our growth program.
With.
Free cash flow and divestitures.
Selling an asset thats partway through.
Just for the sake of avoiding further capital expenditures is not something that we're really interested in at all.
Are going to focus on maximizing value in terms of swapping assets look we're opportunity rich.
We have a $34 billion industry leading.
Fully secured capital program.
I don't see asset swaps.
Factoring into our plans in the near future and as to partnerships and I talked about this recently at a conference.
As we look to invest in low carbon infrastructure.
Where we do not have all of the skills and capabilities to manage the risks in a particular asset class, we will be looking to partner.
Partnering with Nikola and highs on.
On hydrogen production they will be the demand sink for the hydrogen that's produced we may partner with a technical equipment.
Supplier to the extent that helps mitigate risks and individual projects, we may partner with.
A third party entity that has competitive storage for located storage. If we're looking at a carbon capture project. So.
Partnerships in the future will be less.
Motivated by.
Finding an external source of capital and more by finding partners, who can help us manage this suite of risks in a more effective manner.
Thank you and just as a follow up recognizing that it's a very dynamic geopolitical environment on a number of fronts layer operating can you talk about.
Okay great.
Geographic exposure might factor in as it relates to Mexico.
And maybe some evolving.
Developments on policy.
Ross as well.
And specifically maybe for example.
Jones Act.
The rules get relaxed to facilitate.
That business domestically.
Or.
Potentially product export bans over the next couple of years can you can you comment on geopolitics as well.
Sure I'll start with Mexico, and then I'll ask Stan to provide.
Some thoughts on your question about the U S policy environment in Mexico, as we said when we announced the southeast Gateway project, we remain committed to.
Managing our consolidated exposure in Mexico to 10% of our consolidated portfolio.
We won't actually get to that level until we put southeast gateway into service and Thats scheduled for two.
<unk> 2025, so that gives us time in terms of thinking through when the optimal time might be for us to find partners on southeast Gateway and.
We continue to make strong progress on that project our relationship with the Cfe has.
Move to a whole other level from a positivity standpoint.
Having them as a partner in addition to as a customer we've.
We've seen the level of collaboration with them do nothing but improve over the course of the last few months. So over to you stand on the U S policy environment. This.
This is Stan will continue to watch policy developments as they mature over time, including the results of the elections, which we're still evaluating at the current moment.
With respect to potential for product export bans or LNG exports I would maybe just offer up one thought that with respect to an LNG band for example, it's conceivable that as such a ban on exports get actually increased energy prices for U S. Consumers in places like New England, who for example rely on LNG.
Imports to meet their winter energy needs. So in theory, given that the U S supplies about 25% of the LNG exports today.
Individuals in new England for example could be competing for LNG cargoes with 25% less supply out there meeting higher prices for them. So.
We will continue to monitor this over the next weeks months as things develop.
Thank you.
Thanks Linda.
The next question is from <unk> Satish from Wells Fargo. Please go ahead.
Thanks.
Good morning, with interest rates rising in cost of financing.
Creeping higher I'm, just wondering if you're if you've thought about raising the IRR on new projects historically its been in the 7% to 9% range, but then I think I heard you say on this call that you could recycle capex and invest in and kind of a seven times EBITDA range. So.
Just wondering if the corporate hurdle rate.
New projects is hasnt moved higher.
Yes, Puneet, it's Joel here, obviously with rising interest rates and <unk> seen the cost of equity kind of across the board or go higher.
Certainly we're seeing that hurdle rates are going higher as well, we do have hurdle rates for our various business lines various assets that we look to invest in.
So we adjust accordingly, and we never take into consideration when you think about a few years ago when rates were low we build in a bit of a buffer into our economics again trying to exceed our cost of capital and so as we think about new projects going forward here certainly that is certainly is a factor.
Add to that.
To the extent, we see an opportunity to sanction a project in the nearer term.
When we have strong objectives to deleverage, we're going to be looking at further.
Divestiture program too.
To address and mitigate any potential increase in our leverage which means by definition that your hurdle rate is higher because youre needing to use a larger proportion of equity to make sure that you maintain your balance sheet strength.
That makes sense. That's helpful. And then just switching gears I wanted to check in on northern border and bison in the Bakken I guess, what's the latest there in securing an expansion.
I know theres a lot of ethane, that's being recovered and that's helping lower btu limits, but our producers comfortable with that as a long term solution or do they ultimately want a pipeline expansion bill.
So this is Stan as you know the northern border pipeline is a critical part of our unparalleled asset footprint across the U S. The fundamentals still remain very strong and support the need for an expansion of for example, our throughput on northern border was up quarter over quarter flaring is down and the gas oil ratios remained very strong.
Had a non binding open season that closed earlier this summer.
We are still negotiating with our customers to get to definitive agreements.
And while it's taking a little bit longer to get that done our in service date of early 2026, and our capital estimates to get that project done haven't moved.
With respect to.
Heat rates.
Notwithstanding the higher flows that we've seen on the northern border system coming out of the Bakken Btu factors remain in line roughly in the $10 70 to $2 90 range. So as long they stay below 1100 Btu used are no issues to the extent that we see ethane rejection or higher BT rates across the system start to appear then we'll have to get back together with our customers and perhaps.
Go back to FERC again, but as of right now thats not an issue.
Got it thank you.
The next question is from Robert <unk> from CIBC capital markets. Please go ahead.
Thank you this question.
Because nonexclusive wafer trop and his broader industry implications, but.
As you've described notwithstanding your very strong stable assets as proven by our results year to date.
And your target of 475 leverage I'm just curious if you believe that's the right level to ultimately target your leverage.
In light of the rising interest rates to inflationary environment.
Or or perhaps.
Erring on the side of conservatism the right approach.
And specifically are you hearing anything from the rating agencies about what.
If there are target preferences are changing are you still comfortable with those levels.
And I guess the same question could apply to how you manage your dividend growth policy.
Okay.
So Rob it's Joel here first of all I'll start with the rating agencies, they still target five times debt to EBITDA for our Triple B plus ratings with a stable outlook.
When we look at our leverage.
Part you have to consider here is the left hand side of the balance sheet and you look at our asset profile.
95% of our assets underpinned by long term contracts are regulated cost of service and that's what really differentiates us relative to a lot of our peers is that stability that we have with our earnings and cash flow on the left hand side of the balance sheet, which supports higher leverage being at that five times in which the agency is targeted for we just felt it was <unk>.
Port and last year, we continue to view this.
Today that $4 75 is the appropriate level for us to provide a bit of a cushion. If you will under the five times, but certainly for US we don't need to go to four 5% or 42 five.
Because again of the strength of the left hand side of the balance sheet with respect to our dividend growth.
We talked about today with our strong performance along with portfolio rotation.
This really enhances our strategic positioning to deliver shareholder value over the medium to long term and really support our 3% to 5% dividend growth going forward.
Okay. Thanks for that answer, but maybe supporting point Joel.
Which of your.
EBITDA is cost pass through and including interest maybe that would support that before I get onto an LNG question.
I'll start here and if Greg wants to add anything.
When we look at the the pass through for our interest costs.
Overall interest we have about $2 $9 billion of financial charges.
Roughly 20% of that would flow through in our rates, whether it's the NGL system more of the Canadian mainline when I look at rising interest costs as I mentioned in my prepared remarks, we are largely insulated from that given that 85% of our debt is fixed rate at an average coupon of four 8%.
In the duration of our portfolio is 20 years, we took advantage over the last really call. It 10 years of extending the duration of our portfolio with low interest rates. So again. Despite the fact that we are in a higher interest rate environment today, when I look at a balanced maturity profile when I look at the fact again that 85% of our debt is fixed rate debt.
Again, we are largely immune from rising interest rates that would hit our bottom line. When you also factor that about 2025% would flow through in our rates to our customers.
That's helpful detail. Thank you and just one question here on the LNG I was wondering if you could discuss the <unk> project in more detail in the.
Implications for supplying U S Gulf Coast LNG.
Exactly.
What you think the strategic benefits are for this project.
Yes, sure Ken we're excited to provide solutions for our customers and to further enhance what we view as an irreplaceable pipeline infrastructure with the announcement of our give us access project today and again, it's a $400 million capital investment about a bcf a.
A day of capacity in service in December 2024, you can think of US building that at the lower end of a six to eight times build multiple essentially the project has a header system that can be further expanded over time within the state of Louisiana that will ultimately connect the haynesville supplies that are going to show up at a point called Gillis.
To serve downstream LNG industrial and other markets within the state.
With respect to the in service timing.
Sanctioning authority or the authority has to approve this project actually rests with the state of Louisiana Department of natural resources office.
So why will still need to secure key environmental permits from entities such as the U S. Army Corps of engineers in U S fish and wildlife and various other state agencies were not required to file a FERC certificate and Thats in large part what allows us to target a summer 2024 and service date.
With respect to the more macro picture I guess I would offer this.
With our <unk> project and the other projects that we have placed into service or will be placing into service over the next several months and years.
We're going to increase the flowing LNG feed gas that we have from about three bcf today, which is roughly a 30% market share to over six bcf or 35% market share in 2025.
We see continued opportunities and a target rich environment to continue to expand our best in class footprint, particularly across the state of Louisiana to serve LNG loads, particularly important as energy security and energy reliability becomes a forward theme with respect to world energy demand.
Okay. That's very helpful. Thank you everyone and congratulations on the results.
Thanks Robert.
The next question is from Michael Lapides from Goldman Sachs. Please go ahead.
Hey, guys. Thank you for taking my question actually two of them a little bit unrelated. The first one is any update you all talked a while ago about a large scale hydro project in Ontario.
The department of Defense involve just curious any update there and then the second question.
Really trying to think about.
Youre seeing inflation impact you and specifically on the both on the capital side, but also on the operating cost like where is it impacting you where you don't necessarily get recovery of it.
Okay.
Cory I'll ask you to start on <unk>, and then I'll take the second part of the question.
Good morning, Michael our Ontario pumped storage project earlier this month submitted.
Its filings to move into stage gate III.
Of considerations or the ISO for 1000 megawatts.
Pump storage facility located as you mentioned near me for at Ontario, We are awaiting ISO feedback and.
Should have a decision on our go forward steps in Q1 of 2023.
And I think that.
We are very confident that we have built the right.
Local and support for this project amongst a variety of constituents that we serve and it reinforces our very.
A large a large set of.
Opportunities.
For our.
For our service territory across Ontario.
And Michael we are very bullish on Ontario.
We feel that there will be it will be an opportunity rich environment for us.
The need for incremental generating capacity is going to be significant over the course of the next decade as Pickering.
It comes out of service.
And as the Ontario market re shores Cigna.
Significant amount of manufacturing so.
Antero has a target rich environment for us and we're very excited about about the.
Ontario pump storage project on the inflation question look.
Clearly there is an impact on the cost of labor we have.
Sure.
When you look at the number of construction projects that are happening in Canada for instance.
Far in excess of the sustainable capacity of the market to support those levels of construction activity in the near term that will obviously balance out over time.
No.
We've seen more pressure on inflation in the Canadian market than in the U S market.
On our labor costs for construction, but I will point out that we have an ability to.
Flow through those costs to the extent they are prudently incurred.
In rates given the regulatory construct in Canada.
We have $110 billion in assets and only about 7500 employees. So from an operating operation standpoint, where we don't run a very labor intensive business. So while we are seeing.
Above average inflation in terms of labor costs on the operation side, we factor that into our plans and into our budget for next year and the year beyond and.
Don't expect meaningful incremental pressure because of inflation in terms of impacting our.
Our cost of funding.
Our.
Our free cash flow generation over the course of the next couple of years.
Got it that's super helpful and just one quick follow up on the cost of funding just curious as you're kind of planning out for the analyst day, or Investor day, and kind of thinking about multiyear both EBITDA and EPS growth.
How do you think about the higher cost of debt kind of what the impact on earnings power will be longer term.
I'm just trying to think about ex the asset sale, how you finance some of the big growth projects Youre doing.
Yes, Michael as I mentioned earlier the good thing here is that when you have 85% of your debt portfolio with an average duration of 20 years with an average weighted average coupon of four 8% and largely insulates us from from rising interest rates, where we do see the exposure obviously is more on our.
Floating rate debt and the way to think of that as really with our commercial paper program and the sensitivity that we use is for a 25 basis point increase.
Weighted to that that it would impact our EPS by about a penny per share so not a huge impact.
Overall when you consider.
Our portfolio, that's around $50 billion of debt today.
And so as we think about things going forward with the higher interest rates, obviously may have the ability to.
Earn a higher return on some of our assets on the regulated side going forward if interest rates stay high for an extended period of time.
So again largely insulated at this point from from rising interest rates in our portfolio.
Got it. Thank you guys much appreciate it.
Thank you.
The next question is from Ben Pham from BMO. Please go ahead.
Hi, Thanks, good morning.
Asked a annoying all of you I actually had a couple of questions on the portfolio management and I'm just wondering on your comments around.
You had that last cycle asset sales a couple of years back plus Colombia.
And I'm wondering as you think about this next cycle you did anticipate to bring forward some synergies from.
That first.
Phase and maybe anything qualitatively you can share today versus loss in terms of the arb between public and private maybe the buyer pool and sensitivity ESG.
Then I would say on your second question that there remains a strong bid.
In private markets for assets, particularly infrastructure assets that are highly contracted are regulated and have very stable cash flows because of those lend themselves.
Well two to back leverage, which which is what many of the.
Infrastructure investors like to employ to improve their returns.
<unk> it.
If you look at our suite of assets, we have a very consistent risk profile across the board and there is a strong bid whichever way we want to go we're going to see a strong bid for our assets.
On your first question around around synergies.
I am not quite sure I understand what you were getting at band it could you perhaps refine that question. So I can help you.
Yes, I was thinking more maybe I just went through a <unk> process, you would perhaps develop relationships with a number of potential buyers and you would've gone through maybe some pros and cons and assessment and it's more it's different going on an asset monetization of first time versus doing a second time.
Thank you for that.
Clarification.
I think it's incumbent upon us and as to a prior question. This is going to be a tool in our toolkit going forward.
It's incumbent upon us to maintain good relationships and a steady dialogue with potential buyers. So.
We we developed and strengthen those relationships.
With a prior divestiture program and we're going to leverage those relationships, yet again here and I'll just underscore that.
Yes.
There is an art to divesting of assets and it's a core competency of this company it.
It's a very labor intensive process as you can imagine when you are running a competitive process and.
We we act with integrity, we deal with potential buyers in a fair manner and that means when we have other assets that we offer up to the marketplace, we get strong demand because we deal with Counterparties.
With integrity.
Okay, Great and then my follow up if I may I know youre not going to discuss potential assets on the block but are you sure.
Sacred cows or anything that you would not look to sell at all.
I will.
Defer a response to that question for when we announced the transaction then I think there are many people listening in here with whom we're in conversations and I'm going to refrain from making any comments. Thank you.
Okay no problem. Thank you.
Next.
Western is from Andrew Kuske from Credit Suisse. Please go ahead.
Thanks, Good morning, I guess the question is going to be for Stan in for Bourbon.
If you could just give us any kind of tone from your customers and maybe with some basin specifics on there clearly you mentioned the Haynesville per day with the <unk> project with clear appetite for.
Take away, but any kind of context, you can give on people seeking more capacity greater duration.
Do you think about effect would be greatly appreciated.
So I can go ahead and start and then I'll turn things over to Devin. This is Stan and maybe I'll just stick with the LNG theme because theres a lot of discussions going on these days about the east Coast LNG for example, and I would say that our Columbia gas system again, as an irreplaceable part of our pipeline network and given its connectivity to the east coast would be uniquely situated.
To fund or build a supply project over to an east coast LNG terminal. However, given the permitting challenges with building a terminal on the east coast, we think that that is somewhat unlikely.
We think it's a lot more likely that any new LNG terminals that are built in the U S will be in the Gulf Coast and that is why most of the forecast that Youll see show for example that Louisiana will export about 60% of all U S exports come 2030.
So with respect to that and maybe just keeping with that theme we are in what I would call.
Initial cursory conversations with a couple of Counterparties to look at the potential to expand our Columbia Gulf system to bring more volumes down to the Gulf Coast again, consistent with this theme of energy reliability and security and the worldwide demand for energy and LNG exports from the U S. In particular.
So Andrew this is Kevin.
I'll start with the gas and then I'll move to liquids, so with respect to our Canada gas operations or assets are ideally positioned.
In the Montney and we're seeing tremendous.
Growth in response from our customers with desire for increased access to market and egress out of the basin are assets ideally are situated so that they can feed into stands in the U S gas asset base to deliver that gas from Canada down through into the <unk>.
Gulf Coast markets as well as into the East East Coast of Canada, So we've seen tremendous.
<unk> term interest in the build out of our systems.
And the health of our customers is extremely strong in this environment.
Moving to liquids again, a very similar story the supply basins that we serve up up in northern Alberta.
Our customers in that market are extreme are receiving very high margins driving the highest utilization of our Keystone system down to the Gulf coast and into the Midwest markets that we've ever seen so we've reached record production of our record throughput of 640.
<unk> thousand barrels a day in the month of October just highlighting the.
<unk> desire to move more barrels to the Gulf coast.
That both of those two examples just reflect the high quality nature of where our assets are situated.
Our operational performance has been extremely strong in this past year.
That serves us well as well as our customers for the next years to come.
That's very helpful. Thank you and then my follow up question, probably pointed to a French large role.
And I guess, if you just sort of step back and think about the targeted asset sales stock implications that can have but ultimately does.
The potential reduction of the cost of capital.
Ultimately serve their customers better as you try to expand the networks.
How do you philosophically think about that.
Our job.
To create shareholder value is to maximize the spread between what we earn on our on the capital we invest in our cost of capital.
But the other benefit of minimizing our cost of capital is that it reduces your cost of service for your customers.
We operate in competitive markets in many jurisdictions and to the extent, we can lower our cost of capital. It makes us more competitive as we look to compete for additional projects to add to our $34 billion backlog. So I appreciate that question Andrew.
Okay. Thank you.
The next question is from Matthew Weekes from IAA capital markets. Please go ahead.
Good morning, Thanks for taking my question, just thinking about the macro and support for low carbon projects, maybe inflation reduction act in the U S and kind of sees more of that in Canada too.
Recently hydrogen project in receiving a good good amount of government funding I'm. Just wondering how you are looking at that side of the portfolio in that opportunity.
The kind of government support and where you think it would be at this point do you need to see more.
Do you see these these steps being taken really accelerating or providing more growth opportunities in that side of the business.
Thanks for that question Matthew.
As we've talked about part of our strategy is to make.
Make sure that we diversify our portfolio and forms of supply as they become cost competitive and we've been working very hard to develop our capabilities in some of these new low carbon areas.
From my perspective, both the inflation reduction act and the fall economic statement in Canada are directionally very positive.
Sure.
Making alternate lower carbon forms of energy supply more cost competitive and that's what needs to happen for.
For us to allocate capital into a new technology, it needs to be affordable reliable and sustainable and affordability being a key criteria. So.
Having these incentives advance in the manner they have.
Is it really is a cornerstone of us being able to allocate capital into those new areas. So we view that very much as a positive. So it supports our business development activities and our low carbon businesses.
And.
That includes pumped hydro, which is an qualifies in Canada. It includes.
Extending benefits for renewables in the United States.
As well as carbon capture and hydrogen production.
On both sides of the border as well as small modular reactors, which are a little bit of a ways out I think I've talked about that in the past, we see that as more of a 2000 and <unk> opportunity set.
Clearly the incentives that have been presented both in the U S and Canada are going to accelerate our opportunity set and our low carbon businesses.
Okay. Thank you for the comments on that I appreciate it.
And just wondering im not im not sure. If this was disclosed or not but is there any kind of timelines on next steps for the Alberta carbon grid at this point.
Yes, Matthew it's Kevin.
Alberta carbon grid with our partner <unk>, we've entered into carbon sequestration evaluation agreement with the government of Alberta to further evaluate one of the largest areas of interest that came through that process north of Fort Saskatchewan and Alberta. So this agreement allows us to evaluate.
The suitability of that area of interest for safely storing the carbon.
Industrial emissions, so we're going to take some time to ensure that.
We can.
<unk> evaluate.
What that project will look like and work very closely with our customers of the point sources.
As we're looking to create a number of these hubs across the province, and eventually hopefully transport and store up to 20 million tons of carbon across across the province.
Our objective really is to leverage our collective capabilities and footprint to provide.
Our competitive open access solution for our customers.
The timeline is we're right in the middle of it with the province, and this is going to take.
<unk>.
A few years of development in order to secure the right commercial constructs for our customers to move this project forward effectively.
Okay. Thank you I appreciate it I'll turn the call back thanks.
Thanks, Patrick.
The next question is from Patrick Kenny from National Bank Financial. Please go ahead.
Hey, good morning, just on the NGL as you're closing in on completing the secured expansions through next year.
Update on discussions with producers either on sanctioning further expansions on the system or perhaps the cadence of future maintenance activities to help further debottleneck the system.
Yes, sure absolutely Patrick I appreciate the questions Greg Grant the Canadian gas business.
As you've seen in the market and what we've seen over the last year. There is significant demand for the system Devin touched on a couple of the points earlier.
As quickly as we can get assets into the ground. They are being used and I think we've seen that through the great work. Our team has done in the 2021 program.
We were able to safely bring online deep belly self in north here through September and October which has added a significant amount of capacity to the system.
So roughly bringing on about one three bcf this year.
That doesn't stop we have significant interest from customers you've seen on the producer side receipts upwards of over a bcf Dr.
Factory hit another record here in October .
<unk> thousand 14, and a quarter Bcf per day.
So you're really seeing the culmination of what we've been continuing to say on that world class.
WCS B asset, it's very economic we're seeing a ton of support both from the producer side and on the demand as we've seen record levels of demand, leaving the province, so quite supportive and seeing some great opportunities here for growth both for us and our customers.
Okay. That's great color. Thank you and then.
Maybe just a quick follow up on CGM.
It looks like there is a.
New disclaimer in the release regarding.
The recently revised capital cost just sitting.
Market conditions inflationary impacts on labor I'm, just wondering if there is further upward pressure on that $11 $2 billion budget.
Through 2023.
And your equity contributions ended up being somewhere north of $50 one.
If that would push out your timeline to shut off the drip or if you would look to use some of the asset.
Asset sale proceeds to cover the additional overrun.
Patrick This is bevin I'll begin and then I'll pass it off to Joel So as Francois mentioned earlier in his remarks <unk> approximately 75% of the project is completed.
500 kilometers as well that 400 of that is already back filled in various stages of.
Getting back to looking how it how it was when we started construction.
This is one of the most complex projects.
Executed an industry and certainly in my career and we know the headwinds.
And we have clear line of sight to the project risks and continue to develop mitigation plans to limit the impact of those risks are our commercial structure also has some provisions to manage manage those risks. So each day, we're laser focused on delivering safely with high quality and zero impact to the environment and.
The communities that we're operating in and this is a legacy project that will serve not only our upstream, but our downstream customers for decades to come. So we're we're laser focused on ensuring that we can deliver the project by the end of 2023 for our customers' LNG Canada.
And those those risks were aware of and we're managing them day to day, and we're just being transparent about as Francois earlier pointed out about some of the inflationary environment that we are in we are experiencing some of that in our labor force.
And Patrick.
It's Joel here.
Did increase the credit facility associated with CGM from $6 8 billion up to $8 4 billion. So we do have the funding in place we do have a subordinated loan in place as well.
T CPL into the project if need be but we do have all the funding in place to the extent that if there were costs to be higher than 11, two we would look to utilize the subordinated loan agreement, which would be temporary in nature. Your question around the drip we would see no change here with the drip as I said in my prepared remarks.
That we expect to turn that off with the dividend declared for June 30 of next year to the extent that we see with our capital rotation is Francois mentioned that gets accelerated depending on the timing and the quantum of the proceeds then we will look at the drip at that point in time, so again.
<unk>, we don't see a need here to extend the drip that we would look to if anything bring that sooner rather than later, depending on the level of capital rotation.
Okay. That's great. Thank you very much.
Ladies and gentlemen. This concludes the question answer session. If there are any further questions. Please contact investor relations at TC Energy I will now turn the call over to Gavin Wylie. Please go ahead.
Yes, Thank you operator, and thanks, everyone for participating this morning, we very much appreciate your interest in TC energy and of course, we look forward to talking with you all soon again.
Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.