TC Energy Corporation (NYSE:TRP) Q3 2023 Earnings Call Transcript

TC Energy Corporation (NYSE:TRP) Q3 2023 Earnings Call Transcript November 8, 2023

TC Energy Corporation beats earnings expectations. Reported EPS is $1, expectations were $0.71.

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

Gavin Wylie: Thanks very much and good morning everyone. I’d like to welcome you to TC Energy’s 2023 third quarter conference call. Joining me 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 will begin with comments on our overall operational performance. Bevin will highlight progress made to-date on our announced intention to spin-off our liquids business. And finally, Joel will discuss our financial results and outlook. A copy of the slide presentation that will accompany our remarks is available on our website under the Investors section. Following the remarks, we’ll take questions from the investment community.

[Operator Instructions] I’d like to remind you that remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information, please see the reports filed by TC Energy with Canadian Securities Regulators and with the U.S. Securities Exchange Commission. Finally, during the presentation, we’ll refer to certain non-GAAP measures that may not be comparable to similar measures provided 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.

Francois Poirier: Thanks, Gavin, and good morning everyone. I’ll start by saying our team is making exceptional progress towards our 2023 priorities. Our focus on execution is paying off. Demonstrated by our strong year-over-year increase in comparable EBITDA and with our major projects remaining on track or ahead of 2023 targets. This is setting us up extremely well for 2020’s tour. So far this year we’ve placed approximately $5 billion of assets into service, including the majority of our West Path project that went into service on November 1. Importantly, the projects placed into service so far this year have largely been on budget. On the deleveraging front, we received $5.3 billion in cash proceeds after closing the sale of a non-controlling minority equity interest in Columbia Gas and Columbia Gulf.

This puts us firmly on the path to restoring our balance sheet strength and flexibility. We also continue to evaluate an additional $3 billion of asset sales. As a result, post-2024, we’re committed to limiting our annual net capital expenditures to $6 to $7 billion, which will also support further organic deleveraging. We continue to see strong sustained demand for our services, and that’s maximizing the value of our assets through safety and operational efficiency. And as a result, we now expect our 2023 comparable EBITDA to be at the upper end of our 5% to 7% growth outlook compared to 2022. While our natural gas pipeline’s businesses do not carry any material volumetric or price risk, strong utilization rates do demonstrate the demand for our services and the criticality of our assets.

On the NGTL system, for example, we continued to see strong receipts. In fact, the system achieved its highest single-day record of 14.6 Bcf on August 6. Same theme in the U.S. LNG deliveries averaged 3.1 Bcf a year – year-to-date in 2023, about a 1.5% increase compared to last year’s third quarter. And in July, we achieved a new all-time record for deliveries to power generators of 5.2 Bcf. Additionally, on our GTN system, we achieved an all-time delivery record of 2.96 Bcf. And we’re pleased to see that the GTN Express project recently received FERC approval. This project will expand the GTN system to transport incremental contracted export facilitated by the Foothills West Path Delivery Program. We continue to make meaningful progress in Mexico.

The lateral section of VdR has been placed into commercial service, and for the last remaining portion, the south section, we expect that to be in service by the second half of 2024. In our power and energy solutions business, we achieved a significant execution milestone with Bruce Power’s Unit 6 returning a service ahead of schedule and within budget. This highlights our shared commitment with the Bruce Power team on project execution excellence. In addition, Bruce Power also achieved 94% availability in the quarter, and we continue to anticipate annual availability in the low 90% range for the units that are not down for the MCR program. For reference, in 2019, before we started the MCR program, the average availability at Bruce was 84%.

So what we’ve been able to deliver over the last several years is a 10% increase in average availability, largely due to the steady decrease in the forced loss rate and the reduction in planned outages. Following the completion of the MCR program, we expect to continue to see increases in availability. Furthermore, on our Alberta cogen fleet, we achieved approximately a 98% peak price availability during the third quarter, and that with Alberta power prices averaging $152 per megawatt hour. And on Keystone, operational reliability was close to 94% year-to-date, and Bevan will come back to that in just a few minutes. To sum up, our operational excellence, our unparalleled asset base has been delivering strong operational results and strong availability, which has translated to solid, sustainable financial results through every phase of the economic cycle.

As I mentioned earlier, we’ve sharpened our focus on project execution. After five years of construction and 55 million hours worked, we’ve now achieved the monumental milestone of mechanical completion on Coastal GasLink and we achieved this ahead of our year-end target. This means that 100% of the pipe has been welded, coated, lowered into the trenches. We’ve completed all 800 classified water crossings. We’ve hydro tested the entirety of the pipeline. And incremental to our announcement on the project last week, we’ve now finished the documentation and additional engineering analysis associated with the mechanical completion milestone. Coastal GasLink is Canada’s first pipeline to the West Coast in 70 years and once operational, it will be the first direct path for Canadian natural gas to reach global markets.

The next steps on this project are introduction of natural gas, project commissioning and the land reclamation work that has already begun across the route. As mentioned in our press release this morning, the project also remains on track with our approximately $14.5 billion cost estimate. Now turning to Southeast Gateway. Looking at progress on the onshore portion of 25 kilometers, all land has been acquired and construction at all three landfall sites is progressing on plan. In preparation for offshore work, our engineering is complete and concrete pipe coating is well underway. We are expecting the 690 kilometer offshore pipe installation to begin by the end of this year. Now we continue to see benefits from our enhanced capital allocation governance process.

And on Southeast Gateway, that means that that project remains on track to be placed into service as expected in mid-2025. I want to take a moment to recognize our Board Chair, Siim Vanaselja for his excellent leadership role during a time of significant change at TC Energy. By the 2024 Annual General meeting, Siim will have served on our Board for 10 years, and he’s been Chair for the last seven. I’m very grateful that Siim will continue to offer his knowledge and expertise as he steps down as Chair, but continues to serve as a member of the Board in a Director capacity. As part of our Board’s ongoing succession program, John Lowe has been designated as TC Energy’s next Board Chair. His significant midstream and energy experience and his role as a Board Director of TC Energy since 2015 make him ideally suited to take on this critical role.

And now I’ll pass the call over to Bevin.

Bevin Wirzba: Thanks Francois. In July, we announced the intention to spin-off our Liquids Pipelines business into a standalone investment grade entity in order to maximize the commercial potential of this highly and competitive corridor. We’ve made important progress in just three months, and I want to take a few minutes this morning to discuss some of the highlights. Today I’m thrilled to share the name of the new Liquids Pipeline Company, South Bow. South Bow symbolizes the historical roots of the company established near the Bow River in Calgary. The name acknowledges the pipeline system’s strategic corridor, which enables the company to deliver a premier resource southward to the strongest U.S. refining markets in both the Gulf Coast and the Midwest.

Last month, we also shared the news that Hal Kvisle has agreed to be appointed as the Chair of South Bow’s Board of Directors. Hal is a distinguished industry leader with extensive experience spanning a wide range of companies across the energy space. He was also TransCanada’s President and CEO from 2001 to 2010, back when Keystone came into service. He knows our liquids assets and knows this business very well. We look forward, to welcoming Hal’s leadership and guidance in this key role at South Bow. I want to remind you of some important points around the value of this spin-off will bring to shareholders. We made this announcement last quarter. We received strong support from customers. There are a few reasons for this. The assets in our system are critical to meeting customers’ needs, and we are seeing additional demand, for incremental service that reflects the competitive nature of the corridor.

We connect some of the largest and most resilient supply, demand and export markets and offer the fastest, most cost competitive pathways from the Western Canadian sedimentary basin to the Gulf Coast. We’ll be able to direct cash flow flexibly without competing, for capital in a company that’s strategically focused on maximizing the synergies in its natural gas and power businesses. Our premium value is supported by our compelling and sustainable dividend yield and low risk, highly contracted business with competitive advantages, and contract structures unlike any of our peers. Fundamental to our value proposition, is that South Bow is expected to be an investment grade entity at the time of spin. This expectation remains in the current interest rate environment.

We will look to establish the capital structure in a constructive capital markets environment. Furthermore, there is no time limit for us to affect the spin. We fully expect to have the capital structure in place prior to the spin. To the extent we have not stood up the capital structure in its entirety, we have – various tools available, including access to the bank term loan markets and utilizing hedging instruments if appropriate, to allow us flexibility to optimally, implement the long-term capital structure at South Bow. Our team is also committed to excellence in our operations. Throughout the third quarter, our system continued, to perform exceptionally well. We are seeing strong, sustained demand in the U.S. Gulf Coast for Canadian crude.

We successfully completed two open seasons on Marketlink. This system is operating well. As Francois mentioned, Keystone’s system operating reliability year-to-date, is approximately 94%. As a result, year-to-date comparable EBITDA of $1.1 billion from the liquids business was up approximately 8% versus the same time last year. As of this past week, we’ve completed the clean-up at Milepost 14 and restored natural flow to Mill Creek. We thank the local community, Washington County, EPA, Kansas Department of Health and Environment, and the Army Corps of Engineers for their support and assistance as we concluded this work. We will maintain a presence at site, to progress long-term reclamation activities and environmental monitoring. I invite you to look at our website for additional details.

With respect to inspections across Keystone, we have completed inline inspection across 60% of the entire system. The Integrity Dates program is 50% complete, and we anticipate being fully complete by early second quarter next year. No concerning circumstances have been identified, and we continue to deliver on our contracted volumes. You’ll hear more details at our upcoming Investor Day in a few weeks. Now I’ll turn it over to Joel.

Joel Hunter: Thanks Bevin. During the third quarter, we continue to deliver strong performance leading to a 7% year-over-year increase in comparable EBITDA. Primary drivers include higher flow-through costs, and increased NGTL rate-based earnings in our Canadian natural gas rate-regulated pipelines business, additional assets placed into service in our Mexico natural gas pipelines business, higher long haul contracted volumes, as well as higher volumes on the U.S. Gulf Coast section, of the Keystone Pipeline System, and the impact of a stronger U.S. dollar. As Francois mentioned, given our strong year-to-date performance, we now expect our 2023 comparable EBITDA, to be at the upper end of the 5% to 7% outlook, compared to 2022.

Comparable earnings per common share, are expected to be generally consistent with 2022. Year-to-date, we have placed approximately $5 billion of projects into service, including capacity projects in our natural gas and liquids pipeline businesses. And Bruce Power’s Unit 6 MCR program. Total capital expenditures for 2023, are now expected to be approximately $12 billion to $12.5 billion. I want to note that the estimated costs of major projects remain consistent. The increase primarily relates to our decision to bring forward 2024 capital expenditures and work into 2023. This includes accelerating the timing, of certain maintenance and growth capital expenditures, to optimize efficiencies and mitigate project execution risk, in our natural gas pipelines businesses, as well as the foreign exchange impact of a stronger U.S. dollar.

We’ve also delivered meaningful progress towards our leveraging target. We have a clear path to achieving our 4.75 times debt-to-EBITDA target by the end of 2024 and will remain there beyond 2024. On October 4, we successfully completed the 40% minority equity interest sale in our Columbia Gas and Columbia Golf systems. Cash proceeds from this transaction of $5.3 billion will be directed towards reducing our year-end 2023 debt to EBITDA metric by over 0.4 times. We’re continuing to evaluate capital rotation opportunities in the range of $3 billion. Our deleveraging is further supported by organic, comparable EBITDA growth, as we place additional assets into service. As of November 1, substantially all the West Path delivery program on our NGTL system has been placed into service.

This brings our year-to-date total to approximately $5 billion. In 2024, we expect to place approximately $7 billion of projects into service, including Coastal GasLink, GTN XPress, and the south section of the Villa de Reyes pipeline in Mexico. Looking to 2025, we expect to place $9 billion of assets into service and an average build multiple of approximately eight times. This includes our Southeast Gateway project in mid-2025, expected to contribute approximately $800 million in incremental annual comparable EBITDA, along with an additional $3 billion of assets on our U.S. Natural gas pipelines business, some of which include Gillis Access Extension, Virginia Reliability, and Wisconsin Reliability projects. Now in light of volatility in the market, I want to remind you of the stability of TC Energy’s low-risk business model.

We have a very manageable debt maturity profile and 89% of our long-term debt portfolio, is comprised of fixed-rate debt with an average maturity of 18 years and a weighted average pre-tax coupon of just over 5%. This largely insulates us from the impact of interest rate changes. Our Canadian and U.S. natural gas businesses, are also underpinned by rate regulated frameworks that further allow for the recovery of interest expense in tools. This means the cost of debt is a direct flow through, in our regulated Canadian business and is factored into U.S. rate cases. This, in part, has allowed us to increase the earned returns on our sanctioned capital projects over the last few years and maximize the spread versus our cost of capital. Based on our low risk business model, in combination with net capital expenditures of $6 billion to $7 billion annually post 2024, we expect to continue to grow our business commensurate with our 3% to 5% dividend growth rate.

This is why, despite the challenges facing the broader market, I am confident in the sustainability of our dividend through all parts of the economic cycle, which is further bolstered by one of the lowest payout ratios amongst our midstream peers. TC Energy’s Board of Directors has declared a third quarter dividend of $0.93 per common share, equivalent to $3.72 per share on an annualized basis. Our dividend will remain foundational to the enduring value proposition of TC Energy, prefer to build upon 23 consecutive years of common share dividend increases. Thank you. I’ll pass the call back to Francois.

Francois Poirier: Thanks, Joel. Before we turn it over to Q&A, I just want to reiterate our long-standing value proposition. Our recent strategic announcements are all in direct service of our four pillars. We take a long-term view by maximizing the synergies of our natural gas and power businesses. Simultaneously, we’re unlocking the full long-term potential of our liquids business through our intended spin. We’re also remaining disciplined and refocusing on our well-established conservative risk preferences. We’re restoring our balance sheet strength and we’re allocating capital thoughtfully and in a manner that balances our ability to grow the dividend while maintaining balance sheet strength and reinvesting in the business. You’ll hear a lot more about this on our upcoming Investor Day on November 28, and I hope you’ll be able to join us. With that, I’ll turn it over to the operator for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Theresa Chen of Barclays. Please go ahead.

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Q&A Session

Theresa Chen: Good morning, and thank you for taking my questions. First, I’d like to ask about the plans to manage Mexico exposure pro forma asset sales and the South Coast spin given that you already have cash flowing assets there and come mid-2025 when South East Gateway starts up and contributes EBITDA, it would likely be above that 10% exposure. How are you thinking about managing this and any comments related to asset sales specifically within that segment would be great. Thank you.

Francois Poirier: Thanks, Theresa. It’s Francois. I’ll take that one on. I’ll just reiterate, our commitment and our goal is to execute on an incremental $3 billion of divestitures and realize the cash proceeds thereof within 2024. Part of that program may include some discrete asset sales in the U.S., but in terms of entering into joint ventures as we have with GIP on our Columbia assets, we can look to our Canadian assets and our Mexico assets for those types of transactions being contemplated. Obviously, we’re going to be in conversations with investors around our Mexico projects, balancing valuations with where we are and the progress we’re making around construction. And we’ve made the commitment to reduce our exposure to a more manageable level.

And over time we’ll be giving you all a little bit more clarity and granularity around the percentage post-spin as well as a percentage of what is it EBITDA, is it net assets? Because we are looking at tools like project financing. We’ve actually raised nearly $4 billion of non-recourse debt over the course of the last year to fund about two-thirds of the Southeast Gateway project financing. So more to come there, and as I said, we’ll be looking to joint ventures in Mexico and Canada as potential tools to execute on our $3 billion divestiture program. Our goal is to reduce our exposure in Mexico as a percentage of the overall average and given the sensitivities of our conversations we’re going to – I guess leave it at that at this point.

Theresa Chen: Understood. Thank you. And on the remaining asset sales in general to execute, how are you thinking about the economics in today’s environment in light of the recent announcements by some of your competitors in the market to also put their assets up for sale and some of the recent valuations paid for similar assets within the valuations that you operate in.

Francois Poirier: Yes. If you look at some of the announced transactions, I would suggest that there’s a pretty wide range of risk profile and therefore the returns that – expected returns that buyers need to be able to realize and that translates into purchase price. What I’ll tell you is we are still in the same interest rate environment as we were a few months ago when we announced our transaction with GIP. We did make the objective of announcing a very sizable transaction at that time, I do believe that since we are proceeding with multiple transactions to achieve the balance of the 3 billion, that smaller bundles will garner more competitive tension. And so despite the fact that we are in a similar interest rate environment, smaller assets, more competitive tension, and then you have to account for the fact that the assets that we would make available either for partial or full interests are at very low risk, highly contracted, no commodity volumetric or price risk.

And that will be factored into what – how people value the assets. But again, as I said, we’re still in the same interest rate environment as we were a few months ago. And so, I think we have fairly conservative expectations in our plan.

Theresa Chen: Thank you.

Francois Poirier: Thank you, Theresa.

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

Praneeth Satish: Hi, good morning. With capital here, CapEx being constrained in the $6 billion to $7 billion range in ’24 and beyond. I’d imagine that you’re becoming more selective on what projects you bring to FID and maybe turning down some of the lower return projects. So can you maybe help us understand whether there’s been a shift here in terms of your corporate return target, which has historically been in the 7% to 9% range and whether that’s trending higher?

Francois Poirier: Thanks for that question, Praneeth. The answer is we have definitely seen an upward trend in the IRRs for projects we’ve sanctioned. Clearly as we’ll be high grading, we have an opportunity set that is well in excess of the $6 billion to $7 billion a year. We are resolute and living within that number. So that allows us, as you said, to be a bit more selective. And one of the important criteria is going to be the risk-adjusted returns. If you look back to 2019 or thereabouts, the projects we sanctioned in that year were in that 7% to 8% range. And that has gradually crept up over time to the point that in 2022 we saw sanctioning projects in that 9% to 10% range. And in the environment we’re in today, we do continue to see sanctioning projects in that range.

That will be adjusted up or down depending on the proportion of the portfolio that goes, for example, in Canada Gas where the returns are a bit lower versus in something like Bruce Power where the returns are higher. So on an average basis, we have seen those returns increase and we’ve been able to, in our conversations commercially with our customers to sustain levels as we’ve seen over the last year or so.

Praneeth Satish: That’s helpful. And then switching gears, I wanted to ask about the next rate case for Columbia Gas in 2025. As we calculated, the ROE on Columbia Gas was only 10% based on the 2022 filings. So it seems like there’s some headroom there to maybe boost the revenue in 2025. So I guess how should we think about the magnitude of the next rate case on Columbia Gas versus the last rate case where you got, I think, a $200 million step up?

Francois Poirier: Yes, I’ll ask Tina to cover that one.

Tina Faraca: Good morning. We have a moratorium currently on new rates going into effect prior to April 2025. And you may recall, we also have a comeback for new rates effective April 1, 2026. So, we’ll be working within those bounds, for filing of our next rate case. And obviously, we’ll be striving for a balance of recovering our capital, and earning a fair return and maintaining competitive rates with our customers.