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.
After the presentation, there will 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 Relations. Please go ahead.
Yes. Thank you very much and good morning, everyone I'd like to welcome you TC Energy's 2022 third quarter Conference call. Joining me today are French law for a 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 go with it begins to get state 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'll 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.
<unk> 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.
Demand 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 was 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 and or minority interests.
The objective will be to use capital rotation to bring forward our deleveraging targets from 2026.
And new projects and progress longer term portfolio migration.
We will consider a multitude of factors in determining where to rotate capital.
Including valuation simplicity of corporate structure, delivering on our sustainability goals and profile pro forma impact on per share and credit metrics, along with gross 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 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 dollar 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 and 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've grown our NGL system investment.
Investment base by 11%, placing $1.9 billion of assets into service. We also sanctioned the V. N V. Our 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 million 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 case.
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 seven $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.
We are rare Earth reaffirmed our 10 sustainability commitments and key ESG targets from 'twenty, 'twenty, one, 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 G. H G emissions that provides greater rigor to our G. H G 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 French was highlighted our results continue to demonstrate the resilience of our portfolio.
Our assets are largely rate regulated or underpinned by long term contracts. It provides 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 big.
Factor in our performance was the strength in power and energy solutions, driven by 95% availability at Bruce power.
Alberta, 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 a $1 $9 billion of assets into service. This year. The NGL 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 <unk> 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 and average pretax 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 of 6% compounded annual growth rate for 2021 to 2026.
I'll reiterate our EBITDA 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 seven five 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 will 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 be NPR 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 sanction the U S $400 million Keyless access project. It 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. It 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 hybrid capacity, while funding accretive growth opportunities.
Yeah.
To prudently fund our current capital program, while maintaining our leverage targets last quarter, we reinstated our dividend reinvestment program at a 2% discount beginning with the dividends declared on July 27.
Participation with our first declaration was approximately 38% and provided $342 million reinvested and common equity.
The discounted dividend reinvestment program is expected to be in place through dividends declared for the quarter ending June 32023.
In opportunity rich well, 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 are 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.
Yeah.
We continue to expect to grow our dividends by 3% to 5% supported by sustainable growth in earnings and cash flow per share and strong coverage ratios.
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 Francois before the Q&A.
Thanks, Joe just a couple of comments to reiterate our diversified portfolio.
Is resilient and 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.
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.
Thank you.
We will now begin the question and answer session. We ask that you please limit yourselves to two questions.
Joining the 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 to.
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.
The expectation that you're going to get most of this announced in 2023 or could this be a longer term endeavor and I guess finally does this replacing the triple.
Yeah.
Robert It's Francois I'll take those two questions.
First of all.
You know as we're 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 asset divestitures within 2023.
To the extent, we decided to expand the program beyond there and it presents an opportunity for us to.
Turning 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 a as stated in our in our opening remarks.
Alright, I appreciate that and then maybe as a follow up you mentioned the asset.
The 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 could be higher on the list than lower carbon intensity assets.
As I said before we're not going to delve into a you know a great deal of detail on the conversations we're having Rob I'll go back to the criteria have or however, if that can help you first and foremost our goal is to accelerate deleveraging and fund growth. We are going to consider you know 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 G. H G emissions going forward.
Simplicity of corporate structure is also very important to us. So all of those are issues, we'll 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, I'm, just you did list Francois number of those aspects valuations and pro form impact portfolio.
Portfolio migration structure and sustainability I'm, just wondering can you rank order just by importance what.
We're gonna be your top priorities and then just as you related or mentioned per share metrics. What are the per share metrics that are most important to you.
First and foremost a 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 at.
At a you know 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 that we're creating value for our shareholders. So we are going to continue to do that so deleveraging as a first priority.
Sustaining our 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 a simplicity of our corporate structure.
Got it.
A lot of your comments here just confined to the 2023 year does that you know.
Fully get you to where you want to be or do you just 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 exceeded our free cash flow after dividends any opportunity we have to monetize assets that are at a high multiple and redeploy in constructing an assay.
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 I'll pass it over to Joel.
Yeah, I think Robert again.
Deleveraging is obviously a key priority for us and you know what it does for US is perverted preserves our financial strength and flexibility. It's Francois mentioned this is a core competency for us and again, having capital rotation.
Is just as important factor for us going forward too to add shareholder value as.
As we think about our deleveraging we'd look to accelerated by approximately two years that would be our goal here. So as we stated before our 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 again 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.
Morning.
Uh huh.
Just to follow up on the go onto questions here, if I if I could.
As to asset sales.
Talking about sustainability being part of the criteria here.
Just wondering is that like full scope 123 emissions as you think about it in <unk>.
Looking about I guess that you know GHT intensity, but at the same time I think you also talking about carbon capture projects. So are there any assets, where you find it difficult to abate teacher, ghd and maybe they weren't themselves.
They kind of differentiate in this manner, just trying to kill for your thoughts on that side.
Jeremy Jeremy we're going to balance all of those criteria are we focus on scope, one and scope two emissions since.
We set our emission.
Our emissions intensity reduction targets on that basis. So that's the basis upon which we will.
You know factor.
That topic into what we divest up into what order of magnitude.
We continue to make significant progress on our carbon capture our initiative through a alberta carbon grid, our hydrogen production initiatives with a number of customers.
And you know advancing a divestiture program simply gives us more capacity to allow those projects to proceed on their natural timing.
So we havent had 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 or themes pop up versus 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 there are opportunities that we see we all talk about after the.
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 and yes, it's again nice to be in person again this year.
Sounds good to see you there. 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 our projects, perhaps they're not completed.
So servicing maximum value by by selling more mature assets.
How did tax considerations factor into your decision making.
And some of your peers have all continue.
Continue to optimize their franchise by swapping assets. So also wondering what.
Sort of opportunity that might be to.
Consider asset swaps or partnerships beyond just a financial a selling of financial interests to two partners, who might bring something else to the table.
Wondering how that nuance might.
Influence how you proceed as well.
Thanks Linda.
You know.
Clearly we're focused on an after tax proceeds that you know part three of your six part question.
Is the 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 Ah in managing divestitures, and making decisions on where to rotate capital.
Our focus is on.
Addressing and accelerating our deleveraging and maximizing our growth and allowing us to prosecute on the opportunity rich.
<unk> said 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 a free cash flow and divestitures.
Selling an asset that's partway through them just for the sake of avoiding further capital expenditures is not something that we're really interested in at all.
We're going to focus on maximizing value in terms of swapping assets look we're opportunity rich we have a 34 billion dollar industry, leading CAD fully secured capital program.
I.
I don't see asset swaps, you know factoring into our plans in the near future and Aster 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.
You know partnering with Nikola and highs on a on a hydrogen production they will be the demand sink for the hydrogen that's produced a we may partner with a technical equipment supplier to the extent that helps mitigate risks and individual projects, we may partner with.
Third party entity that has competitive storage for located storage. If we're looking at a carbon capture project. So.
Our 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, where you're operating can you talk about how are you.
Geographic exposure might factor in as it relates to Mexico, and maybe some evolving.
Developments on policy and in the U S as well and specifically maybe for example.
Jones Act rules get relaxed to facilitate product 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 the your question about the U S policy environment in Mexico, as we said when we announced the southeast Gateway project, we remain committed to it.
Managing our consolidated exposure in Mexico to 10% of our consolidated portfolio.
We won't actually get to that level until we put south east gateway into service and that's our schedule for a 2025. So that gives us time in terms of thinking through when the optimal time might be for us to find partners on South East Gateway.
And.
You know we continue to make strong progress on that project or our relationship with the Cfe has a move to a whole other level from a positivity standpoint.
Having them as a partner in addition to as a customer we've seen the level of collaboration with them do nothing but improve over the course of the last few months and so over to you stand on the U S policy environment since I know.
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 how about the current moment with respect to a potential or product export bans or LNG exports. I mean, maybe just offer up one thought that with respect to and LNG bad for.
It is conceivable that as such a ban in 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% at the LNG exports today.
Individuals in new England for example could be competing for LNG cargoes with 25% less supply out there, meaning higher prices for them. So we'll.
We'll continue to monitor this over the next weeks months or as things develop.
Thank you.
Thanks Linda.
The next question is from <unk> Satish from Wells Fargo. Please go ahead.
Thanks.
Good morning, with with interest rates rising and in cost of financing.
Creeping higher I'm, just wondering if you're if you've thought about you know raising the IRR on our new projects are 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 the seven times EBITDA range. So I'm just wondering if the corporate hurdle rate on new projects is has.
It moved higher.
Yeah, 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 our hurdle rates are going higher as well and we do have hurdle rates for our various business lines various assets that we look to invest in them and 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.
Capital.
So as we think about new projects going forward here certainly that is certainly is a factor.
And I'll add to that you know to the extent, we see an opportunity to sanction a project are in the nearer term.
You know when we have a strong objectives are to deleverage we're gonna be looking at further.
Divestiture program, our two to address and mitigate any potential increase in our leverage which means by definition that your hurdle rate is higher because you're 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 aren't securing an expansion.
There's a lot of ethane that 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 for example, our throughput on northern border was up quarter over quarter flaring is down and the gas to oil ratios remained very strong.
We 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.
<unk> system coming out of the Bakken Btu factors remain in line roughly in the $10 70 to $2 90 range. So as long as they stay below 1100 beta used there are no issues to the extent that we see ethane rejection or higher btu 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 that's not an issue.
Hugh.
Got it thank you.
The next question is from Robert <unk> from CIBC capital markets. Please go ahead.
Thank you this question.
Theres not exclusively for trop and has broader industry implications.
As you've described.
Sterling you very strong stable assets, that's proven by our results year to date.
Hmm 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 you know the rising interest rates to inflationary environment or or perhaps.
Erring on the side of conservatism the bright approach.
And specifically are you hearing anything from the rating agencies about what if their target preferences are changing or are they still comfortable with those levels.
And I guess the same question could apply to how you manage your dividend growth policy.
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 stable outlook.
You know when we look at our leverage the other part you have to consider here is the left hand side of the balance sheet and you look at our asset profile.
Under you know 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, which the agency is targeted for we just felt it was important.
And last year, we continue to view this.
Today that $4 75 is the appropriate level for us surprised it provides a bit of a cushion if you will under the five times, but certainly for US we don't need to go to 4.5 or 42.25.
Because again the strength of the left hand side of the balance sheet with respect to our dividend growth again, where 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 three 5% dividend growth going forward.
Okay. Thanks for that answer, but maybe supporting point Joel you know how much of your.
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.
The overall interest we have about $2 $9 billion of financial charges are roughly 20% of that would flow through in our rates, whether it's the NGL system are the Canadian mainline when I look at you know rising interest costs as I mentioned in my prepared remarks, we are largely insulated from that given that 85.
Percent 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.
While 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 are about 20% to 25% would flow through in our rates to our customers.
Yeah. That's helpful detail. Thank you and just one question here on the LNG I was wondering if Stan could discuss the the Gillis access project in more detail and the implications.
The implications for supplying U S Gulf Coast LNG than you know.
Luckily.
What do you think the strategic benefits are for for this project.
Yes sure Ken you know were excited to provide solutions for our customers and to further enhance what we view as an irreplaceable pipeline infrastructure with the announcement of our guest access project today and again, it's a $400 million capital investment about a bcf in a half a day of capacity in service in December 2024, you can think of us building that.
At the lower end of the six to eight times build multiple essentially the project is 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, but then.
The state.
With respect to the in service timing, the sanctioning authority or there's already a 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 that's 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.
So 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 everyone and congratulations on the results.
Thanks Robert.
The next question is from Michael <unk> 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 just any update you all don't talked a while ago about a large scale hydro project in Ontario.
The department of Defense involved just curious any update there and then the second question.
Really trying to think about where you're 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 Oh P. S. And then I'll take the second part of the question.
Good morning, Michael our Ontario pumped storage project earlier this month submitted its.
Its filings to move into stage three.
Of consideration for the ISO for 1000 megawatt.
Pump storage facility located as you mentioned near me for at Ontario, We are awaiting our 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 our support for this project amongst a variety of constituents that we serve and it reinforces you know are very large.
Large a large set of opportunities for our for our service territory across Ontario.
Yeah, Michael we're very bullish on Ontario.
We feel that there will be it'll 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 comes out of service and as are the Ontario market a resource a significant amount of manufacturing so.
Ontario is a target rich environment for us and we're very excited about about the.
Ontario pump storage project on the inflation question look.
You know clearly there's an impact on the cost of labor.
We have you know.
When you look at the number of construction projects are happening in Canada for instance, it's 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. So you know, we've we've seen more pressure on inflation.
And in the Canadian market than in the U S market are on our labor costs for construction, but I will point out that we have an ability to blow 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, when 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 Andrew are.
Budget for next year and the year beyond and.
Don't expect a meaningful incremental pressure because of inflation in terms of impacting our our cost of funding or our hum our free cash flow generation over the course of the next couple of years.
Got it that's Super helpful. And then 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 multi year, both EBITDA and EPS growth.
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 you're doing.
Yeah, 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 in our <unk>.
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.
Related 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 a you know around $50 billion of debt today.
So as we think about things going forward with higher interest rates, obviously may have the ability to.
Earn a higher return on some of our assets unregulated 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, I'm at the rest of annoying all he lie I actually had a couple of questions on the portfolio management and I'm just wondering on your comments around the 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 are you.
Did anticipate to bring forward some synergies from that.
That first.
Phase and maybe anything qualitatively you can share today versus last 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 to to back leverage, which which is what many of.
Infrastructure investors like to employ to improve their returns so if.
If you look at our suite of assets, we have a very consistent risk profile across the board and there's 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'm 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 the last process you would've perhaps developed relationships with a number of potential buyers and you would've gone through maybe some pros and cons and assessment in and it's more it's different going on an asset monetization of first time versus doing a second time.
I see thank you for that clarification.
No. We I think it's incumbent upon us and you know as to a prior question. This is going to be a tool in our tool kit 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.
There's an art to divesting of assets and it's a core competency of this company. It's a very labor intensive process as you can imagine when you're running a competitive process.
And Ah, 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, you're not going to discuss potential assets on the block, but are you able to share a sacred cows or anything that you would not look to sell at all.
I will differ.
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 adding any comments. Thank you.
Okay no problem. Thank you.
Next question is from Andrew Kuske from Credit Suisse. Please go ahead.
Thanks, Good morning, I guess the question is gonna be for Stan in for Bourbon.
And if you could just give us any kind of tone from your customers and maybe with some basin specifics on clearly you mentioned the haynesville today with a gearless project with no clear appetite for takeaway, but any kind of context you can give.
You know people seeking more capacity greater duration.
Anything to that effect would be greatly appreciated.
So I can go ahead and start and then I'll turn things over to Devin. This is stand 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.
And as an irreplaceable part of our pipeline network and given its connectivity to the east coast would be uniquely situated to fund or a 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.
Instead, 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.
We would call our 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.
And for energy and LNG exports from the U S in particular.
So Andrew this is Burton I'll.
I'll start with the gas and then I'll move to liquids, so with respect to our Canada gas operations are our assets are ideally positioned.
In the Montney and we're seeing tremendous.
Growth in response from our customers with a 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.
Gulf Coast markets as well as into the East East Coast, Canada, So we've seen tremendous.
Long term interest in the build out of our systems and.
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 the 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 roll.
And I guess, if you just step back and think about the targeted asset sales and stock implications that can have but ultimately does to you.
Potential reduction of the cost of capital ultimately serve our customers better as you try to expand the networks I'm just sort of how do you philosophically think about that.
You know 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 and 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 our low carbon projects in India inflation reduction Act in the U S and kind of seeing some more of that in Canada too.
<unk> hydrogen project now receiving a good good amount of government funding I'm, just wondering how you're looking at that side of the portfolio and that opportunities do you see.
He was kind of government support and where do you think it needs to be at this point do you need to see more you know 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 you know part of our strategy is to.
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 in the areas.
From my perspective, both the inflation reduction act and the fall economic statement in Canada are directionally very positive for making alternate lower carbon forms of energy supply more cost competitive and that's what needs to happen.
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 advanced 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 and qualifies in Canada. It includes extending our benefits for renewables in the United States.
As well as carbon capture and hydrogen production.
On both sides of the border as well as a small modular reactors, which are a little bit of a ways out, but I think I've talked about that in the past, we see that as more of a 'twenty thirties opportunity set but.
Clearly the incentives that had been presented both in the U S and Canada are going to accelerate our opportunity set and in our low carbon businesses.
Okay. Thank you for the comment on that I appreciate it and I'm, just wondering I'm not I'm not sure. If this was disclosed or not but if there are any kind of timelines on next steps for the Alberta carbon grid at this point.
Yeah, Matthew it's Kevin we've Alberta carbon grid with our partner <unk>, we've entered into a 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 free.
From industrial emissions, so we're going to take some time to ensure that we.
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, and our our.
Our objective really is to leverage our collective capabilities and footprint to provide a competitive open access solution for our customers.
<unk> is we're right in the middle of it with the province, and this is going to take you know a.
A few years of development in order to secure the right commercial constructs for our customers to move this project forward effectively.
Okay.
Okay. Thank you I appreciate it I'll turn the call back thanks.
Patrick.
The next question is from Patrick Kenny from National Bank Financial. Please go ahead.
Yeah. Good morning, just on N G T L. As you're closing in on completing the secured expansions through next year any.
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 are the Canadian gas business.
But as you've seen in the market and what we've seen over the last year, there's significant demand for the system Devin touched on a couple of the points earlier.
As quickly as we can get assets into the ground there 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.
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.
Factory hit another record here in October at 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 I'm seeing some great opportunities here for growth both for us and our customers.
Okay. That's great color. Thank you and then maybe.
Maybe just a quick follow up on C. G L.
It looks like there's a new disclaimer in the release regarding the.
The recently revised capital cost just siding.
Current market conditions inflationary impacts on labor I'm, just wondering if there is further upward pressure on that $11 $2 billion budget through.
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 the.
The 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 backfill them in various stages of getting.
Getting back to looking how it how it was when we started construction this.
This is one of the most complex projects.
<unk> 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 where we're experiencing some of that in our labor force.
And Patrick it's it's Joel here.
Did increase the credit facility associated with C. G. L 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.
<unk> <unk> 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 11.2, 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 and then we will look at the drip at that point in time, so again.
C. G L. We don't see a need here to extend the drip that we would look to if anything I bring that up sooner rather than later, depending on the level of capital rotation.
Okay. That's great. Thank you very much.
Okay.
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 are 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.
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