TC Energy Corporation (NYSE:TRP) Q4 2023 Earnings Call Transcript

TC Energy Corporation (NYSE:TRP) Q4 2023 Earnings Call Transcript February 16, 2024

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Operator: Thank you for standing by. This is the conference operator. Welcome to the TC Energy Fourth 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 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 2023 fourth 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 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. At the beginning of 2023, we set out to deliver on three clearly defined priorities that focused on maximizing the value of our assets, project execution and enhancing balance sheet strength and I’m pleased to report that we delivered on all three of those commitments. Our focus on safety and operational excellence resulted in high availability and several utilization records across our systems that contributed to 2023 comparable EBITDA being 11% higher compared to 2022, another record year for operational and financial results. We also announced our intention to spin off our liquids pipelines business to create two standalone investment grade companies with greater flexibility to implement distinct strategies to unlock their full potential and deliver incremental long-term shareholder value.

Our focus on project execution resulted in placing approximately $5.3 billion of projects into service on budget. And our major projects, including CGL and Southeast Gateway, remained on track or ahead of our 2023 targets. We committed to enhance our balance sheet strength through capital rotation and successfully closed the sale of a non-controlling interest in our Columbia pipelines with cash proceeds totaling $5.3 billion. And that reduced our 2023 debt to EBITDA leverage metric by over 0.4 times, a major step towards reaching our 2024 year-end objective of 4.75 times debt to EBITDA. And with this positive momentum, building into 2024, we have increased our dividend for the 24th consecutive year and reaffirmed 2024 comparable EBITDA outlook to be between $11.2 billion and $11.5 billion.

Now, after five years of construction and 55 million hours worked, we achieved the monumental milestone of mechanical completion on Coastal GasLink. This was one of the most technically challenging pipelines ever built in Canada, and our team applied project execution and safety excellence to deliver this project ahead of our year-end target. Following mechanical completion, we completed the required commissioning process safely in 2023, and we are now ready to deliver natural gas to LNG Canada’s facility as soon as they are ready to receive it. Reflecting the team’s monumental efforts to achieve these milestones, as the project developer, TC Energy earned a $200 million incentive payment that was settled through a cash distribution earlier this week.

Post-construction and reclamation activities will continue throughout 2024, with the project remaining on track with its cost estimate of approximately $14.5 billion. The success of this project is not only important for TC Energy and for our customer LNG Canada. It’s a nation-building project that will provide Canada’s first direct path for sustainably produced Canadian natural gas to reach global LNG markets. In Mexico, we are making meaningful progress on our Southeast Gateway marine pipeline. We reached a milestone in the fourth quarter when we began offshore pipe installation for the project. We’ve now completed 100% of the concrete weight coating on all of the offshore pipe, and the remainder of the offshore pipe installation will continue throughout this year.

And with all critical permits for construction obtained, the onshore construction at all landfall sites continues to progress on plan. Importantly, the project continues to track schedule and expected cost of $4.5 billion as we continue to see benefits from sanctioning this project under our enhanced capital allocation governance process that included a Class 3 estimate prior to our final investment decision. Now, while our utility-like assets do not carry any material of volumetric or commodity price risk, continued high utilizations throughout the fourth quarter continue to reflect volume growth and the incremental demand for our services that underpins our future investments. Within our integrated natural gas business, total NGTL system deliveries in Canada averaged 14.5 Bcf a day, while our investment base grew by 9% year-over-year.

In the US, various pipelines achieved record throughput volumes, including our GTN system, which achieved an all-time delivery record of 3.1 Bcf in November. And our Mexico pipeline’s daily throughput was also higher, averaging 2.7 Bcf per day, which is up 30% compared with the fourth quarter of 2022 levels. In our Power and Energy Solutions business, our focus on operational excellence centers around our assets being available to deliver power when it was needed most. And our Alberta cogen power fleet achieved 99% availability in the fourth quarter. And Bruce Power also had strong performance and averaged a 92% availability throughout 2023, which is well above our historical averages. Bruce Power’s Unit 6 returned to commercial operations in 2023 following its major component replacement outage, ahead of schedule and within budget.

Bruce also submitted its final basis of estimate for the Unit 4 MCR with the ISO in the fourth quarter and we have now received the ISO’s approval last week. Unit 4 will be the third of six units in the Bruce MCR program where we are extending its asset life for the next 40 years. This exceptional emission-less asset produces 30% of the electricity in Ontario. On South Bow, Bevin and team continue to make progress on the proposed spin-off of our liquids pipelines business into a standalone investment grade entity. Van Dafoe has been named as incoming Senior VP and CFO. With over 30 years of experience in the energy industry, including being the CFO of a public company for eight years, Van will be instrumental in leading South Bow’s financial and strategic affairs.

Additionally, Lori Muratta was named as incoming senior VP and General Counsel. Lori will oversee South Bow’s legal, compliance, and regulatory activities, bringing over 20 years of experience in the energy industry and 30 years overall practicing law. For next steps, we expect our proxy circular will be filed in the first half of this year and we remain on track to advance a shareholder vote by mid-year. It is expected that we will hold our AGM concurrently with the shareholder vote on the spin-off transaction. And now, I’ll turn the call over to Joel.

Joel Hunter: Thanks, Francois. Strong operational performance during the fourth quarter delivered 16% year-over-year growth in comparable EBITDA. The primary driver of this growth relates to increased comparable EBITDA from our Canadian natural gas pipelines business, largely related to the recognition of a $200 million incentive payment upon meeting certain project milestones on Coastal GasLink. This amount was settled through a cash distribution on February 12th, 2024, and it was recognized as income from equity investments in our consolidated income statement for the year ended December 31st, 2023. I’ll note that even when excluding the $200 million incentive payment, we delivered approximately 8% growth in comparable EBITDA versus fourth quarter 2022.

As Francois mentioned, our base business performed exceptionally well during the fourth quarter and throughout 2023, our team safely placed approximately $5.3 billion of projects into service on budget. We also delivered a 24% increase in quarterly comparable earnings relative to last year. This largely resulted from increased comparable EBITDA, partially offset by higher interest expense and higher net income attributable to non-controlling interest following the Columbia sale in 2023. For 2024, we expect comparable EBITDA to be between $11.2 billion and $11.5 billion, consistent with what we announced at our November 2023 Investor Day. This growth is primarily driven by an increase in the NGTL System, the full year impact of projects placed into service in 2023, and approximately $7 billion of new projects expected to be placed in service this year.

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. I’ll now discuss a few highlights from our 2024 outlook. Within our integrated natural gas pipelines business, comparable EBITDA is expected to be consistent in Canada due to the continued growth of our NGTL system, partially offset by the absence of the Coastal GasLink incentive payment that was recognized this year. Higher in the US, largely due to assets placed in service in 2023, and projects we expect to place in service in 2024, including Gillis Access and GTN XPress.

And higher in Mexico, with growth underpinned by a full year of incremental revenue from the BDR lateral that was placed into service in Q3 2023. With Bruce Power Unit 6 having returned to service, comparable EBITDA from our Power and Energy Solutions business is also expected to increase relative to 2023. Without taking into account impacts related to the proposed spin-off, comparable EBITDA from the Liquids Pipelines business is expected to be consistent with 2023. Consistent with what we showed in Investor Day and excluding contributions from the liquids pipelines business shown on the left hand side of this slide, comparable EBITDA out to 2026 is expected to be in the range of $11.2 billion to $11.5 billion. Growth out to 2026 is underpinned by high quality assets that are expected to be placed into service, further supported by the highly rate regulated and long-term contracted nature of our business.

I’ll note that recent announcements related to our Heartland project and Bruce Unit 4 MCR were included in our net capital expenditures outlook shown in Investor Day. These projects do not change our commitment to limiting net capital spending to $6 billion to $7 billion with a bias to the lower end in 2025 and beyond. Looking to the right hand side of this slide, South Bow’s long-term outlook also remains consistent with what Bevin showed at Investor Day. The South Bow team expects to see comparable EBITDA growth averaging 2% to 3% out to 2026, delivering low-risk, double-digit shareholder returns. Bevin and his team have the intention to have the majority, if not all, of the capital structure in place prior to the spinoff, subject to a successful shareholder vote.

Anticipated proceeds from the senior and subordinated debt issued at South Bow will be used to repay approximately $8 billion of TC Energy debt and help meet future funding requirements. Underpinned by our strong performance last year, TC Energy’s Board of Directors has declared a first quarter 2024 dividend of $0.96 per common share, which is equivalent to $3.84 per share on an annualized basis, representing a 3.2% year-over-year increase. This is the 24th consecutive year the Board has raised a dividend which is foundational to the enduring value proposition of TC Energy. Thank you and I’ll pass the call back to Francois.

Francois Poirier: Thanks, Joel. We had a great success in 2023 focusing on executing a clearly defined set of priorities that directly align to our strategic vision and value proposition. So for 2024, there should be no surprise that our strategic priorities will look very similar to 2023’s. First, we’ll continue to maximize the value of our assets through safety and operational excellence and by successfully executing the spin-off of South Bow. Second, we will remain focused on project execution, delivering on time and on budget, including Bruce Power’s MCR 3 and advancing Southeast Gateway’s mechanical completion by the end of 2024. And third, we will continue our path to achieving and sustaining our 4.75 debt to EBITDA upper limit by the end of 2024 by advancing our divestiture program and continuing to streamline our business through our efficiency efforts.

By executing on our high quality secured capital program, we expect to deliver 2024 comparable EBITDA of $11.2 billion to $11.5 billion and incremental long-term value for our shareholders. With that, I’ll turn it over to the operator for questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rob Hope of Scotiabank. Please go ahead.

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Q&A Session

Rob Hope: Good morning, everyone. Questions on Mexico. Southeast Gateway has over half the spend out the door already. As we take a look into 2024, what key milestones should we be watching for? What do you view as the highest risk factors and how is spend — have you seen a increase in any contingencies there?

Stan Chapman: Hey, good morning, Rob. This is Stan. As Francois pointed out, we have no change in our cost of schedule and we’re continuing to track to the $4.5 billion cost estimate in summer 2025 in service date. We spent about $2.5 billion or so to date. We’ll spend another $1.5 billion this year and about $500 million or $600 million closing things out in 2025. Just a couple of highlights. As of earlier this week, we’ve laid about 225 kilometers, which is about 34% of our subsea pipeline in the Gulf of Mexico. The work that we’re doing onshore is progressing nicely at all three of our landfalls. As a matter of fact, at [indiscernible] we actually completed our drill last week on time and on schedule. The micro tunnel that we’re building in [indiscernible] should be completed sometime by the end of this month.

So going forward when I think about next milestones, we should have all of the deep water portion of the subsea pipeline completed by early summer. The shallow water tie-in work should be completed by the end of the summer and then the compressor work will be completed this fall so that we could then turn our attention to commissioning activities and putting the project in service for summer 2025. So no changes to capital costs, no changes to contingencies at this point in time, but the project is progressing nicely as planned.

Rob Hope: Excellent. And then just keeping on Mexico, is there any updated thinking on how to get to the 10% Mexico EBITDA limit and is this more of a near-term or longer-term target or where can we see some additional clarity there?

Francois Poirier: Rob, it’s Francois. I’ll take that one. As we’ve said before, we remain committed to reducing our exposure as a percentage of consolidated EBITDA. That 10% threshold was prior to the spin. Post spin, if we’re successful, probably more in the 12% range. We are exploring a variety of different avenues to begin lowering our exposure. We are prepared to transact in 2024, but we’re not going to give up shareholder value to do that. We’re progressing nicely on construction on Southeast Gateway. So we’re going to take our time and do this in an orderly fashion and look over the next two or three years to be reducing to that 10% to 12% level.

Rob Hope: Thank you.

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

Theresa Chen: Good morning. Maybe hitting on that last point and [putting] (ph) to the broader asset divestiture program. As you seek to de-lever towards your target by the end of this year, can you provide any updates on the progress of additional asset sales this year and just the steps from here, transaction timing, size, and such, anything we can think about there?

Francois Poirier: Theresa, we have a number of processes in market right now, so I’m going to maintain deal discipline to every extent possible, but still try and help you here. As we’ve mentioned in the past, we’re not looking to do a single transaction to achieve the $3 billion like we did last year with the very sizable GIP transaction. Think of us doing anywhere from, let’s say, two to four transactions to get to that $3 billion number. Those smaller transaction sizes tend to widen the buyer universe, because more people can write those check sizes. So we have seen good interest in the different processes that we have underway. These processes tend to have their natural pace and cadence. We’re hopeful that we’ll be able to make at least one announcement in the first half of the year, but again, we’re going to be disciplined and make sure that we’re preserving value for our shareholders.

Theresa Chen: That is helpful. Thank you. And then turning to South Bow and the anticipated growth posts in order to aid in its own deleveraging. When we think about the potential upside opportunity in Marketlink going forward, just given the many moving pieces in that mid-continent or Permian to Gulf Coast part of the world. So you have certain competitors expanding capacity, others having contract roll-offs near term, others converting crude back to NGL service and vice versa. How should we think about Marketlink’s potential expansion of earnings with this background?

Bevin Wirzba: Theresa, this is Bevin. You basically just acknowledged the premise for the spin. There’s a tremendous opportunity for South Bow to address the tremendous demand that we’ve been seeing in the Gulf Coast. We had over 150,000 barrels additional demand on our Marketlink system here in the last half of 2023. And that allowed us to underpin over 200,000 barrels a day of incremental contracts on that Marketlink system here in the balance of the year. So we accelerated a bit of the growth that we were anticipating in ‘24 into ‘23. A lot of that came from, I’ve shared previously, the fingers and toes strategy. So we added the Port Neches link last year on time and on budget and that began seeing consistent flows providing that additional outlet for those customers on Marketlink.

In addition, we brought on the capability to hit tidewater. So as you mentioned, many are providing different access to tidewater. We have six terminals that can now provide that capability for our customers. So our South Bow strategy is to leverage that pre-capitalized system on the Gulf Coast but also we’re seeing similar opportunities in Alberta where we have an underutilized or under — we’ve already capitalized our Grand Rapids system for example and bringing on additional volumes onto that system is very accretive. And so that underpins our ability to have our own capital structure to attend to those opportunities is a really strong opportunity for our shareholders.

Theresa Chen: Thank you.

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

Praneeth Satish: Thanks. Good morning. Maybe just back to the asset sales for a second. I’m just wondering how the interest rate environment could influence the timing of asset sales over the balance of the year. I mean, I know you mentioned you expect to potentially transact at least one deal in the first half of this year, but I think the general consensus is that interest rates will fall over the balance of the year. So does that favor maybe waiting towards the latter half of the year to announce more asset sales? I’m just curious for your thoughts on that and whether that makes a difference in how you perceive the cadence of sales?

Francois Poirier: Thanks, Praneeth. Interesting question. As I said in Theresa’s prior question, these transactions tend to have their own cadence and momentum is a very powerful thing. No question that in the current environment, certainly when you’re thinking about financial buyers that the underlying interest rate environment does have an impact on valuation. We’re being really disciplined here. We’re not in a rush. The agencies have given us the feedback that we do have until the end of 2024 to get to our below the upper limit of 4.75 debt to EBITDA and we’re going to take our time and it’s not lost on us that as monetary policy starts to ease in the second half of the year, we may benefit from that. But having said that, our first priority is to achieve a minimum of $3 billion of divestitures and to do that by the end of the year. And while we’re not going to undertake fire sales, if we see reasonable value today, we will transact on it.

Praneeth Satish: Got it. Thank you. And then it looks like gas deliveries from — gas deliveries to power plants set another record. I’m just wondering if you could talk about how much of this uptick is being driven by demand from data centers. That seems to be picking up quite a bit here. And whether you’re seeing any data centers reach out to you directly for gas supply to maybe power cogen units and go around the grid?

Stan Chapman: Hey, Praneeth, this is Stan. I can take that one. Data centers, as you know, tend to be high-demand consumers that need a constant and reliable energy source, such as provided by natural gas. And we are looking at several options across our footprint. That includes some of our smaller pipes out west, opportunities on the Columbia system in Virginia, and maybe most recently on ANR where the assets that we have in Mount Pleasant, Wisconsin are going to indirectly serve Microsoft’s new data center via a local distribution company that will be in between us and them. So yes, this is a growing demand source for us and something that we are well aware of and expect to take advantage of in the future.

Praneeth Satish: Thank you.

Operator: The next question comes from Jeremy Tonet of JPMorgan. Please go ahead.

Jeremy Tonet: Hi, good morning.

Francois Poirier: Good morning.

Jeremy Tonet: Just wanted to kind of expand on the LNG outlook, I guess, as well, with the moratorium in the US, just wondering your thoughts, I guess, in positioning for West Coast Canada there, future growth and, possible expansions on those facilities. It seems like with the cost put into those facilities overall, economies of scale would argue for further expansions. Just wondering how you see North American LNG export outwork going forward and the impact on TRP?

Francois Poirier: I’ll start at a high level there, Jeremy, and then I’ll ask Stan to provide a little bit more detail. Look, we’re the only gas transmission company that has a dominant footprint in all three countries, and we have access to all shores of North America. So LNG demand growth is, as our customer, is going to be a big source of our growth going forward. You’re right, brownfield economics typically beat greenfield economics all day long. So where we are already serving LNG export, we see opportunities for us to grow throughput and, Stan, over to you for a little bit more detail.

Stan Chapman: Yeah. Hey, Jeremy, just to maybe double-click on that, from a macro perspective, we’re exporting around 14 Bcf of LNG from the US today. We see that growing to somewhere north of 30 Bcf by the end of the decade across all of North America with maybe 3 to 4 Bcf coming from Canada and 2 to 3 Bcf coming from Mexico. You also referenced the moratorium or the stay and maybe just a couple points on it. First of all, the stay impacts about 20 or so projects that are currently in the approval queue, but it does not impact projects that are already approved. So projects like our Gillis project, which is slated for in-service later this year, and our East Lateral XPress project, which is slated for in-service in 2025, are not going to be impacted.

But today, our assets transport about 25% of the deliverable LNG terminals, and those two projects are just going to further enhance that. A bigger picture, though, what I would note is, it really is the diversity of our pipeline network across North America, which is one of our biggest strengths. And we’re going to continue to see strong demand for our assets across the LDC, power generation, and LNG export sector. And should a pause in LNG exports in the US be extended for a significant period of time, the geographical diversity that our pipelines afford us may well see opportunities both in Mexico and Canada. And as a matter of fact, we heard that the Canadian Energy Minister, Wilkinson, expressed that exact sentiment just a few weeks ago.

Jeremy Tonet: Got it. That’s very helpful. And, Stan, may be kind of expanding on the US gas pipe network, I was just wondering, as far as future growth is concerned, where do you see, I guess, more of the growth coming from? Is it just more of these kind of bolt-ons, or do you see the potential for anything like bigger brownfield expansions or even greenfield expansions here, just given increased peaking needs for natural gas across the US?

Stan Chapman: Again, given the — our best-in-class footprint, we’re going to leverage our in-corridor expansions to the greatest degree possible. So I don’t see us doing a lot of greenfield expansions. Particularly, it makes it more challenging on the permitting and construction front. But I continue to point out to you to growth in the power generation sector and our Heartland project that we just announced today is another example of that where coal fired power generation is retiring, demand for energy continues to grow and our assets are uniquely positioned to fill that gap. So growth in power generation, growth in LNG exports longer term, as well as increased connectivity with our LDC customers I think are going to be the main drivers for our US pipes.

Jeremy Tonet: Got it. Thank you for that. I’ll leave it there. Thank you.

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

Linda Ezergailis: Thank you. Just wondering if you can give us any update on how you’re progressing on your productivity and cost effectiveness initiatives in your natural gas business? Where are you at in terms of identifying opportunities and implementing them?

Stan Chapman: Hi, Linda, this is Stan. I think you’re referring to what we call our Project Focus initiative. And you may recall that that is all about creating value by fundamentally changing the way we do our work around safety, operational excellence, and cost and capital discipline. Last year, we announced a target run rate of about $750 million of efficiencies that would be realized by the end of 2025. And you can think of that as being made up of things like capital reductions, expense reductions, and revenue enhancements. At the end of last year, we actually captured and implemented run rate efficiencies of about $230 million. We expect to generate another $270 million of efficiencies by the end of this year. So we’ll have a cumulative amount of around $500 million. And the balance of the $750 million will be generated in 2025. So I would say things are progressing nicely and according to plan.