TC Energy Corporation (NYSE:TRP) Q1 2024 Earnings Call Transcript

TC Energy Corporation (NYSE:TRP) Q1 2024 Earnings Call Transcript May 3, 2024

TC Energy Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the TC Energy First Quarter 2024 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. [Operator Instructions] I would now like to turn the conference over to Gavin Wylie, Vice President, Investor Relations. Please go ahead.

Gavin Wylie: Thanks very much, and good morning. I’d like to welcome you to TC Energy’s 2024 first 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 senior leadership team. Francois and Joel will begin today with some comments on our financial results and operational highlights. A copy of the slide presentation that will accompany their remarks is available on our website under the Investors section. Following their remarks, we’ll take questions from the investment community. We ask that you limit yourself to two questions, and if you’re a member of the media, please contact our media team.

Before Francois begins, I’d like to remind you that today’s remarks 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 the Canadian Securities Regulators and with the US Securities Exchange Commission. 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 turn the call over to Francois.

Francois Poirier: Thanks, Gavin, and good morning, everyone. We set out with three clearly defined priorities for 2024 that’s focused on maximizing the value of our assets, project execution and enhancing our balance sheet strength and I’m please to report that we continue to deliver on all of these commitments. We saw another quarter of record earnings, with comparable EBITDA up 11% compared to the first quarter of last year. With a relentless focus on safety and operational excellence, the company saw high availability and utilization across our asset base, including multiple first quarter all-time records. Our secured capital program continues to progress on plan, and we are tracking the cost and schedule with our major projects, Southeast Gateway and the Bruce Power Unit 3 MCR.

In March of 2024, the U.S. $300 million Gillis Access project was placed into service with a bill multiple of approximately 6 times. This greenfield pipeline system connects gas production source from the Gillis hub to downstream markets in southeast Louisiana. Gillis, along with projects on our NGTL system mean that we’ve placed approximately $1 billion of projects into service so far this year, largely on budget. Additionally, $200 million of maintenance capital was placed into service over the quarter. We continue to execute against our $3 billion asset divestiture program with the recent sale of PNGTS for expected pre-tax proceeds of approximately Canadian $1.1 billion, which includes the assumption by the purchaser of U.S. $250 million of senior notes outstanding at PNGTS.

We also continue to progress the proposed spinoff of South Bow. As you saw a couple of weeks ago, we released our management information circular and the shareholder vote is scheduled for June 4th. Finally, we’re pleased to announce Sean O’Donnell as our Incoming Executive Vice President and Chief Financial Officer effective May 15th following Joel’s decision to pursue another opportunity. We’re grateful for Joel’s 26 years with TC Energy and the incredible impact he has made on the company. And I’ll reserve a few more thank you’s for Joel in my closing remarks. As for Sean, he joined TC Energy six months ago as part of our succession planning and brings 30 years of invaluable energy industry experience, including past roles as CFO. This, paired with his tenure in corporate finance and private equity, aligns directly with our clear set of strategic priorities.

In Mexico, we continue to achieve milestones in the construction of Southeast Gateway. The total offshore pipe installation is now over 70% complete. The offshore portion represents about 670 kilometers of the total 715 kilometers of pipeline length. Onshore, all critical permits for construction have been obtained and we have completed construction on all three landfall sites. Importantly, the project continues to track schedule and expected cost of U.S. $4.5 billion. Continued high utilizations across our integrated natural gas system in the first quarter reflect continued demand growth for natural gas in the markets we serve. Total NGTL system deliveries in Canada averaged 15.3 Bcf a day, with a new daily record high of 17.3 Bcf achieved in January.

In the U.S., daily average flows of 30 Bcf were up 5% compared to the first quarter of last year. Once again, various pipelines achieved record throughput volumes, including in our Columbia Gas, Columbia Gulf, and Great Lakes systems. Natural gas demand growth is continuing, empowering the U.S. as electricity demand grows. 2023 was a record year for power burn across the U.S. and that strength is continuing into 2024. Mirroring that, our assets continue to support the record demand and we set a first quarter record for deliveries to power generators of 2.9 Bcf per day, up 11% versus the first quarter of 2023. New growth drivers like data centers will help continue that positive growth momentum. In Mexico, average daily throughput was nearly 3.0 Bcf per day, up 13% versus the first quarter of last year.

In our power business, our power assets were available to deliver power when it was needed most resulting in an increase to comparable EBITDA of 14% versus the first quarter of last year. As you all know, Bruce Power produces 30% of the electricity in Ontario. And Bruce met continued demand in the first quarter by providing and delivering availability of 92%. We continue to expect average availability in the low 90s percent range for 2024, which is a significant and gradual improvement over the last decade or so. The Bruce Power major component replacement program to extend the asset life for the next 40 years continues to progress on plan. Unit 3 is tracking, cost and schedule, and Unit 4 received the ISOs approval to begin in early 2025. Our Alberta cogeneration fleet also delivered strong performance and reliability in the quarter with overall portfolio availability of 98.7%.

There continues to be strong demand for our transportation service in our liquids business, and Keystone is meeting this demand, achieving 96% operational reliability in the first quarter. This operational strength supported a 28% increase in comparable EBITDA as compared to the first quarter of last year. Turning to South Bow and the proposed spin-off of the liquids pipeline business, Bevin and the South Bow team continue to make meaningful progress towards the South Bow business, transitioning to a standalone public company. We are confident we will have a successful launch of an independent South Bow in late Q3 or Q4 of this year. We do not anticipate any material dis-synergies related to South Bow as the liquids business was operated mostly as a standalone business within the broader TC Energy and we intend to offset any potential dis-synergies in the year in which they would have otherwise been incurred.

Further, the team plans to develop the Blackrod Connection project. This project is expected to underwrite a meaningful portion of South Bow’s near-term comparable EBITDA growth targets. We issued our Management Information Circular on April 16, and you may have seen that leading proxy advisor, ISS, has come out with a supportive recommendation for the transaction. As described in the circular, favorable tax rulings have now been received in both Canada and the U.S. Our 2024 annual and special meeting will be held on June 4. I hope you take the time to look at the information in the circular and on our website to support your voting decision. And now, I’ll turn the call over to Joel.

Joel Hunter: Thanks, Francois, and good morning. Exceptional operational performance during the first three months of the year delivered 11% year-over-year growth in comparable EBITDA. As Francois mentioned, we saw strong year-over-year increases across all of our business units, including a 14% increase in power and energy solutions, driven by increased availability, and in our liquids business, a 28% increase in comparable EBITDA driven by higher utilizations on both the Keystone and Marketlink systems. We also delivered a 4% increase in quarterly comparable earnings relative to Q1 of last year. This largely resulted from increased comparable EBITDA, partially offset by higher net income attributable to non-controlling interests following the Columbia sale in 2023, and higher interest expense primarily due to long-term debt issuances, net of maturities, partially offset by reduced levels of short-term borrowings and higher capitalized interest.

We reaffirm our outlook for 2024, which does not take into consideration the proposed liquids pipeline spinoff. As a reminder, in 2024, we expect comparable EBITDA to be between $11.2 billion and $11.5 billion. This growth is primarily driven by an increase in the NGTL system, the full year impact of projects placed into service last year, and approximately $7 billion of new projects expected to be placed into service this year. As a reminder, the $7 billion includes Coastal GasLink, which is expected to be placed into commercial in-service later this year. At the end of April, we placed approximately $1 billion of projects into service, including Gillis Access and the Columbia Gas Virginia Electrification project. Comparable earnings per common share is expected to be lower than 2023, largely due to higher net income attributable to non-controlling interests related to the Columbia sale.

Total net capital expenditures for this year are expected to be approximately $8 billion to $8.5 billion. We continue to actively manage our fixed floating interest rate mix, which helps to insulate us from rising rates. Approximately 92% of our debt is fixed with an average term to maturity of approximately 17 years and a pre-tax weighted average coupon of approximately 5.3%. We are making progress towards our asset divestiture program with the announced sale of PNGTS, which will put us over a third of the way towards our $3 billion target for 2024. This transaction implies a valuation multiple of approximately 11 times 2023 comparable EBITDA. We remain committed to achieving our 4.75 times debt to EBITDA target in 2024, the upper limit to which we will manage to and expect to announce incremental asset sales in the coming months.

Related to the Liquids spin-off, shareholders of TC Energy as of the distribution record date established for the spin-off will receive one new TC common share and 0.2 South Bow common shares in exchange for each TC common share. As highlighted on this slide, dividends are expected to remain whole following the Liquids spin-off. In addition, we expect to have the capital structure in place prior to the spin-off, subject to a successful shareholder vote on June 4. Anticipated proceeds from the senior and subordinated debt issued at South Bow were used to repay approximately $7.9 billion of TC Energy debt and help meet future funding requirements. Our longstanding value proposition sets the foundation for continued operational and financial strength, insulating us well from volatility we see in the broader market.

Our stable, low-risk business model and highly utilized asset portfolio provide stability in our comparable EBITDA and cash flows. TC Energy’s Board of Directors has declared a second quarter 2024 dividend of $0.96 common share, which is equivalent to $3.84 per share on an annual basis. As we look ahead, both TC Energy and South Bow are expected to maximize respective value propositions in a manner that will benefit shareholders for years to come. I’ve had a great career here at TC Energy. As you know, I’m moving on to a new opportunity, but I am truly grateful for my time with the company. TC Energy has been a great place to work, and I appreciate everything I’ve been able to accomplish during my time here. As Francois mentioned, effective May 15, Sean O’Donnell will step into the role of Executive Vice-President and Chief Financial Officer, and I’ll remain part of the team as an Executive Advisor until my last day on July 1 to support a seamless transition.

TC Energy is in good hands with Sean, who has tremendous amount of experience in the energy industry and expertise across North America. Now, with that, I’ll pass the call over to Sean for a few words.

Sean O’Donnell: Thanks, Joel, and good morning, everyone. As I’ve mentioned to many of our stakeholders over the past several weeks, I am very excited for the opportunity to succeed you as the next CFO of TC. For our shareholders I want to highlight that I, like Joel, will be focused on the continued successful execution of the 2024 strategic priorities that Francois detailed earlier. I look forward to connecting in person with as many shareholders as possible over the coming months. But for now, I’ll turn the call back over to Francois for his closing remarks.

Francois Poirier: Thanks, Sean. I’m happy to share that we’ve once again delivered record results, supported by our relentless focus on safety and operational excellence. Our priorities for this year are very clear. First, continue to maximizing the value of our assets through safety and operational excellence. Second, remaining focused on project execution, delivering our projects on time and on budget, including Southeast Gateway and Bruce Powers Unit 3 MCR. And third, we will continue on our path to achieving and sustaining our 4.75 debt to EBITDA upper limit by the end of the year by advancing our divestiture program and continuing to streamline our business through efficiency efforts. Before I turn it over to the operator, I would like to take a moment to thank Joel for his contributions to TC Energy over his 26 years with the company.

Joel, you’ve been a valued member of the TC Energy team. I know you share our passion and commitment to the strategic path we’re on and I look forward to working with you until mid-year. Also, on behalf of the entire team, we wish you the best in your next opportunity. I’ll now turn the call back to the operator for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ben Pham of BMO. Please go ahead.

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Q&A Session

Ben Pham: Hi, thanks. Good Morning. Let me start off on asset sales. You mentioned potential additional asset sales in the coming months. Can you talk about then just really anything has changed with respect to the buyer interest? Does the federal budget change perhaps some of the discussions on the NGTL and the federal loan guarantee for First Nations? And then does a CFE purchase that you’ve disclosed, is that going to be included in that $3 billion target?

Francois Poirier: Hi, Ben. It’s Francois. Thanks very much for the question. Things have been progressing very well on all fronts on our divestiture program. I can report that, yes, the CFE’s purchase of an equity interest in TGNH is included in that number. I can report that the CFE has received all approvals for its investment. They have secured the funds and we are in the final throes of negotiating documentation, and we can expect to receive proceeds in exchange for an approximately 15% interest perhaps as early as next week. I will remind everyone that this transaction was negotiated at the outset of the Southeast Gateway sanctioning and consideration provided by CFE includes not only cash, but also assets in kind, as well as them agreeing to take on certain risks disproportionately around land acquisition and permitting, as well as a disproportionate percentage of cost overruns by virtue of them taking on 50% of those with only a minority interest in TGNH.

So, we’re very optimistic about that occurring as early as next week. On other asset sales, we’re focusing on Canada. In the nearer term, the budget does not have any impact on our ability to proceed, nor have we seen any impact on prospective valuations. We have a couple of processes that are reasonably well-advanced in Canada and we could expect to announce additional divestitures in the second quarter if progress continues on the positive path it is on. Beyond that, we continue to focus on other divestiture opportunities to progress our divestiture plans and deleveraging plans, whether it’s in Mexico, where we are in conversations with a number of parties. We’re also exploring a [indiscernible] as a potential alternative, as well as a number of other assets — smaller assets in our portfolio.

So, we’re very confident in the $3 billion number and we look forward to announcing more positive progress over the coming months.

Ben Pham: Okay. Thank you, Francois. I’ll get back in the queue.

Francois Poirier: You bet.

Operator: Our next question comes from Rob Hope of Scotiabank. Please go ahead.

Rob Hope: Good morning. I want to ask a question on increasing power demand driving, increasing gas demand, which you noted in your prepared remarks. How are you seeing this kind of manifest itself across your system and what opportunities does it provide in both your gas and pipeline, or gas pipeline, and power business? And, I guess, as a kind of an offset there would be — could we see renewed interest in additional power investments on a longer-term basis? And kind of what does this mean for the Ontario storage project?

Stan Chapman: Good morning, Rob. This is Stan. I will start and then pass it over to Annesley. I want to make sure that you all have a proper appreciation for the really strong growth story that’s going on right now. Due to the operational excellence that our teams have demonstrated, we’re seeing record deliveries across all of our jurisdictions. In Canada, flows on the NGTL system are up 5% quarter-over-quarter, including strong deliveries not only to power generators, but also within the oil sands. In Mexico, our flows are up 13% quarter-over-quarter, led by higher volumes on both our Sur de Texas system and the Topolobampo system. And similarly, across the U.S., our throughput was up 5% quarter-over-quarter, with new record deliveries to power generators leading the way.

Our power generation deliveries were up over 11% quarter-over-quarter. Matter of fact, over the past six months, six of our 13 pipelines in the U.S. set new record peak day deliveries, again, just showing the demand for the assets that we have, and we’re well-positioned to continue to capture that growth with projects like our Heartland Project on the ANR system that we announced last quarter. Somebody’s probably going to ask you about data centers in particular, so it’s probably a good time to bring that up right now. We do see a meaningful load in growth opportunity and increased demand in coming years due to data centers. When we look and do the math, we think somewhere between 6 Bcf to 8 Bcf of increased gas demand between now and 2030 is more than reasonable.

But there are also higher forecasts out there that exceed 10 Bcf a day. Reliability requirements associated with data centers are also driving increased depreciation for the role that natural gas is going to play in supporting those loads as well. We believe that much of the data center load is likely to materialize behind LDCs, as opposed to be directly connected to our mainline pipes. And given that, and given our best-in-class pipeline footprint, which happens to connect to eight of the 10 largest LDCs across the U.S., it’s just a reinforcement of our strategy to increase connectivity with LDCs via both permittable, constructable, and quarter expansions with long-term take or pay contracts, particularly in data center hungry areas like Virginia and Wisconsin.

So, if you notice, the disproportionate amount of the projects that we announced over the past couple of quarters are in those two states, and that’s why.

Annesley Wallace: Thanks, Stan. So, I’ll speak to the power part of your question, Rob. Our power and energy solution strategy really remains for the near term to focus our investment in nuclear and pumped hydro. We have continued great opportunities through our investment in Bruce Power to deploy capital dollars. Nuclear is base load generation that will continue to support the grid. And then our Ontario Pump Storage project, which I think you spoke to specifically, we continue to have really great support from municipalities and local communities. We received just in the last couple of weeks another City Municipal Council vote in support of the project. We also feel really strongly along with our partners [indiscernible] Nation that the project will offer Ontario really good socioeconomic benefits, $6.8 billion to the economy in present value terms over the life of the project, 90% of which will benefit Ontario directly and much of that is in rural communities.

That said, as we continue to progress the project, we are very mindful that we will not continue to invest capital dollars without having a cost recovery and commercial framework in place. We’re very optimistic. We continue to work with the province. But that is sort of what our near-term focus is, is securing that agreement.

Rob Hope: I appreciate that. And then maybe as a follow-up and more broadly, through the years we’ve seen TC Energy kind of shift capital between its power and pipeline business. Recognized right now on the power side, the focus is on the pump storage as well as nuclear. But in a world where North America short power in a number of years, if gas power generation can give you good risk adjusted returns and good contractual backlogs, could we see you reinvigorate your development pipeline on that side of the business?

Annesley Wallace: So, right now, we really are focused in the near term on nuclear and pumped hydro. We’re committed to adhering to our $6 billion $7 billion capital spend commitment. It’s not to say that we wouldn’t opportunistically look at those opportunities, given exactly what you’ve described relative to power demand, but it would have to fit within that $6 billion to $7 billion limit.

Francois Poirier: And what I would add, Rob, it’s Francois, is that, we’ve had a couple of assets achieve or reach contract expiry, and we’ve been able to renew and extend those contracts which, obviously, protects the terminal value of our businesses. The one example I’d point you to is in New Brunswick, our co-gen, we were able to extend that contract and we’ve got other assets such as [indiscernible] where we are in very positive conversations with potential customers about extending and entering into new contracts just to continue to perpetuate those cash flows. So the dynamic around natural gas demand and power demand is very positive. That’s exactly at the intersection of the strategy for the new TC. We are a gas and power company focusing on growing our gas franchises in all three countries, as well as growing our investment in primarily emission-less power going forward, but also extending the life of our existing natural gas power generation assets.

Rob Hope: All right, Thank you. And Joel, all the best in the new role. And Sean, congratulations as well.

Joel Hunter: Thanks, Rob.

Operator: Thank you. Our next question comes from Jeremy Tonet of JPMorgan. Please go ahead.

Jeremy Tonet: Hi, good morning.

Francois Poirier: Good morning, Jeremy.

Jeremy Tonet: Joel, I want to wish you best wishes going forward as well. Sean, congratulations. And just wanted to, I guess, start off, it seems like the business continues to kind of perform pretty well and exceeding the expectations again here. And just wondering, I guess, how you see things, I guess, performing versus Analyst Day expectations at that point and how you think things unfold going forward.

Francois Poirier: Appreciate the question, Jeremy, and the acknowledgement of the strong performance we’ve delivered. This is why we have a very short set of priorities in 2024 as we did in 2023, and it begins and ends with strong execution. We are laser focused on improving the return on invested capital on our existing assets and then delivering on our new projects on time and on budget and essentially delivering the business cases that we brought forward to our Board of Directors and we are performing exactly on that plan. We reaffirmed our guidance for 2024 prior to giving effect to the spin transaction because the timing could move around plus or minus a month. At $11.2 billion to $11.5 billion in EBITDA, we remain confident and reaffirm that guidance.

And there are a lot of things that contribute to where you end up in that band or outside of that band. Asset availability is a critical driver. It’s a great opportunity to create upside with no capital. You’ve seen through laser focus of our operating groups a huge focus on increasing the availability of our assets. We’ve talked about that in our prepared remarks in a fair amount of detail. We see that as low-hanging fruit to continue to perform or even beat our expectations. For now, we’re going to under-promise and over-deliver and reiterate our guidance as is for the remainder of the year.

Jeremy Tonet: Got it. Understood. Thank you for that. And there seems to be some debate in the marketplace with regards to credit rating agencies and if S&P were to downgrade TRP, just wondering if you could walk us through what type of impact that would have on the company hybrids, et cetera.

Francois Poirier: I’ll provide a couple of overall comments and then pass it on to Sean who as our SVP of Capital Markets and Planning has been managing the dialogue with the rating agencies. And all I will say first off is that, we are performing exactly to the plan. We provided all rating agencies in our review last summer in advance of the announced intention to spin our business and we continue to execute against that plan. But over to you, Sean.

Sean O’Donnell: Yes, thanks, Francois. Jeremy, good to be connected. I just want to reiterate as a new voice on the phone, the commitment to these deleveraging plans remain exactly intact. I’m picking up where Joel left off. And as it relates to what the agencies are doing back to Francois’s comment, we engage with them last year significantly across their advisory service in developing these plan. They know very well all of the moving parts and we remain in regular contact with each of the agencies quarterly. We’ve been on the phone all this week and as interim updates whenever they ask for it for each of our kind of ongoing initiatives. So while I don’t believe any company can or should predict what any one agency may or may not do.

Your specific question about a particular notch downgrade, we’ve seen some of our peers get downgraded in the last couple of weeks, and the bond market didn’t move, but for a basis point. No market reaction whatsoever. And I think you have such disparate kind of views across the agencies, investors are just taking kind of their own point of view on it. And as it relates to what would be the pricing impact across our complex. The JSNs are pretty far out, right? We’ve got a call date, but our maturity stack on the JSN doesn’t really arrive until 2027. So we’ve got a lot of time. And importantly, our deleveraging plan that sits with all the agencies shows this 4.75 very stable for the long term. So we feel really good about it and virtually no impact should anything like that happen.

Jeremy Tonet: Got it. That’s very helpful. Thank you for that.

Operator: Our next question comes from Linda Ezergailis of TD Cowen. Please go ahead.

Linda Ezergailis: Thank you. I have a two-pronged question. Your Alberta natural gas storage business appears to have outperformed significantly in the quarter. What — just help us understand, maybe a breakdown between that and your lower business development cost to just get a sense of the magnitude of the outperformance? And is there something onetime in nature or can there be some new emerging opportunities given some of the shifts in market dynamics?

Annesley Wallace: Hi Linda, it’s Annesley. Thanks for the question. So the outperformance in the gas storage business in Q1 was what drove the results there. The impact of the business development costs was much less significant and the operational outperformance was really a result of us being able to capitalize on the severe weather event that happened in January. So the storage business benefits from the price volatility in the market and we were able to deliver those results. It isn’t something that you would expect to see quarter-over-quarter, because it was related to the severe weather event, but we have demonstrated an ability to take advantage of those types of events in the past and to the extent they were to happen in the future, we would expect the same thing.

Linda Ezergailis: Thank you, Annesley. Just as a follow-up, recognizing that this might be somewhat opportunistic and provide a valuable service during some extreme times for the industry. How are you seeing the economics potentially improving for natural gas storage? Is there any contemplation of brownfield or potentially greenfield storage anywhere in your network? And can you comment on how that might become an increasing proportion of your natural gas related infrastructure opportunities? Or maybe this is also a question for Stan. I don’t know.

Annesley Wallace: Yes, I can start and then I’ll pass it over to Stan. I think with respect to the unregulated gas storage business that we have in Canada, our focus is really just to continue to maximize the value of the exceptional assets that we have as part of that business. But, Stan, maybe you want to comment further.

Stan Chapman: Good morning, Linda. As you know, we’re one of the largest storage owner operators in North America and do see a lot of value in storage going forward. In the aggregate, we operate around 650 Bcf of capacity with about 530 Bcf of that here in the US. With respect to our storage position in the US, high demand for it continues. We’re in our eighth consecutive year of having 100% of our storage capacity fully contracted for. Our storage is heavily located in our market area, and over 80% of the storage is subscribed by our LDC customers who rely on it as a source of their peak day needs. Maybe a bit in contrast, much of the discussion going on today with respect to new storage is pertaining to locales in the Gulf Coast in response to demand volatility around LNG exports.

And there’s meaningful differences between those types of merchant storage activities versus our more integrated storage approach, with our storage being integrated with our LDC customers that come with long-term contracts that are take or pay in nature and have synergies back to the pipeline. So from my perspective when I look at the opportunities going forward, I don’t see us chasing these merchant opportunities that do not have synergies or are not integrated with our assets. But I do see us building more storage that complements our best-in-class footprint through either enhancements and drilling new wells to our existing storage footprint, or in some cases, constructing new storage or even LNG peaking facilities as we have operated historically in the eastern part of our system.

Linda Ezergailis: Thank you.

Operator: Our next question comes from Praneeth Satish of Wells Fargo. Please go ahead.

Praneeth Satish: Thanks. Good morning. If I could switch to South Bow. So you talked about an initial leverage ratio there of 5 times. Has anything changed with respect to your thinking of the capital structure there in light of the higher interest rate environment? And then secondly, can you comment on any discussions? You mentioned that you’re talking to the rating agencies frequently. Any discussions with them as it relates to the creditworthiness of South Bow and what leverage profile would be consistent with investment grade credit rating?

Bevin Wirzba: Excuse me, sorry Praneeth, it’s Bevin here. So first off, I’ll address your last question first I guess is, we just recently went back to the credit agencies here just a few weeks ago with my CFO, Van Dafoe, outlining the update of our plan you’ve seen the outperformance this past quarter of the business as well as bringing forward the Blackrod project, which is credit accretive and so very solid ground with respect to our leverage profile of South Bow with the agencies coming out, being investment grade, a commitment that we made in the information circular that went out. With respect to our capital allocation priorities and your comment around the interest rates, our capital allocation priorities first are deleveraging, the way we can — because we believe that deleveraging is accretive to the equity investor, the way we can achieve that on an accelerated basis compared to what we highlighted at Investor Day is allocating capital to Blackrod.

That project is a very short cycle project. It will be on in early 2026. Cash flows can be created off that asset at the low end of our EBITDA build multiple range at the 6 times level. That allows us to really accelerate our de-levering in the face of that interest rate environment that you point out. Our second priority — in capital allocation is organic growth in that build multiple range. With Blackrod we achieve just about 60% of our EBITDA growth CAGR that we highlighted at Investor Day, so that’s strong. And then with discretionary capital, we want to look at the bottom, want to have the opportunity to do share buybacks or over the long term, increase the dividend. And as you may have pointed out, starting with deleveraging, deleveraging is critical given the interest rate environment, but also getting our payout ratios closer in class with our peers is another priority.

Joel Hunter: Praneeth, it’s Joel here. I’ll just add on a few comments here. We’ve been working closely with Bevin’s team as well. With the capital structure, it will be across the term spectrum anywhere from three years out to 30 plus years, including junior subordinated notes that will comprise about $1.5 billion of the capital structure. So nothing has changed from where we were last summer. And more importantly in the interest rates, we looked at where we’re at today relative to where we were last summer. Actually the rates are in slightly. So again, despite the rise in rates over the last three or four months on an all-in basis, they still remain very favorable to where we were when we first budgeted for this last summer.

Praneeth Satish: Got it. That’s helpful. I’m going to go back to the AI theme, because it’s an interesting one. So there’s only, as you know, two pipelines that flow right through the heart of Data Center Valley in Northern Virginia. Columbia is one of them. I mean, I know you touched on it, but can you talk about any discussions you’ve had with utilities that are coming to you requesting or anticipating more gas in preparation for more load growth. And then if so, how easy do you think it’ll be to accommodate this additional demand in terms of expanding your system? Let’s say you pick up 1 Bcf to 2 Bcf per day of that plus 6 Bcf to 7 Bcf of incremental gas demand that you quoted. How much can you handle with compression versus new build?

Stan Chapman: It’s Stan, I appreciate the question. And again, just reiterate, the overall opportunity is probably somewhere around 6 Bcf a day by 2030. When you look at places like Virginia in particular, we do have one data center that we are already serving, that is actually tied into our mainline facilities. But again, I think that that’s a bit of an anomaly [Technical Difficulty] data center growth, either directly contracting with power generation loads or behind the LDC. So our strategy is going to be continue to increase our connectivity with the LDC loads. If you look at some of the annual plans that the LDCs are filing, you’re seeing that they’re representing that strong growth going forward. In terms of assets that it’ll take, it’s probably going to take more than compression.

It’s going to be a combination of pipe and compression and back from a liquid supply source. So we continue to be bullish on Appalachian production. As we said in the past, that production is constrained only by takeaway path. And we think that when we look at our systems and the path that we can deliver from [TECO Pool] (ph) over to these data centers in places like Virginia in particular uniquely positions us amongst our peers.

Praneeth Satish: Got it. Thank you.

Operator: Our next question comes from Theresa Chen of Barclays. Please go ahead.

Theresa Chen: Good morning. Thank you for taking my questions. Stan, I wanted to follow up on this theme and just go back to that 6 Bcf number that you highlighted earlier. How did you come to that number? What are the assumptions driving that as it relates to your system? And In terms of EBITDA, as a follow-up to Praneeth’s question, what kind of CapEx should we think about as this evolves?

Stan Chapman: Yes. With respect to the 6 Bcf a day number, again, I look at that as not anything that’s proprietary to us, but a kind of a midpoint of the various analyst summaries that were done by parties like WoodMAC and EIA and others. And again, we’re seeing estimates as high as 10 Bcf, which I think are a little bit aggressive, given the fact that there’s likely to be some supply chain challenges with associated build-out. It’s going to take a little bit longer. Don’t have specifics for you with respect to capital investments. Again, I think this is going to play out over the next several years through the end of the decade. I can tell you that we are in discussions with various entities to get these types of loads attached to our system, but it’s going to play out.

Francois Poirier: What I’d add to that, Theresa, it’s Francois, is while we remain very focused on living within our means and the lower end of that $6 billion to $7 billion range. What this means is that, after giving effect to our maintenance capital of roughly $2 billion a year, and we’ve got about $1 billion a year committed to Bruce, we’ve got $3 billion a year, approximately, of discretionary opportunities to deploy capital. And that long-term trend presents us with a very high degree of confidence of being able to attract very high return, attractive investment opportunities, and continue to be able to deliver a very healthy spread between earned returns on projects and our cost of capital.