Q2 2023 TC Energy Corporation Earnings Call
Thank you for standing by. This is the conference operator. Welcome to the TC Energy 2nd Quarter 2023 Financial 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. For more information, visit www.tccenergy2ndquarter.com
To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. I would now like to turn the conference over to Gavin Wiley, Vice President Investor Relations. Please go ahead.
Thank you very much and good morning everyone. I'd like to welcome you to TC Energy's 2023 second quarter conference call. Joining me are Francois Poirier, President and Chief Executive Officer, Joel Hunter, Executive Vice President and Chief Financial Officer, along with other members of our executive team. I want to begin with comments around the announcement we made this week.
Bevin will provide additional details around the spin-off of our liquids pipelines business and Joel with our financial and operational results. A copy of the slide presentation that will accompany the remarks and additional presentation materials on the announced spin-off are available on our website under the investors section. Following the remarks, we'll take questions from the investment community. We ask that you limit yourself to two questions.
Finally, during the presentation, we'll 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.
With that, I'll now turn over to Francois. Thanks, Gavin, and good morning everyone. Well, it's been a busy week, but an extremely transformative one that sets out our company's path for the next decade.
TC Energy's long-term strategy is focused on unlocking discipline growth.
having financial strength
and operating safely and efficiently.
And the announcements we've made this week all align to that vision.
As we've said all along, energy fundamentals drive our strategy and our decisions.
And what we're seeing is that all forms of energy will be required to meet demand.
and we are very fortunate to have incumbency across a wide range of energy infrastructure platforms.
We're an incumbent in transporting natural gas from the Western Canadian Basin.
We're an incumbent transporting natural gas from the Appalachian Basin.
We are an incumbent with the shortest transit time for crude oil to Gulf Coast refineries.
We're building incumbency and importing natural gas into Mexico.
And, of course, we have incumbency in nuclear generation in Ontario.
That incumbency brings growth opportunities and superior returns.
and we need to protect it by continually investing capital and pursuing that growth.
Simply put, the number of attractive opportunities we are seeing is accelerating. In fact, it's exceeded our financial and human capacity to pursue them.
of attractive opportunities we are seeing is accelerating. In fact, it's exceeded our financial and human capacity to pursue them as a single company.
And with our renewed commitment to an annual limit on net capital spend to $6-7 billion per year, UPON has had more than 26,000 members over the years.
This left us with the simple conclusion.
Separating into two businesses with separate mind and management.
each with a strong balance sheet and their own currency, will allow us to pursue more growth for the benefit of our shareholders than we could today.
So why now?
Global events have reminded us of the need to balance reliability, affordability and sustainability and that all forms of energy will be required.
Long term fundamentals have shifted and that has created significant opportunities for liquids business.
that we've had to turn down.
and that value should be captured. This spin-off allows Bevan and his team the opportunity to fully leverage the growth opportunities that we are seeing and doing so in a tax-efficient manner.
The second value proposition comes from greater efficiencies we can capture
that are catalyzed by separation.
As a premier North American energy company, TC Energy will leverage the complementary synergies across our natural gas and power and energy solutions businesses.
Now earlier this week we announced a first step.
and with the sale of a 40% interest in our Columbia pipelines to GIP.
This sets up the new TC energy for success.
Both businesses...
have enormous growth opportunities and the beauty of that is that we see ourselves
migrating to a more regulated business model.
Our operational results continue to demonstrate that decarbonization and increasing reliance on renewables requires greater firming and natural gas.
will play a key role for decades to come.
We see this in Europe , which has been a driver behind the growth in LNG exports.
Our Power and Energy Solutions business is expected to derive more than 75% of its 2030 from nuclear and firming resources.
Likely to be underpinned by rate regulation.
We're also advancing the development of CCS projects in Canada and the U.S. with projects like the Alberta Carbon Grid and Project Tundra in North Dakota.
Beyond this, we see extended capabilities to leverage the complementary nature of our gas assets.
see extended capabilities to leverage the complementary nature of our gas assets in areas like hydrogen.
Critical to the adoption of any new technology will be expertise and relationships with regulators, stakeholders and customers. And this is a deep skill set and competitive advantage for us.
TC Energy will continue to optimize our capital allocation processes to leverage the mutual benefits across our businesses.
Our value proposition and low risk preferences are unchanged and we are increasingly utility-weighted in our business.
At close of the spin-off transaction we expect that 96% of our adjusted EBITDA will be either rate regulated or long-term contracts.
Post transaction, our 2022 comparable EBITDA is expected to grow at a 7% compound annual growth rate through 2026.
And with the transaction with GIP,
And then with the spinoff.
We believe that only an incremental three billion dollars of additional divestitures over the course of the next 18 months will be required for us.
to get below 4.75, dead to EBITDA by the end of 2024.
Separately, our liquids business has an unrivaled commercial construct. We have the longest tenured contracts among its peer group. The lowest cost path to market with the fastest transit times. It delivers the highest quality crude for our customers to the refining market.
And that is what drives the opportunity to create more value as separate entities.
Now, let's come back to our 2023 priorities that we stated at the onset of the year.
These announcements this week are in direct service of those commitments.
and we've made significant progress.
First.
We are safely delivering on our major projects, such as Coastal Gas Link and Southeast Gateway, on the planned cost and schedule.
We've significantly accelerated our deleveraging goal with the announced sale of a 40% equity interest in the Columbia Pipeline Systems for total cash proceeds of $5.2 billion, which will go directly to reducing our debt to the tune of 0.4 times debt to EBITDA.
And third, we continue to safely and reliably operate our assets and provide essential services across North America.
Now we also realize that the spin-off of our liquids businesses creates an opportunity to simplify our gas organization.
That's the second value proposition with the spin.
and allows us to operate our systems in an integrated natural gas network across North America.
We've promoted Stan Chapman to Executive Vice President and Chief Operating Officer of our natural gas pipelines to integrate our geographically dispersed natural gas businesses into a single unified structure.
This is something that we have been working on for many months.
With our consultants and we have a credible and detailed plan that we are already implementing.
So as our spin-off transaction proceeds, we will remain focused on safety, operational excellence and business continuity for all of our valued customers and stakeholders.
Now, we're firmly moving towards our desired future state.
We'll have two separate entities with strong management to pursue incremental growth and both companies will be free to pursue their own distinct opportunity sets.
One will be increasingly utility weighted growth vehicle that's natural gas, nuclear, hydro storage and new technologies.
It will have a stable balance sheet, above average per share growth, that supports a stable dividend growth rate of 3-5% at attractive and conservative payout ratios.
The other, our liquid pipeline company led by Bevan, will be a highly contracted business with stable and robust cash flows supported by long-term customers.
To me, this is how we create incremental value for our shareholders.
Now with that, I'll turn it over to Bevan to speak a bit more about the Liquids Pipeline Act Company for Racine Polishing.
Thanks Francois and good morning everyone. This is a monumental moment for the entire TC Energy organization and the new liquids pipeline company.
The vision for our liquids business has always been to be the premier liquids backbone for North America, sustainably fueling quality of life.
Yesterday's announcement to spin off the liquids business will allow us to continue to deliver on that vision and as a standalone entity, we will have greater flexibility to use our significant free cash flow to add shareholder value.
In its new form, the Liquids Pipeline Company will continue to offer one of North America's most competitive liquids platforms.
Connecting some of the largest and most resilient supply, demand and export markets.
Our focus to deliver on our value proposition is on safety and operational excellence as we continue to deliver on the premium value proposition that has served our business well historically.
Across three pipeline systems, we operate 40.
4900 kilometers of pipe or over 3,000 miles of crude oil infrastructure.
Since its inception, the Keystone system has delivered over 3.9 billion barrels and we transport 16% of crude oil exports out of the Western Canadian sedimentary basin.
by delivering stable, responsible,
WCSB supply to the most resilient refining markets in PADS 2 and 3, we see a long runway of opportunities supported by long-term energy market fundamentals. We also remain highly committed to ESG, including safety and reducing our emissions by decarbonizing our power consumption.
We have stable, robust cash flows supported by 96% investment grade counterparties.
Our comparable EVITA is approximately 88% contracted, with a weighted average contract length of approximately 8 years.
We also have the shortest transit times and maintain industry-leading product quality for our customers.
and recall that over 90% of the product we transport from the oil sands is committed also to net zero by 2050.
With minimal volumetric and commodity price risk, we have an unrivaled low risk business model that differentiates us from our peers.
Initially, our team's focus will be accelerating deleveraging to drive additional value for our shareholders while identifying low risk in-court or growth projects that enhance and extend the system's reach. We will focus on optimizing latent capacity. A good example of this is our successful open season on MarketLink with Chuy Choy just closed in July .
The 2022 comparable EBITDA of $1.4 billion is expected to grow at a 2-3% compounded annual growth rate through 2026. And don't forget, as a business we have very minimal sustaining capital requirements.
That means we have significant free cash flow to pursue these opportunities and support an interactive dividend for shareholders.
With our strong commercial underpinning and initial capital structure, the Liquids Pipeline company is expected to be investment grade. Following the spin-off, we will establish approximately $8 billion of senior debt and junior subordinating notes. We can think about the split as being approximately $6 billion.
long-term debt and approximately 2 billion of junior subordinated notes which receive 50% equity credit.
Proceeds will be used to repay TC energy debt.
This works out to be five times that to EBITDA and we plan to prioritize deleveraging to the tune of a quarter to a half turn within three years.
Our annual dividend growth is expected to be commensurate with our comparable EBITDA growth outlook at 2-3% while adhering to conservative dividend payout ratios.
With the significant cash flow this business generates, we will continuously evaluate deleveraging against the benefits of share buybacks in terms of what will serve our shareholders.
I'm honored to have been endorsed by the TC Energy Board of Directors to lead the new liquids pipeline company as the intended president and CEO . And you're familiar with my partner and our intended chief operating officer Richard Prior from our previous analyst calls.
The liquids business already has a strong operational team in place. We have the capabilities, infrastructure and resources to successfully stand as an independent company and the spin-off will enable us to maximize the full value and potential of our talented team and our high quality assets.
I'm very excited that a board chair has been selected and we will be announcing our broader management team and board of directors in the coming months.
I want to highlight some of our operational successes that the liquids business has had in the second quarter of 2023.
Comparable EBITDA of $363 million was up 6% versus the same time last year. The strong demand for US Gulf Coast capacity resulted in an increase in market-related throughput by over 150,000 barrels per day. And through the first half of the year, the Keystone system's operational reliability was approximately 95%.
I'll wrap things up by saying this is already a differentiated business. We have significant free cash flow and a long runway of future opportunities.
As a distinct entity with the ability to focus on operational excellence and discipline growth, I believe we can further unlock shareholder value.
Now I'll turn it over to Joel.
Thanks, Bevan. During the second quarter, we continued to deliver strong performance with comparable EBITDA up 4% year over year and 10% on a 6 month basis.
Our base business remains robust.
As Bevan mentioned, the liquids pipeline business performed exceptionally well during the quarter, resulting in 6% comparable eva to growth year over year.
And we also saw the highest market link throughput since early 2020.
In power and energy solutions, we continue to see solid performance.
Bruce Power achieved 94% availability and her cogeneration fleet achieved 93% availability.
We are pleased to see the Ontario government announce that the Minister of Energy will begin the final evaluation of the Ontario Pump Storage Project. We look forward to receiving the final decision later this year.
In our Canadian natural gas pipelines business, our NGTL system continues to see strong receipts.
The system achieved its high single-day record of 14.6 BCF on April 21st.
Also on April 21st, US natural gas achieved record LNG feed gas deliveries of 3.8 BCF, which represents over 30% of current US LNG exports.
We're making steady progress on our projects in Mexico.
The lateral section of our billet array as pipeline has achieved mechanical completion and is expected to be commercially in service in third quarter 2023.
In alignment with our 2023 priorities, we continue to safely execute major projects like Coastal Gas Link and Southeast Gateway.
We've made tremendous progress on coastal gas length this year. The project is now approximately 91% complete and nearly 98% of all pipe has been welded.
We continue to expect mechanical completion by year-end, and our $14.5 million estimate remains unchanged.
The Southeast Gateway is also progressing according to planned milestones.
We have begun onshore installation and facilities construction in Veracruz and Tabasco.
We expect to start offshore pipe installation by year end.
Following the partial sale of Columbia Gas and Columbia Golf, we continue to expect the 2023 Copperwood EBITDA to be 5-7% higher than 2022.
Compable earnings per common share is now expected to be generally consistent with 2022, primarily due to higher expected net income attributable to non-controlling interests partially offset by a lower interest expense.
So far this year, we have placed approximately $2.1 billion of capacity capital projects into service, progressing to the $6 million of projects we expect to place into service this year.
This includes North Baja Express, which entered service in June , and $1.5 million in Canadian natural gas projects.
Now turning to our funding program.
A key priority continues to be capital discipline.
and more recently following this week's credit actions where we saw less than a five basis point impact. We have demonstrated competitive access to capital markets this year in both Canada and the US as evidenced by the $4 billion that was issued back in March. Now while a lot has been announced this week, I want to provide clarity on our engagement with the credit rating agencies. We engaged all four to present our plan in its totality which included the Columbia asset monetization and liquid spinoff.
We remain confident in our plan that we can achieve our de-leveraging goals and remain committed to our 4.75x target. To wrap up this slide, as we previously committed, subsequent to the dividends declared on April 27, 2023 that are being paid on July 31, 2023, our discounted drip has been discontinued.
Now I'm going to take some time here to walk you through how we will achieve our 4.75x depth EBITDA target and stay there.
$5.2 billion of cash proceeds from the 40% monetization of Columbia Gas and Columbia Golf are expected to result in an approximate 0.45 times reduction in our debt to EBITDA metric measured and derived from this short version of thanking American
Over the next 18 months, we will continue to evaluate capital rotation, currently in the range of $3 billion.
And given our expected timeline for the liquid spinoff, in 2024 we anticipate 8-10 months of liquid comparable EBITDA contribution.
So as Bevin said, liquid company will issue approximately $8 million of long-term debt and junior supporting notes.
the proceeds of which will be used to repay debt to TC Energy.
Our deleveraging is further supported by assets that will be placed in the service between now and 2026, further bolstering our comparable EBITDA.
For example, our Southeast Gateway project, which has a targeted and service date of mid-2025, is expected to contribute approximately $800 million in incremental comparable EBITDA.
We believe we have a credible plan and a clear path to achieve our deleveraging goals.
PC's Energy Board of Directors has declared a third quarter common dividend of 93 cents per common share, equivalent to $3.72 per share on an annualized basis.
I'm excited as we look to the future and I'm confident that we'll continue to deliver a sustainable dividend growth rate of 3-5%.
This will remain core to the enduring value proposition of TC Energy and Liquids Company to further build upon 23 consecutive years of common share dividend increases.
Thank you for your time, and I'll pass the call back to Francois. Thanks, Joel.
The series announcements that you saw this week are a complementary effort taken together.
Spinning off our liquids business, integrating our natural gas businesses under single leadership, and creating a strategic partnership with GIP all directly serve our 2023 priorities.
and our long-term strategy to create value and prosecute growth.
With that, I'll turn it over to the operator for questions.
Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. Please limit your questions to 2 and if you should have additional questions, please re-enter the queue.
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To withdraw your question, please press star then 2.
We will pause for a moment as callers join the queue.
Our first question comes from Rob Hope of Scotiabank.
please go ahead.
Good morning everyone.
Just want to get a sense of how you're thinking about operational capacity as well as the manpower within the organization. What you announced yesterday, realigning the natural gas business units as well as spinning off the liquids business units are quite a large endeavor. You have delivering in play as well as a number of large pipelines under construction right now.
How do you ensure that or how do you think about the ability for the organization to engage in all of these different items and why not push off the spinoff a little bit a couple quarters just to better allow you to focus on the construction and delivery.
Thanks for the question, Rob. It's Francois. I'll start and then I'll pass it over to Stan for some commentary on our
First of all, literally hundreds of people have been working on this for six plus months.
We have a separation management office that's been stood up. We've been working with Bain on this for nearly a year. And I'll point to our performance in terms of operating our assets right now. Our availability of our overall system is actually up.
Our performance around project execution, we've been bringing in our projects. We brought in five and a half billion of projects last year, 2.1 billion into service so far. This year we are on track to bring in six billion for the full year. CGL is on plan.
So we are performing very well. I'm very confident in our team's ability to absorb and have all these work streams because we've been doing so in a very planful manner and a very organized manner. And Stan, over to you. Very good question, Rob. And it's something that is on the forefront of our mind. And I would just say that we were very careful to make sure that we're setting up a dedicated team.
to help us capture and process these energies and keeping that separate from the rest of the workforce that's accomplishing our day-to-day tasks. So there's a little bit of a separation of duties between the two, so there's not a lot of overlap.
I appreciate that. And then just maybe a follow up on the coastal gas link. We're well into the construction season. When you take a look at the downside scenarios, I would imagine you have a pretty good understanding of productivity and whether it's been okay. What are the kind of variables or scenarios where you can miss the...
a tremendous record on safety the first seven months of this year and the reason why I start with safety is that's what has also allowed us to have tremendous productivity through the first half of this year and through the summer construction season. We've had our share of
really complex and risky parts of the project to accomplish and I'm really proud that the team has delivered upon all of them. We've been in parallel to working the plan, and putting in contingency plans for the balance of the risks that we see going forward.
And so the remaining scope is not without execution risk, but we've been able to navigate these challenges week by week and it's a daily task.
your question around the scenarios around you know finishing the project well you know our
Our plan is to finish strong. We do have what I would call single point risks. There's a number of critical paths that are all jockeying for position to to be the critical path, but they don't at this point in the project. I'm happy to say that
None of the single point risks have a
significant materiality in us being able to deliver to our targeted cost or schedule. And so that's why we've maintained our target and we believe that we have all the plans in place to deliver the project strong and finish strong here in the year end.
Hopefully that gives you an answer to your question.
Hopefully that gives you an answer to your question. That's helpful. Thank you.
Our next question comes from Patrick Kenny of National Bank Financial. Please go ahead..
Thank you. Good morning. Just on the business mix pro forma, the spinoff.
looking into 2026 with Southeast Gateway online.
Mexico contributions will be
well through your previous 10% max threshold. I know you're looking at rotating another $3 billion of capital, but if you could just comment on how you're thinking about managing your 10% comfort level there for Mexico with the spinoff. Thanks.
Hi Patrick, it's Francois. So we're really pleased with the execution on Southeast Gateway thus far. You know at the outset when we announced the sanctioning of the project we had 70% of the project costs fixed and really the risk in terms of cost of schedule was front-end loading.
land and we will have the requisite pipe delivered in time for a late in year start to the offshore pipeline construction.
What's important for us to deliver value to our shareholders is to meet cost and schedule on that project and we believe that we will derive maximum value for that investment after we achieve in service. So in terms of managing our exposure in Mexico, we remain committed to managing our exposure
making sure that that's an appropriate portion of our business mix. There are other tools to manage our capital exposure in Mexico to help us stay below that 10%, other than what the accounting says the portion of EBITDA on a consolidated basis is and I'll ask Joel to maybe talk about that a little bit.
Sure, thanks Francois. So some of the tools that we're using right now Pat include in-country financing. So for example, we issued $1.6 billion at Certa Teos last year. We did another $2.3 billion here in January . So think of that as a total of almost $4 billion of in-country financing.
along with these tools including project financing and PRI. We have a way here to really manage the exposure to what we've targeted before, which is around that 10% area of total exposure once Southeast Gateway is in service in 2025.
Okay, thanks for that, Carl. And then maybe just on the 8 billion of debt to be issued at the new liquid company.
How should we be thinking about the tenor on the new debt to be issued relative to the stated average contract life of eight years?
or looking to implement from a credit quality or backstopping perspective just to help solidify a strong investment grade credit rating for the liquids company. So Pat, one of the things we did that is fundamental to our decision around the spin of the liquids business was engaging with
here approximately $8 billion of total funding as Bevin outlined, which includes $6 billion of long term debt and $2 billion of subordinated debt that would achieve 50% equity credit. So that was presented and we do have indicative ratings that would be investment grade. We won't have final ratings until we actually have an entity that is up and going once we have approval from our shareholders here mid next year.
When we look at tenor, it will be across the curve. The strong business risk profile of liquids will allow us to issue debt from right at the front end of the curve, say three years, right out to 60 years. When you think of the form of subordinate capital when they have a 60 non-call, 10 type structure. We'll be able to issue right across the curve.
Absolutely, so as Joel alluded to, we have a rough average of just over eight years of contract life left. Our contract terms themselves are very differentiated in terms of the style of contract we have supporting our systems don't have volume or commodity price risk.
And when you look at our system and how competitive it is to serve the supply basin and then into the Gulf Coast and Midwest in terms of pricing time to deliver, we don't...
We believe that barrels will flow to our system. So when we think of the recontracting profile out seven, eight years from now, we believe that we can remain very competitive against the demand markets that both TMX and the main line will serve.
given that we'll still be able to deliver to the strongest market quicker, more competitively and under more favorable terms.
I know you're in the middle of another open season for MarketLink, but I'm just curious if there's an opportunity to integrate more of a blend and extend service offering all the way down from Alberta through the Gulf Coast.
just to mitigate some of that longer-term recontracting risk.
Yeah, right now we're focused on, you know, we have latent capacity on our market link system and we're very happy with the demand that we've seen. You know, for 2024 we see incremental demand due to the strategic reserves needing to be refilled.
that is going to be a nice tailwind for us. When you look at the blend and extend, you know our long-hauled barrels.
We're sold out. Right now that is a very competitive offering and the premier delivery vehicle for those barrels. So as we move closer to recontracting and that is five to seven years away before we get there, there is an opportunity.
to blend and extend and we think we can do so very competitively.
extend and we think we can do so very competitively. Thanks guys, I'll leave it there.
Our next question comes from Jeremy Tonette of JP Morgan. Please go ahead.
Our next question comes from Jeremy Tonette of JP Morgan. Please go ahead. Hi, good morning.
Good morning.
Just wanted to start with a high level...
Question if I could here just with regards to the portfolio of growth capex at Remain Co. Just wondering if you could talk a bit or for the company as a whole rather how the mix between natural gas capex versus energy transition opportunities. I see that mix shifting today versus over time at this point. You know want to get a current check in.
I guess, what type of opportunities you're seeing over what time frame that could shift.
Hi Jeremy, it's Francois, I'll take that one. Right now our capital is almost fully committed for the next three or four years, our $34 billion program. Right now the weighting of that is about 80-20 between natural gas and power and energy solutions. The power and energy solutions portion is predominantly made up of the major component replacement.
weighting to things like more nuclear and more pumped hydro, but also a balance quite well with more attractive opportunities to extend our natural gas system to connect more LNG to more LNG facilities for export. We will be
Bringing our MCR Unit 6 back into service later this year on or ahead of schedule and on budget is our expectation. We are about a half a year into the MCR on Unit 3 and we will be sanctioning
the MCR on Unit 4 by roughly January or February of next year. So you're going to see more capital being allocated to Bruce as per our refurbishment schedule over the course of the next decade. As we mentioned…
at our sustainability forum, we have some price increases built into the schedule in our contract with the ISO. So you're going to see the EBIT contribution coming from that business growing significantly over the balance of the decade.
The ISO has been directed by the Ministry of Ontario to make its final determination on our OPS project. That is a zero emitting pumped hydro project. It may be the largest emissions reduction project in the federal government's portfolio given that we are siting that project on federal land.
And when we do that, we will use project financing and make sure that we limit our exposure only to our equity investment in those types of projects.
That's very helpful. Thank you. And then...
Just wanted to pivot towards the design initiative as put in the release today. And as you discussed, wondering if you could provide a bit more detail on what's being realized in that 750, specifically the 150 that's online, what's happening there. I think there's a potential for 250 upside down the road. Just wondering what that could look like.
to do this in a very planful manner. So we're very well organized and already in the early phases of execution. And I'll pass it over to Stan for some detail. Hey, good morning, Jeremy. And we've been working with Bain over the past nine months or so to effectively rethink the way that we work. And one conclusion we came to is that our processes, our structure, are really preventing us from reaching our full potential.
This is really not that atypical with companies like ours that have been aggregated by various acquisitions over time and different work processes had to be integrated.
So that was really the driver behind doing what we did in combining our three gas businesses and our technical center. And that's something that we've never done before under a single unified structure. Doing so is going to allow us to leverage best practices across our footprint and really create value by focusing on one way of doing things.
advancing our commitment to safety, asset management, and operational excellence, making us more agile, and really leveraging innovation.
which is a great opportunity for us. So in recognition of the unique regulatory and commercial constructs under our new structure we're still going to have a business unit president for each of our jurisdictions in Canada, US and Mexico and they're going to lead our commercial regulatory and operations teams.
But what's new, what's new that we're doing here is we're going to create two new shared services or cross-border groups.
One group is going to focus on safety and integrity, and you can think about them as optimizing our $2 billion annual maintenance capital spend.
The other group is going to focus primarily on executing our projects on time on budget.
So, examples of how we're going to do this include things like re-looking at our insourcing and outsourcing mix. Quite honestly, we're spending too much money on external spend.
And we're not leveraging the $10 billion spend across the supply chain footprint that we have as efficiently as we can.
So after doing this analysis, we've identified about $750 million of annual run rate opportunities across our gas businesses and corporate support functions.
That'll be realized by the end of 2025, with about 150 million of that realized in 2023. Simply, if you wanted to unpack the 150 a little bit, think of it as $70 million of reductions in our IS spend, $30 million of reductions just by aggregating the technical center into a common group and eliminating redundancies and efficiencies.
And all that together is going to more than offset any disenergies from the spin.
So think of these opportunities as primarily in the form of capital reductions and other efficiencies which primarily are going to flow back to our customers, but they're going to enhance our competitiveness at the end of the day, and they are included into our $6 to $7 billion capital expenditure outlook. Now on top of that, we just started a second initiative, and we believe that there's an additional $250 million of opportunities.
that in part will get flowed back to our customers, but also in part are gonna flow back to our bottom line. And those are the proof points that we're gonna be working on on finalizing over the balance of the year.
That's very helpful. Thank you for that.
Our next question comes from Andrew Kuski of Credit Suisse. Please go ahead.
Thanks, good morning. There's lots of spins to look at over the years as precedents, but maybe if we just sort of focus conceptually on one when in Canis Bonovs and Ovis.
you know, the spin, the oil sands business was largely viewed as not being able to grow. And so with your spin, you know, you clearly have segmented the capital market. There's an ESG segmentation.
And you're going to have two different currencies in the future. And so I know that's a lot of intertwined issues. But how do you think about the ability to grow the liquids business with a separate currency and then effectively, and this is Francois, one of your points over the last few quarters of high grading traps returns?
Andrew, this is Bevan. I'll start.
So let's start with the value proposition of what the liquid spinco will be right out of the gate. First, it will have a very compelling dividend. That dividend fully covered by contracted EBITDA. So 88% of our EBITDA is contracted in the liquid spinco.
you'll have what we believe is a very strong income yield out of the gate with this entity. The free cash flow out of the assets is extremely strong and so it not only covers dividends but it also can support some
modest capital growth, capital light. Because we have the pre-investment in the Gulf Coast system in Grand Rapids, developments like what we put in place with the Port Neches Link that serves the Port Arthur refinery in Motiva, that's the largest North American refinery, we've already seen
significant movements of volumes through that link. Those types of opportunities we can develop at 68 times EBITDA build. The Port Nancher's link was at a seven time build. Those are very strong and compelling returns so that is again under our free cash flow. And then finally the value proposition includes
accelerating our deleveraging. And so with the balance of the cash flow that can be generated, we can choose to slowly pay down.
that will be in place at time of spin. You know, the capacity of what we see in our plan is that we can reduce that by up to a half a turn of leverage in three years, but we'll balance that with share buybacks or other ways to return golfer training purposes withoutangs.
value back to shareholders. With respect to the separate currency, absolutely, you know, we haven't had a separate currency to look at inorganic opportunities, but we don't need those to deliver our value proposition and we want to put some points on the board first to demonstrate to shareholders that what we're providing as a...
as a new equity is a very compelling investment. But we have seen and we have seen a number of opportunities over the last number of years that we didn't participate in because we didn't have a currency to pursue. So, capital allocation is...
is going to be extremely disciplined because we can't forego the risk, you know, our value proposition to shareholders. And so we're going to generate a low risk, high quality return asset for shareholders.
And Andrew, on the second part of your question around high grading returns, yes, absolutely. One of the benefits of...
being opportunity rich but limiting your cash flow. Pardon me, your capital investment to six billion dollars a year is that you get to choose the projects that deliver the highest weighted average returns.
you're going to be like for like with the other competitors from an oil sands basin, but we think of the duration of the volumetric flows versus what you'd see out of a US basin. Just your thoughts on that and how that translates into multiple. Yeah, absolutely. I think we'll be extremely differentiated. We're the only system that is not a supply push, which would be like the Permian Basin is into the Gulf Coast.
We're both a supply push and demand pull asset, meaning our customers are participating in both sides of that equation. And so when you think about the enduring nature of the asset, we're not chasing declines on the upstream. And the,
through five different export points out of the Gulf Coast and we brought in capability internally to deliver those barrels to tidewater. So you know when we compare ourselves to other systems.
You know, our system is basically, you know, we already have regulatory approval for our recontracting from both the FERC and the CER. Those are market-based rates and again, they don't have any volumetric or commodity price risk. Our system is extremely unique compared to any peer liquid system out there.
And so while there will be other flows and we're happy that our customers can have the opportunity to flow out west onto the TMX system that's getting close to being complete and through main line, but we remain the shortest and most competitive pathway to the strongest demand markets.
Okay, I appreciate that. Thank you. Our next question comes from Robert Kwan of RBC Capital Markets. Please go ahead.
Good morning. You previously outlined that the liquids pipeline that segment generates a lot of cash flow, given the relatively low maintenance capex. I'm just wondering, can you talk about the mechanics that allow the reiteration of the ability to internally fund at max $7 billion capex post-spin effectively the two entities can pursue more capex than you previously articulated?
And then for remaining Co. is there still a firm commitment to the internal funding model, given the already secured capital? Mostly remain code project. Hey Robert, I'll start with the second one first, because it's simpler. Yes, the commitment remains.
Frankly, we had an eye on the knowledge that we may be pursuing a spin when in April we made the commitment to limit our capital spend to $6 billion per year and we tested our ability to maintain that commitment.
for what I would call Romainco after the spin has taken effect. So that commitment had that potential announcement in mind. Look, the liquids business generates a tremendous amount of free cash flow. The ability to kind
it will bring to its capital structure going forward its pro rata share of debt and it will bring forward its pro rata share of the dividend with a payout ratio that is higher than what the payout ratio will be for the remain co portion so in the materials that we gave you in the investor presentation
and we walk through the free cash flow generation of Romainco after dividends.
payable, you see that we can support a $6 to $7 billion capital program on the remain co side of it because there's an $8 billion you know reduction in debt as well as you know roughly 55 cent reduction in in dividend that is that is borne by the liquid entity
And then Mike just finished the question on the operating and funding model. So one of the benefits you highlighted as part of a Columbia transaction was the ability to flexibly operate the assets but reduce the capital intensity with GIP funding its 40% share of the future capital there. So, Prime Carey issue here.
Recognizing you already have some partners for potential future capital, do you see, though, this type of structure as more of a template to be an attractive way to pursue growth? Then if so, do you envision this occurring more as a joint venture going into a specific project or selling down an existing asset with future growth as you did with Columbia?
I think it would depend on the circumstance, Robert. You know, we're very experienced and comfortable in joint ventures. We have partners on Iroquois and PNGTS.
and now with GIP.
Given, as I talked at the opening, the importance of continuing to invest capital to protect the competitiveness of our franchises.
And that need and that opportunity set being an excess of our $6 billion per year. Joint Ventures are a great way for us to actually...
defend the franchise value and still live within our means. So you could expect to see us do more of those going forward. Obviously, we felt it was important for us to honor our 2023 commitment to significant deleveraging of 5 plus billion.
We achieve that with a single transaction with GIP. Don't expect us to be pursuing...
such a sizable dollar amount or percentage in an individual transaction for the balance of our $3 billion portfolio. And with respect to other potential joint ventures, I think in new energies, that's also a really good fit for that. But it's more around finding partners that have the ability to do that.
So those types of joint ventures would be less financially driven and more getting people together who can manage and mitigate risk on the new types of energy technologies.
Thank you, Francois. You're welcome.
Our next question comes from Robert Catilier of CIBC Capital Markets. Please go ahead.
Good morning everyone. I just wanted to have a follow-up on the cost-saving initiative. I'm glad to see you have that ambitious goal. I wonder if you could delineate that savings between capital items or items that will improve your EBITDA. As you mentioned earlier, Stan, some of that is going to be shared with shippers, so I wonder how much is being...
of that target is going to be retained and help the EBITDA look for TC Energy. Yeah, Rob, within the $750 million, think about somewhere between a third to half that as capital efficiency. Think of a majority of the balance as items that are ultimately going to flow through back to our customers given the regulatory paradigms in our respective jurisdictions.
With respect to the second part, the additional $250 million, and again, we have a little bit more work to do there, that is where I think we'll realize opportunities to be incremental to our plan in addition to certain dollars that are going to flow back to customers or capital efficiencies. But that work is yet to be done. We still have to prove out some of the concepts.
And then once we do that, we'll be able to give you a better line of sight on exactly what you're looking for by the end of the year. Okay, that's great. And then last question, you know, post the spinoff, obviously there's some currency impacts until, you know, related to how much currency is that Spenco?
US dollar exposure at Spenco versus TC Energy. So I'm wondering if that changes how you look at hedging currency or risk mitigation? Yeah, Rob, it's Joel here. It doesn't change anything as it relates to how we hedge our currency. The way we do it now is we do it on a rolling three-year basis with primary focus over the next 12 months because we're structurally long US dollars.
given that we are a $C-Dollar functional currency. And you think about liquids today, roughly two-thirds of its EBITDA comes from the US, but a third comes from Canada. So what it means for us going forward, it doesn't really change the program. It might shrink it a bit with that currency going away, but it doesn't change how we hedge the currency going forward.
Thanks everyone. Our next question comes from Brian Reynolds of UBS. Please go ahead.
Hi, good morning, everyone. Maybe just to follow up on the new CO and the leverage profile, just given that the company's earnings mix will be primarily U.S.-focused, just kind of curious if we can talk about the decision for five times leverage versus some of the U.S. midstream peers of less than four times and for even some three. Thanks.
Yeah, I can start on that one, Brian . This is Bevam. We went through the ResRAS process and had a responsible discussion about that.
What I referred to earlier is, you know, we have a very differentiated contract profile compared to our U.S. peers. Fundamentally, you'll see in the deck that we posted that, you know, our underlying, you know, our counterparties are 96% investment grade. Our contracted portfolio on EBITDA is materially higher and that...
the nature of those contracts is extremely different compared to those US peers. And so when we went through the ratings process you know it's certainly the investment grade at least indicative analysis done highlighted that at five times.
that was really matched well the underlying contract profile that we had. But that, as I mentioned earlier in my remarks, the intent is to accelerate the...
deleveraging for our shareholders as part of the spin for between
You know, remain co-in-spin-co. This is one of the key elements of the value that we're giving back to shareholders is by having a separate entity. We can help accelerate that, deliveraging in the spin-co. So starting at five times, but getting it down a quarter to half turn in three years is going to be, you know, I think a great value.
back to shareholders. And so that was the essence of starting at that point because our liquids business can support it.
Brian , it's Joel here. Just to further Bevin's comments, what was fundamental in our decision around everything we've talked about here, our action this week, think about the partial monetization of Columbia, the liquid spin and $3 billion of capital rotation is that we have investment grade ratings in both entities.
And so in the case of SPINCO, we did present a scenario, our plan if you will, that contemplated $8 billion of debt as Bevin mentioned, and we would have strong ratings as a result of that. It's very fundamental to the decision here that
that we'd have strong ratings coming out of the gate for both entities. Great. That's super helpful. And then as my follow-up, in your prepared remarks you just talked at length about maximizing long-term shareholder value for TC Energy. You have an asset base on a combined basis that is very complementary to one or another. So kind of curious in the context of the dividend level, how is that considered?
in the SPIN co in terms of maximizing value versus perhaps reevaluating the dividend level to aggressively pursue some of these, this very large low carbon growth backlog. Thanks.
I want to make sure, Brian , we understand the question. Are you asking on the SPINCO side or the RemainCo side or both? Just keeping the dividend effectively flat on a total basis.
Well I think in our view it was important to make sure that from a value standpoint one plus one equals more than two. We think one plus one equals three or more here from a value creation standpoint and that starts with ensuring that our shareholders in aggregate holding to securities.
the outset are kept whole with respect to the dividend trajectory with two separate securities as opposed to a single one. We expect and what you see on the Remainco side is you see a higher growth rate on a pro forma basis for the spin than you do in the consolidated entity.
We're going to conservatively keep our dividend growth in Romainco at that 3-5% for some time. We want to make sure that we put some proof points on the board in terms of living within our means, staying at 6 or below in terms of capital spend on an annual basis.
And what you see from the materials is that even with limiting our capital spend of $6 billion a year, we are growing our AFFO and our EBITDA at a CAGR that is at or above the upper end of that 3-5%. So it's important for us to make sure that we'll be...
able to maintain stable and very conservative payout ratios. We'll be at about 50% of cash flow per share and we want to stay there. We feel that with the allocation of the dividend that we came up with to both companies, we struck the right balance.
Great, really appreciate that color. Thanks and enjoy the rest of your morning. Thank you. Our next question comes from Ben Pham of BMO. Please go ahead.
Great, really appreciate that color. Thanks and enjoy the rest of your morning. Thank you. Our next question comes from Ben Pham of BMO. Please go ahead. Thanks, good morning.
Can you maybe comment as you observe, maybe since you started the divestiture program about a year ago, maybe some of the takes that you've gained price discovery on existing assets and price discovery early this week, maybe some observations from that? What are its...
changing not from initial expectations, especially with how you think about your existing assets, the arbitrage between the private and public markets and maybe even a common shift in cost of capital.
Yeah, thanks Ben. I'll make a few comments, but I'll start with the fact that we're really actually, really pleased with the valuation and the transaction we affected with GIP. It's not only about the multiple, it's about the ability of our partner to fund a pro rata portion of our growth going forward.
its alignment in long-term views on the strategic direction and importance of natural gas in a low-carbon economy. As to the multiple, I'll remind you, it is a minority interest.
is the minority interest. You look at other minority interest transactions that have been done recently in energy infrastructure, they are done at multiples below our multiple on this transaction. So we're very happy with the multiple we achieved. Look, if you've been around this game as long as I have, 35 years, valuations in public markets ebb and flow as to which are higher at which point in time.
issue any further equity because in the long run issuing more equity we have to serve those dividends and those dividends are going to grow. So we actually create more value entering into a transaction with a private sector buyer for cash and avoiding further dilution from equity issuance and then the third thing I'd say is the size of the transaction.
If we had been looking for a 10% minority interest for a billion dollars, we would have had a broader bio universe and maybe realized a different valuation. But it was really important for us this year to meet our commitment to $5 billion in cash for debt reduction as one of our three top priorities for the year. And there are really only a handful of PE firms that could transact.
and write a cheque for $5 billion Canadian and commit to 40% of a billion dollars a year of capital on a go-forward basis.
That's really right context and make me a fault. Your comments around the separation, enhancing growth opportunities.
But then I guess you got this threshold of six or seven billion dollars.
Does the separation effectively, does it enhance the pie for you or is it, you needed to do it to get to this six or seven billion? No, I think our six to seven billion would be, whether we're a single entity or we're in two separate vehicles.
more growth to our shareholders than we could as a combined company.
As I said before, the returns we've been realizing on our projects primarily in gas and power have been increasing over the last three years. We're seeing an acceleration of opportunities. Our Ontario pump storage project, you know, if the ISO supports it and brings a recommendation to the province.
But you're going to see us moving to an increased weighting on regulated assets and regulated investments. So all of those things I think make our risk return proposition pretty attractive going forward, which is why we're so excited about this transaction that we view today as a very transformational day for the company and sets the company up.
for the next 10 years on both sides. A helpful contact. Thank you. Thank you.
Our next question comes from Keith Stanley of Wolf Research. Please go ahead. Hi, good morning. I wanted to start, just take a step back high level on the spin. The rationale laid out is focused on the increasing opportunity set for growth projects.
two companies being able to better pursue that and keep the incumbent advantage, which makes sense. Can you also talk about how much of the spin is trying to get the market to value certain businesses differently or somewhat of a some of the parts value unlock story as part of the rationale or is this more about strategic move around growth?
Fundamentally, it's the latter, Keith. This is a growth story and this is a decision to spur on a consolidated basis or with two entities delivering more growth than we could as a combined entity. In my view, if
There's a clearer strategic path for each of the two entities and has its more natural shareholder base to pursue the type of growth it's pursuing. I think that's better for everyone, but we don't make our strategic decisions on the basis of multiple expansions. We make strategic decisions on the basis of fundamentals and delivering growth for our shareholders. The second part is – there are no bitter conclusions that areaddons to be met. We all believe in and through Mike helping other investors use the concept of risk system
Got it, thanks. And just to follow up on the Columbia Cell Down, can you give any more details on the proposed recapitalization if it's too soon to understand, and then just any tax impacts from that cell down, or was it pretty tax-efficient?
Yeah Keith, first of all from the tax perspective there is some leakage but we're saying is around probably 11 to 12 percent so not that significant. As it relates to the recapitalization, the way to think of it, there's two entities. There's a holding company and then there's the operating company.
And combined, we'll see again, kind of going back to our 4.75 times target, the leverage would be capped at 4.75 times as we recapitalize that business at the operating company and holding company.
And just to be clear, on a net basis there is no new debt being issued. Debt that will be issued at the operating company and that holding company just above it, those proceeds will funnel back to TCPL to reduce debt at the TCPL level by the exact amount.
regarding the announcement, posted to the Investor Relations section of our website. As you work through that material, or for any additional questions that we didn't get to today, and forgive us for that, please contact the Investor Relations team.
We thank you for your interest in TC Energy and we look forward to our next update. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.