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spk10: Thank you for standing by. This is the conference operator. Welcome to the TC Energy third quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Gavin Wiley, Vice President, Investor Relations. Please go ahead.
spk08: Thank you very much, and good morning, everyone. I'd like to welcome you to TC Energy's 2022 Third Quarter Conference Call. Joining me today are Francois Poirier, President and Chief Executive Officer, Joel Hunter, 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 the 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 Jamie Harding. Before Francois begins, I'd like to remind you that remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information, please see the reports filed by TC Energy with the Canadian Securities Regulators and the U.S. Securities Exchange Commission. Finally, during the presentation, we will refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC Energy's operating performance, liquidity, and its ability to generate funds to finance its operations. A reconciliation of various GAAP and non-GAAP measures is contained in the appendix of the presentation materials. With that, I'll turn it over to Francois.
spk16: Good morning, everyone. And despite the economic headwinds facing the broader market, TC Energy's portfolio of North American energy assets remains resilient. Demand for our services remains high. We continue to deliver strong utilization, availability, and overall operational performance across our system. Given the strength of our results year-to-date, we have increased our 2022 comparable EBITDA outlook, which is now expected to be approximately 4% higher than in 2021. Our industry-leading portfolio of $34 billion in fully sanctioned capital projects continues to provide long-term sustainable growth. The capital program is expected to be fully funded through increasing cash flow generation and incremental balance sheet capacity. Under our current outlook, we do expect to deliver our debt to EBITDA target of 4.75 by 2026, even without asset sales. But being opportunity rich means we expect to sanction additional high-quality growth projects that will further differentiate TC Energy as an industry leader. So there is a need to balance our sources and uses of capital without the reliance on further external equity. We are executing a divestiture program that will extend through 2023, with proceeds expected to be in excess of $5 billion through the potential sale of discrete assets and or minority interests. The objective will be to use capital rotation to bring forward our deleveraging targets from 2026, fund new projects, and progress longer-term portfolio migration. We will consider a multitude of factors in determining where to rotate capital, including valuation, simplicity of corporate structure, delivering on our sustainability goals, and pro forma impact on per share and credit metrics, along with growth trajectory out to 2026 and beyond. Now, I want to underscore that we have demonstrated over the past decade our ability to successfully rotate capital following the acquisition of Columbia. This is for us, as you know, a core competency. Now, focusing on our strong third quarter results, our U.S. natural gas business continued to deliver record flows. We also sanctioned the Gillis Access Project. This is a very strategic investment for us. It will provide a 1.5 BCF header system that will further connect growing supply from the Hainesville Basin to the rapidly expanding Louisiana LNG market. Year-to-date, we've placed over U.S. $1.8 billion of assets into service, including our Grand Chenier and Louisiana Express projects that have increased our market share of LNG feed gas from approximately 25% to 30%. It's also been a transformative year for our Mexico business. In August, we executed a first-of-its-kind strategic alliance with the CFE to jointly develop the U.S. $4.5 billion Southeast Gateway Pipeline. We're off to a strong start and are already making meaningful progress on the project. I'll remind you that over 70% of the project costs are secured under fixed-price contracts that give us greater certainty around cost and schedule. In the third quarter, we placed the Villa de Reyes north and the Tula east sections into service with line of sight to completing the remaining sections. Our alliance with the CFE demonstrates how we are leveraging our North American strategy and competitive strength to deliver clean, reliable, and affordable natural gas supply to serve the growing central and southeast regions of Mexico. Our NGTL system in Alberta demonstrates had another solid quarter with system deliveries up 4% compared to the same period in 2021. And our system continues to expand and extend the reach of the WCSB. Year to date, we've grown our NGTL system investment base by 11%, placing $1.9 billion of assets into service. We also sanctioned the VNBR project in November, that will connect migrating supply to key demand markets. As part of our decarbonization journey, this project will use non-emitting electric compression to support lower GHG emissions intensity for the system. And the coastal gas link project is now 75% complete. The entire route has been cleared and approximately 400 kilometers of pipeline have been backfilled with reclamation activities well underway. Now to liquids. In September, our Keystone system safely achieved an average monthly record of 640,000 barrels per day. Looking ahead, our liquids business will continue to focus on maximizing value through operational excellence, optimization, and providing cost-effective direct market access to the largest refining market in North America. Our power and energy solutions business produced exceptional results during the quarter and continues to play a greater role in our diversified portfolio of energy infrastructure assets. Strong availability at Bruce Power, combined with peak pricing in Alberta, contributed to a 41% year-over-year increase in comparable EBITDA for the segment. We also progressed several renewable and low-carbon projects, including the 81 megawatt Saddlebrook Solar Project announced in October, which will be the first utility-scale solar project to be fully developed and delivered by TC Energy, thereby progressing the development of our capabilities in that area. In terms of our priorities and progress this year, I am pleased to report that we have made significant positive progress across them all. Increasing the returns on our existing assets and executing on our secured capital program are the linchpins of successfully delivering our compound annual EBITDA growth rate of 6% through 2026. As I mentioned, we resolved arbitrations on the Villa de Reyes and Tula projects and placed them into service and have started generating revenue on both projects. We continue to increase long-haul and long-term contracted volumes on Keystone. And we placed $4.4 billion of assets into service year-to-date. Our sanctioned and secured capital program is now an industry-leading $34 billion, as we've added $7.8 billion of high-quality growth opportunities this year alone. We intend to proceed with the sale of non-core assets and our minority interests in order to achieve a balance between accelerating our deleveraging targets and funding our opportunity-rich portfolio without the need for common equity. And we also continue to progress our sustainability commitments. We just published our 2022 report on sustainability, our ESG data sheet, and our reconciliation action plan. We have reaffirmed our 10 sustainability commitments and key ESG targets from 2021. including a 30% reduction in emissions intensity by 2030. In 2022, we reached a key milestone by obtaining independent third-party limited assurance over our Scope 1 and 2 GHG emissions that provides greater rigor to our GHG reporting and our planning processes. We're making good progress on our key ESG indicators and remain on track to deliver these objectives. I'd encourage you to review the report and reach out with any questions. Thank you very much, and I'll now pass the time over to Joel for a few comments.
spk13: As Francois highlighted, our results continue to demonstrate the resilience of our portfolio. Our assets are largely rate-regulated or underpinned by long-term contracts that provide certainty and stability of our cash flow through various economic cycles. The solid execution and high utilization across our portfolio led to a 10% year-over-year increase in both comparable EBITDA and comparable earnings. A big factor in our performance was the strength in power and energy solutions, driven by 95% availability at Bruce Power. In Alberta, we achieved peak availability with record prices above $260 per megawatt hour during the months of August and September. Canada Gas continues to benefit from the 11% increase in NGTL's investment base as we have brought $1.9 billion of assets into service this year. The NGTL system expansions continue to track growing supply in the WCSB that is also up over 1 billion cubic feet per day. Strength in the U.S. dollar has also acted as a tailwind, with an average rate of 131 versus 126 for the same period last year. This benefits approximately 60% of our total EBITDA. Switching to comparable earnings... Following the strategic partnership announced with the CFE in August, we began booking AFEDC on our Mexico projects under construction. The AFEDC amount will continue to grow as we execute our capital program on the Southeast Gateway project. Despite rising interest costs, we will continue to manage our exposure. And I'll remind you, approximately 85% of our debt is fixed rate and has a weighted average maturity of approximately 20 years, an average pre-tax coupon of 4.8%. We actively manage our long-term debt exposure to fixed and floating rates. However, a high percentage of our long-term debt is fixed rate, which significantly insulates us from rising interest rates. With the solid year-to-date results, we are revising our comparable EBITDA outlook higher for the full year 2022. We now expect comparable EBITDA to be approximately 4% higher than 2021. We are confident in this outlook despite rising interest rates and inflation, and we are well positioned to deliver strong results into 2023. We remain opportunity rich. We expect to grow our comparable EBITDA at a 6% compounded annual growth rate for 2021 to 2026. And I'll reiterate, our EBITDA outlook is largely underpinned by long-term take-or-pay contracts. or cost of service regulation that provides a high level of certainty around our future cash flows. Further, our outlook provides the ability to achieve a leverage ratio of 4.75 times debt to EBITDA within the same time frame without the reliance on asset sales. Our growth is underpinned by our industry-leading $34 billion fully sanctioned, secured capital program that is expected to deliver an after-tax, unlevered IRR of approximately 7% to 9%. As Francois mentioned, our extensive footprint that extends across North America will continue to provide additional growth opportunities. I will highlight that not all projects sanctioned within the next couple of years will have a material capital spend between now and 2026. Today, we announced the $600 million BNBR project that will reduce our emissions intensity on the NGTL system while connecting migrating supply. The project is expected to be in service in 2026 with the most significant capital spend to occur in 2025. Additionally, we sanctioned the U.S. $400 million Gillis Access project that is expected to contribute incremental near-term EBITDA following in-service in 2024. The inclusion of the VNBR and Gillis Access projects has had a moderate impact on our sources and uses of funding that was updated in August following the announcement of our Southeast Gateway project. Our sustainable cash flow growth is expected to drive our deleveraging and incremental long-term debt and hybrid capacity while funding accretive growth opportunities. To prudently fund our current capital program while maintaining our leverage targets, last quarter we reinstated our dividend reinvestment program at a 2% discount, beginning with the dividends declared on July 27. Participation with our first declaration was approximately 38% and provided $342 million reinvested in common equity. The discounted dividend reinvestment program is expected to be in place through dividends declared for the quarter ending June 30, 2023. Being opportunity rich, we will continue to sanction new projects. However, as Francois mentioned, we will use capital rotation to ensure our financial strength and flexibility without the reliance on additional common equity. Capital rotation provides us with the ability to further accelerate our deleveraging target by up to two years. We have successfully rotated capital before. This is a core competency. As Francois noted, Following the Columbia Pipeline acquisition in 2016, our debt-to-EBITDA ratio exceeded six times. Through a series of successful asset sales totaling over $11 billion, we achieved less than five times debt-to-EBITDA exiting 2019. We continue to expect to grow our dividends by 3% to 5%, supported by sustainable growth in earnings and cash flow per share and strong coverage ratios. From an investment perspective, our dividend has now reached an attractive 6% yield while adhering to our targeted payout ratios. Overall, solid execution will allow us to continue delivering superior long-term shareholder value. That's the end of my prepared remarks. I'll now turn the call back over to Francois before the Q&A.
spk16: Thanks, Joel. Just a couple of comments to reiterate. Our diversified portfolio... is resilient and will continue to produce strong operating and financial results. Second, we continue to see tremendous opportunity ahead to extend and expand our unparalleled network. We are opportunity rich. And third, financial strength and flexibility are key priorities, and that goes along with that opportunity rich portfolio. So we are including the sale of non-core assets and minority interests in our go-forward funding plans in order to accelerate our deleveraging targets and capitalize on those opportunities. So operator, we're ready for questions.
spk10: Thank you. We will now begin the question and answer session. We ask that you please limit yourselves to two questions. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question is from Rob Hope from Scotiabank. Please go ahead.
spk04: Good morning, everyone. Two questions on the asset recycling target that was announced today. Can we dive into the timing of the asset sale program? Working in the MD&A is through 2023. Is the expectation that you're going to get most of this announced in 2023, or could this be a longer-term endeavor? And I guess finally, does this replace saying the drip at all?
spk16: Rob, it's Francois. I'll take those two questions. First of all, as we're in conversations with people who may be listening in to this call, I can appreciate the desire to know more today around specific details. We're just not going to be providing that detail. However, I can tell you from a timing perspective, our plan is to announce and close five plus billion dollars of asset divestitures within 2023. To the extent we decide to expand the program beyond there and it presents an opportunity for us to turn the drip off earlier, we would contemplate that. But at this point, the base plan is $5 plus billion in divestitures to close in 2023, and the drip will remain on as stated in our opening remarks.
spk04: All right, I appreciate that. And then maybe as a follow-up, you mentioned the asset sale program would help with portfolio migration. Can you further elaborate on what you mean by this? Does this imply that higher carbon intensity assets could be higher up on the list than lower carbon intensity assets?
spk16: As I said before, we're not going to delve into a great deal of detail on the conversations we're having, Rob. I'll go back to the criteria, however, if that can help you. First and foremost, our goal is to accelerate deleveraging and fund growth. We are going to consider, to the extent there are valuation arbitrages between private and public markets, we want to take advantage of those. We are going to consider impacts on our GHG emissions going forward. Simplicity of corporate structure is also very important to us. So all of those issues will factor into what we monetize, how much we monetize, and when that takes place.
spk04: All right. I appreciate the call. Thank you. Thank you.
spk10: The next question is from Robert Kwan from RBC Capital Markets. Please go ahead.
spk03: Great. Good morning. You did list. Francois, a number of those aspects, valuations, perform impact, portfolio migration structure, and sustainability. I'm just wondering, can you rank order, just by importance, what are going to be your top priorities? And then just as you related or mentioned per share metrics, what are the per share metrics that are most important to you?
spk16: First and foremost, Robert, our goal here is to accelerate our deleveraging. So, credit metrics will remain the number one criteria. Secondly, and I think Joel alluded to this, we want to continue to fund creative growth projects that come forward. Any opportunity we have to monetize an asset at a low to mid-double digit EBITDA multiple and rotate capital into an asset with a seven to eight time build multiple, we're creating value for our shareholders. So we are going to continue to do that. So deal averaging is a first priority. sustaining and extending our growth profile is our second priority. And then we'll balance the other priorities in terms of portfolio migration impacts on our GHG emissions and maintaining simplicity of our corporate structure.
spk03: Got it. A lot of your comments here just have confined to the 2023 year. Does that fully get you to where you want to be, or do you just see this as an ongoing strategy, whether it's in that $5 billion range or another level?
spk16: This is going to be very much an ongoing strategy for us, Robert. We remain opportunity rich. We see an opportunity set in all of our businesses that frankly exceeds our free cash flow after dividends. Any opportunity we have to monetize assets at a high multiple and redeploy in constructing an asset at a lower multiple creates value for our shareholders. And so This is a strategy that we are going to deploy on a consistent basis going forward, not just in 2023, but beyond. And as to how far we want to get in 2023 versus 2024 and later, I'll pass it over to Joel.
spk13: Yeah, I think, Robert, again, you know, deleveraging is obviously a key priority for us. And, you know, what it does for us is preserves our financial strength and flexibility and As Francois mentioned, this is a core competency for us. And again, having capital rotation is just an important factor for us going forward to add shareholder value. As we think about our deleveraging, we look to accelerate it by approximately two years. That would be our goal here. So as we stated before, with our current funding program, we can achieve the 4.75 times. We're on track by 2026. And so the objective here is if we could accelerate that by up to two years, again, to preserve that, add that financial strength and flexibility.
spk03: Male Speaker 1 That's great. Thank you very much.
spk10: Female Speaker 2 The next question is from Jeremy Tonic from J.P. Morgan. Please go ahead.
spk15: Jeremy Tonic Hi. Good morning. Just to follow up on the line of questions here, if I could, with regards to asset sales. You talked about sustainability being part of the criteria here. And just wondering, is that like full scope one through three emissions as you think about it? And you're talking about, I guess, GHG intensity. But at the same time, I think you also talk about carbon capture projects. So are there any assets where you find it difficult to abate future GHG and maybe they lend themselves? Do they kind of differentiate in this manner? Just trying to feel for your thoughts on that side.
spk16: Jeremy, we're going to balance all of those criteria. We focus on Scope 1 and Scope 2 emissions since we set our emissions intensity reduction targets on that basis. So that's the basis upon which we will factor that topic into what we divest of and to what order of magnitude. We continue to make significant progress on our carbon capture initiative through Alberta Carbon Grid, our hydrogen production initiatives with a number of customers, and advancing a divestiture program simply gives us more capacity to allow those projects to proceed on their natural timing. So we have an opportunity-rich environment. and divestitures are just going to enable us to continue to accelerate our growth.
spk15: Got it. Thanks for that. And then just looking forward to the analyst day here, wondering if the format is going to be similar to past years or any differences that we might see this time or themes pop up versus maybe what we heard in the past.
spk13: Jeremy, it's Joel here. First of all, we're excited to be in person this year in Toronto on November 29th for Investor Day. The format will largely be the same this year as previous years. Again, you'll see the entire management team walking through the various business units and their opportunities that we see. We'll talk about, after the investor day is completed, we're going to have a breakout session where you'll actually be able to have time to meet with various BU leaders to ask them specific questions. we think that's something that will be really valued to those that are participating in Investor Day. So, again, looking forward to it on November 29th. And, yeah, it's, again, nice to be in person again this year.
spk15: Sounds good. See you there. Thank you.
spk10: The next question is from Linda Ezregelis from TD Securities. Please go ahead.
spk09: Thank you. Not to belabor this question, capital recycling process too much. But can you give us some more context maybe on how you balance the merits of avoiding capital expenditures through selling projects perhaps that are not completed versus servicing maximum value by selling more mature assets? You know, how do tax considerations factor into your decision-making and and some of your peers have continued to optimize their franchise by swapping assets. So also wondering what sort of opportunity there might be to consider asset swaps or partnerships beyond just selling a financial interest to partners who might bring something else to the table. Just wondering how that nuance might influence how you proceed as well.
spk16: Thanks, Linda. Clearly, we're focused on after-tax proceeds. That's part three of your six-part question, is after-tax proceeds are what matter here. Mature assets versus growth assets, we're here to maximize value for our shareholders. As I mentioned, we're very experienced in managing divestitures and making decisions on where to rotate capital. Our focus is on addressing and accelerating our deleveraging and maximizing our growth and allowing us to prosecute on the opportunity rich set that we have. So that may include some assets that are mature. It may include some assets that have some growth in them. I would tell you that given that we're comfortable in funding our growth program With free cash flow and divestitures, selling an asset that's partway through just for the sake of avoiding further capital expenditures is not something that we're really interested in at all. We're going to focus on maximizing value. In terms of swapping assets, look, we're opportunity rich. We have a $34 billion industry-leading fully secured capital program. I don't see asset swaps factoring into our plans in the near future. And as to partnerships, and I talked about this recently at a conference, as we look to invest in low-carbon infrastructure, where we do not have all of the skills and capabilities to manage the risks in a particular asset class, we will be looking to partner. Partnering with on hydrogen production, they will be the demand sink for the hydrogen that's produced. We may partner with a technical equipment supplier to the extent that helps mitigate risk in individual projects. We may partner with a third-party entity that has competitive storage, located storage, if we're looking at a carbon capture project. So partnerships in the future will be less motivated by finding an external source of capital and more by finding partners who can help us manage the suite of risks in a more effective manner.
spk09: Thank you. And just as a follow-up, recognizing that it's a very dynamic geopolitical environment on a number of fronts where you're operating, can you talk about how... potential geographic exposure might factor in as it relates to Mexico, and maybe some evolving developments on policy in the U.S. as well, and specifically maybe, for example, if Jones Act rules get relaxed to facilitate product movements domestically, or potentially product export bans over the next couple of years. Can you comment on geopolitics as well?
spk16: Sure. I'll start with Mexico, and then I'll ask Stan to provide some thoughts on your question about the U.S. policy environment. In Mexico, as we said when we announced the Southeast Gateway Project, we remain committed to managing our consolidated exposure in Mexico to 10%. of our consolidated portfolio. We won't actually get to that level until we put Southeast Gateway into service, and that's scheduled for 2025. So that gives us time in terms of thinking through when the optimal time might be for us to find partners on Southeast Gateway. And we continue to make strong progress on that project. Our relationship with the CFE has moved to a whole other level from a positivity standpoint. Having them as a partner in addition to as a customer, we've seen the level of collaboration with them do nothing but improve over the course of the last few months. And so over to you, Stan, on the U.S. policy environment.
spk17: This is Stan. We'll continue to watch policy developments as they mature over time, including the results of the elections, which we're still evaluating at the current moment. With respect to potential for product export bans or LNG exports, I would maybe just offer up one thought that with respect to an LNG ban, for example, it's conceivable that such a ban on exports could actually increase energy prices for U.S. consumers in places like New England, who, for example, rely on LNG imports to meet their winter energy needs. So, in theory, given that the U.S. supplies about 25 percent of the LNG exports today, Individuals in New England, for example, could be competing for LNG cargoes with 25% less supply out there, meaning higher prices for them. So we'll continue to monitor this over the next weeks, months as things develop.
spk10: Thank you.
spk17: Thanks, Linda.
spk10: The next question is from Pranith Satish from Wells Fargo. Please go ahead.
spk06: Thanks. Good morning. With interest rates, rising and cost of financing creeping higher. I'm just wondering if you've thought about raising the IRR on new projects. Historically, it's been in the 7% to 9% range, but then I think I heard you say on this call that you could recycle CapEx and invest in kind of the seven times EBITDA range. So I'm just wondering if the corporate hurdle rate on new projects hasn't moved higher.
spk13: Yeah, Praneeth, it's Joel here. You know, obviously with rising interest rates and just seeing the cost of equity kind of across the board go higher, certainly we're seeing that hurdle rates are going higher as well. We do have hurdle rates for our various business lines, various assets that we look to invest in. And so we adjust accordingly. And, you know, we never take into consideration, if you think about a few years ago, when rates were low, we built in a bit of a buffer into our economics, again, trying to exceed our cost of capital. As we think about new projects going forward here, certainly that is a factor. I'll add to that, Praneeth.
spk16: To the extent we see an opportunity to sanction a project in the nearer term, when we have strong objectives to deleverage, we're going to be looking at further divestiture program to to address and mitigate any potential increase in our leverage, which means my definition that your hurdle rate is higher because you're needing to use a larger proportion of equity to make sure that you maintain your balance sheet strength.
spk06: That makes sense. That's helpful. And then, just switching gears, I wanted to check in on Northern Border and Bison and the Bakken. I guess, what's the latest there on securing an expansion? I know there's a lot of ethane that's being recovered, and that's helping lower BTU limits, but are producers comfortable with that as a long-term solution, or do they ultimately want a pipeline expansion built?
spk17: So, Praneet, this is Stan. As you know, the northern border pipeline is a critical part of our unparalleled asset footprint across the U.S. The fundamentals still remain very strong and support the need for an expansion. For example, our throughput on northern border was up Quarter over quarter, flaring is down, and the gas to oil ratios remain very strong. We had a non-binding open season that closed earlier this summer. We are still negotiating with our customers to get to definitive agreements. And while it's taking a little bit longer to get that done, our in-service date of early 2026 and our capital estimates to get that project done haven't moved. With respect to heat rates, notwithstanding the higher flows that we've seen on the northern border system coming out of the Bakken, BTU factors remain in line roughly in the 1070 to 1090 range. So as long as they stay below 1100 BTUs, there are no issues. To the extent that we see ethane rejection or higher BTU rates across the system start to appear, then we'll have to get back together with our customers and perhaps go back to FERC again. But as of right now, that's not an issue.
spk02: Got it. Thank you.
spk10: The next question is from Robert Cattelier from CIBC Capital Markets. Please go ahead.
spk01: Robert Cattelier Thank you. This question is not exclusively for TRAPP and has broader industry implications. But as you've described, notwithstanding your very strong stable assets as proven by your results here today and your targeted 475 leverage, I'm just curious if you believe that's the right level to ultimately target your leverage. in light of the rising interest rates, the inflationary environment, or is perhaps erring on the side of conservatism the right approach? And specifically, are you hearing anything from the rating agencies about if their target preferences are changing, are they still comfortable with those levels? And I guess the same question could apply to how you manage your dividend growth policy.
spk13: So, Rob, it's Joel here. First of all, I'll start with the rating agencies. They still target five times debt to EBITDA for our BBB Plus ratings with a stable outlook. You know, when we look at our leverage, the other part you have to consider here is the left-hand side of the balance sheet, and you look at our asset profile. You know, 95% of our assets are underpinned by long-term contracts or regulated cost of service, and that's what really differentiates us relative to a lot of our peers is that stability that we have with our earnings and cash flow on the left-hand side of the balance sheet, which supports higher leverage being at that five times which the agency's target is for. We just felt it was important last year, and we continue to view this today, that 4.75 is the appropriate level for us. It provides a bit of a cushion, if you will, under the five times. But certainly for us, we don't need to go to 4.5 or 4.25 because, again, of the strength of the left-hand side of the balance sheet With respect to our dividend growth, again, what we talked about today with our strong performance along with portfolio rotation, that this really enhances our strategic positioning to deliver, you know, shareholder value over the medium to long term and really support our 3% to 5% dividend growth going forward.
spk01: Okay, thanks for that answer, but maybe a supporting point, Joel, you know, how much of your... or EBITDA has cost pass-through including interest, maybe that would support that before I get on to an LNG question.
spk13: I'll start here and if Greg wants to add anything. When we look at the pass-through for our interest costs, the overall interest, we have about $2.9 billion of financial charges Roughly 20% of that would flow through in our rates, whether it's the NGTL system or the Canadian mainline. When I look at rising interest costs, as I mentioned in my prior remarks, we are largely insulated from that, given that 85% of our debt is fixed-rated, an average coupon of 4.8%, and the duration of our portfolio is 20 years. We took advantage over the last, really call it 10 years, of extending the duration of our portfolio with low interest rates. So again, despite the fact that we are in a higher interest rate environment today, when I look at our balance maturity profile, when I look at the fact, again, that 85% of our debt is fixed rate, that again, we are largely immune from rising interest rates that would hit our bottom line when you also factor that about 20-25% would flow through in our rates to our customers.
spk01: That's helpful detail. Thank you. Just one question here on LNG. I was wondering if Stan could discuss the Gillis Access project in more detail and the implications for supplying U.S. Gulf Coast LNG and exactly what you think the strategic benefits are for this project.
spk17: Yeah, sure can. You know, we're excited to provide solutions for our customers and to further enhance what we view as an irreplaceable pipeline infrastructure. With the announcement of our Gillis Access project today, and again, it's a $400 million capital investment, about a BCF and a half a day of capacity and service in the summer of 2024, you can think of us building that at the lower end of a six to eight times build multiple. Essentially, the project is a header system That can be further expanded over time within the state of Louisiana that will ultimately connect the Haynesville supplies that are going to show up at a point called Gillis to serve downstream LNG, industrial, and other markets within the state. With respect to the in-service timing, the sanctioning authority or the authority that has to approve this project actually rests with the state of Louisiana's Department of Natural Resources office. So while we'll still need to secure key environmental permits from entities such as the U.S. Army Corps of Engineers and U.S. Fish and Wildlife and various other state agencies, we're not required to file a FERC certificate, and that's in large part what allows us to target a summer 2024 in-service date. With respect to the more macro picture, I guess I would offer this. With our Gillis project and the other projects that we have placed into service or will be placing into service over the next several months and years, we're going to increase the flowing LNG feed gas that we have from about 3 BCF today, which is roughly a 30 percent market share, to over 6 BCF or 35 percent market share in 2025. So we see continued opportunities in a target-rich environment to continue to expand our best-in-class footprint, particularly across the state of Louisiana, to serve LNG loads, particularly important as energy security and energy reliability becomes a forward theme with respect to world energy demand.
spk01: Okay, that's very helpful. Thank you, everyone, and congratulations on the results. Thanks, Robert.
spk10: The next question is from Michael Lapid from Goldman Sachs. Please go ahead.
spk12: Hey, guys. Thank you for taking my question. Actually, two of them are a little bit unrelated. The first one is, any update? Y'all talked a while ago about a large-scale hydro project in Ontario with the Department of Defense involved. Just curious, any update there? And then the second question, really trying to think about where you're seeing inflation impact you, and specifically on the both on the capital side, but also on the operating cost. Like, where is it impacting you where you don't necessarily get recovery of it?
spk16: Corey, I'll ask you to start on OPS, and then I'll take the second part of the question.
spk14: Good morning, Michael. Our Ontario Pump Storage Project earlier this month submitted its filing to move into Stage Gate 3 of consideration for the ISO for 1,000 megawatts a pump storage facility located, as you mentioned, near Meaford, Ontario. We are awaiting ISO feedback and should have a decision on our go-forward steps in Q1 of 2023. And I think that we are very confident that we have built the right local and support for this project amongst a variety of constituents that we serve and it reinforces our very large set of opportunities for our service territory across Ontario.
spk16: Michael, we're very bullish on Ontario. We feel that it will be an opportunity-rich environment for us. The need for incremental generating capacity is going to be significant. over the course of the next decade as pickering comes out of service and as the Ontario market reshores a significant amount of manufacturing. So, you know, Ontario is a target-rich environment for us, so we're very excited about the Ontario Pump Storage Project. On the inflation question, look, you know, clearly there's an impact on the cost of labour When you look at the number of construction projects happening in Canada, for instance, it's far in excess of the sustainable capacity of the market to support those levels of construction activity in the near term. That will obviously balance out over time. We've seen more pressure on inflation in the Canadian market than in the U.S. market on our labor costs for construction. But I will point out that we have an ability to flow through those costs to the extent they are prudently incurred in rates given the regulatory construct in Canada. We have $110 billion in assets and only about 7,500 employees. So from an operation standpoint, we don't run a very labor-intensive business. So while we are seeing above-average inflation in terms of labor costs On the operations side, we factor that into our plans and into our budget for next year and the year beyond. And don't expect meaningful incremental pressure because of inflation in terms of impacting our cost of funding or our free cash flow generation over the course of the next couple of years.
spk12: Got it. That's super helpful. And just one quick follow-up on the cost of funding. Just curious, as you're kind of planning out for the analyst day or investor day and kind of thinking about multi-year both EBITDA and EPS growth, how do you think about the higher cost of debt, kind of what the impact on earnings power will be longer term? I'm just trying to think about, you know, X the asset sale, how you finance some of the big growth projects you're doing.
spk13: Yeah, Michael, you know, as I mentioned earlier, the good thing here is that when you have, you know, 85% of your debt portfolio with an average duration of 20 years with an average wage average coupon of 4.8%, it largely insulates us from rising interest rates. Where we do see the exposure, obviously, is more in our floating rate debt. And the way to think of that is really with our commercial paper program. And the sensitivity that we use is for a 25 basis point increase, you know, related to that debt. it would impact our EPS by about a penny per share. So not a huge impact overall when you consider our portfolio that's around $50 billion of debt today. And so as we think about things going forward with higher interest rates, obviously may have the ability to earn a higher return on some of our assets on the regulated side going forward if interest rates stay high for an extended period of time. So, again, largely insulated at this point from rising interest rates in our portfolio.
spk12: Got it. Thank you, guys. Much appreciated.
spk13: Thank you.
spk10: The next question is from Ben Pham from BMO. Please go ahead.
spk18: Hi. Thanks. Good morning. At the risk of annoying all of you, I actually had a couple questions on the portfolio management, and I'm just wondering on your comments around you had that last cycle of asset sales a couple years back, post-Columbia. And I'm wondering as you think about this next cycle, you did anticipate to bring forward some synergies from that first phase and maybe anything qualitative where you can share today versus last in terms of the art between public and private, maybe the buyer pool and sensitivity ESG.
spk16: Ben, I would say on your second question that there remains a strong bid in private markets for assets, particularly infrastructure assets that are highly contracted or regulated and have very stable cash flows because those lend themselves well to back leverage, which is what many of the infrastructure investors like to employ to improve their returns. So If you look at our suite of assets, we have a very consistent risk profile across the board, and there is a strong bid. Whichever way we want to go, we're going to see a strong bid for our assets. On your first question around synergies, I'm not quite sure I understand what you were getting at, Ben. Could you perhaps refine that question so I can help you?
spk18: Yeah, I was thinking more maybe as you went through that last process, you would have perhaps developed relationships with a number of potential buyers and you would have gone through maybe some pros and cons and assessment and it's more it's different going on in asset monetization the first time versus doing it the second time.
spk16: I see. Thank you for that clarification. I think it's incumbent upon us and as to a prior question, this is going to be a tool in our toolkit going forward it's incumbent upon us to maintain good relationships and a steady dialogue with potential buyers. So we developed and strengthened those relationships with the prior divestiture program, and we're going to leverage those relationships yet again here. And I'll just underscore that, you know, There's an art to divesting of assets, and it's a core competency of this company. It's a very labor-intensive process, as you can imagine, when you're running a competitive process. And we act with integrity. We deal with potential buyers in a fair manner. And that means when we have other assets that we offer up to the marketplace, we get strong demand because we deal with counterparties with integrity.
spk18: Okay, great. And then my follow-up, if I may, I know you're not going to discuss potential assets on the block, but are you able to share sacred cows, anything that you would not look to sell at all?
spk16: I will defer a response to that question for when we announce the transaction, Ben. I think there are many people listening in here with whom we're in conversations, and I'm going to refrain from adding any comments. Thank you.
spk18: Okay, no problem. Thank you.
spk10: The next question is from Andrew Kuski from Credit Suisse. Please go ahead.
spk11: Thanks. Good morning. I guess the question is going to be for Stan and for Bevan. And if you could just give us any kind of tone from your customers and maybe with some basin specifics on, you know, clearly you mentioned the Haynesville today with the Gillis project with, you know, clear appetite for takeaway, but any kind of context you can give on people seeking more capacity, greater duration, anything to that effect would be greatly appreciated.
spk17: So I can go ahead and start, and then I'll turn things over to Bevan. This is Stan. And maybe I'll just stick with the LNG theme, because there's a lot of discussions going on these days about East Coast LNG, for example. And I would say that our Columbia gas system, again, is an irreplaceable part of our pipeline network, and given its connectivity to the East Coast, would be uniquely situated to fund or build a supply project over to an East Coast LNG terminal. However, given the permitting challenges with building a terminal on the East Coast, we think that that is somewhat unlikely. Instead, we think it's a lot more likely that any new LNG terminals that are built in the U.S. will be in the Gulf Coast. And that is why most of the forecasts that you'll see show, for example, that Louisiana will export about 60% of all U.S. exports come 2030. So with respect to that, maybe just keeping with that theme, we are in what I would call initial cursory conversations with a couple of counterparties to look at the potential to expand our Columbia Gulf system to bring more volumes down to the Gulf Coast, again, consistent with this theme of energy reliability and security and the worldwide demand for energy and LNG exports from the U.S. in particular.
spk05: So Andrew, this is Bevan. I'll start with gas and then I'll move to liquids. So with respect to our Canada gas operations, our assets are ideally positioned in the Monty and we're seeing tremendous growth and response from our customers with desire for increased access to market and egress out of the basin. Our assets ideally are situated so that they can feed into Stans and the U.S. gas asset base to deliver that gas from Canada down through into the Gulf Coast markets as well as into the east coast of Canada. So we've seen tremendous long-term interest in the build-out of our systems, and the health of our customers is extremely strong in this environment. Moving to liquids, again, a very similar story. The supply basins that we serve up in northern Alberta, our customers in that market are receiving very high margins, driving the highest utilization of our Keystone system down to the Gulf Coast and into the Midwest markets that we've ever seen. So we've reached record production of our record throughput of of 640,000 barrels a day in the month of October, just highlighting the desire to move more barrels to the Gulf Coast. Both of those two examples just reflect the high-quality nature of where our assets are situated. Our operational performance has been extremely strong in this past year, and that serves us well as well as our customers for the next years to come.
spk11: That's very helpful. Thank you. And then my follow-up question is probably pointed to Francois or Joel. And I guess if you just step back and think about the targeted asset sales and the stock implications that can have, but ultimately, does the potential reduction of your cost of capital ultimately serve your customers better as you try to expand the networks? And just how do you philosophically think about that?
spk16: Our job to create shareholder value is to maximize the spread between what we earn on the capital we invest and our cost of capital. But the other benefit of minimizing your cost of capital is that it reduces your cost of service for your customers. We operate in competitive markets in many jurisdictions, and to the extent we can lower our cost of capital, it makes us more competitive as we look to compete for additional projects to add to our $34 billion backlog. So I appreciate that question, Andrew.
spk11: Thank you.
spk10: The next question is from Matthew Weeks from IA Capital Market. Please go ahead.
spk02: Good morning. Thanks for taking my question. Just thinking about the macro and, you know, support for low-carbon projects and the Inflation Reduction Act in the U.S. and kind of seeing some more of that in Canada, too. Recently, a hydrogen project, you know, receiving a good amount of government funding. I'm just wondering how you're looking at that side of the portfolio and that opportunity. You know, do you see, is kind of government support where you think it needs to be? At this point, do you need to see more? Do you see these steps being taken really accelerating or providing more growth opportunities in that side of the business?
spk16: Thanks for that question, Matthew. As we've talked about, part of our strategy is to make sure that we diversify our portfolio and forms of supply as they become cost competitive. We've been working very hard to develop our capabilities in some of these new low-carbon areas. From my perspective, both the Inflation Reduction Act and the fall economic statement in Canada are directionally very positive for making alternate lower-carbon forms of energy supply more cost-competitive, and that's what needs to happen. For us to allocate capital into a new technology, it needs to be affordable, reliable, and sustainable. and affordability being a key criteria. So having these incentives advance in the manner they have really is a cornerstone of us being able to allocate capital into those new areas. So we view that very much as a positive. So it supports our business development activities in our low-carbon businesses. And, you know, that includes pumped hydro, which qualifies in Canada. It includes extending benefits for renewables in the United States, as well as carbon capture and hydrogen production on both sides of the border, as well as, you know, small and moderate reactors, which are a little bit of a ways out. I think I've talked about that in the past. We see that as more of a 2030s opportunity set. But... clearly the incentives that have been presented both in the US and Canada are going to accelerate our opportunity set in our low carbon businesses.
spk02: Okay, thank you for the comments on that. Appreciate it. And just wondering, I'm not sure if this was disclosed or not, but if there are any kind of timelines on next steps for the Alberta carbon grid at this point.
spk05: Yes, Matthew, it's Bevan. We've, Alberta Carbon Grid, with our partner Pimino, we've entered into a carbon sequestration evaluation agreement with the government of Alberta to further evaluate one of the largest areas of interest that came through that process north of Fort Saskatchewan in Alberta. So this agreement allows us to evaluate the suitability of that area of interest for safely storing the carbon from industrial emissions. So We're going to take some time to ensure that we can effectively evaluate what that project will look like and work very closely with our customers of the point sources as we're looking to create a number of these hubs across the province and eventually hopefully transport and store up to 20 million tons of carbon across the province. Our objective really is to leverage our collective capabilities and footprint to provide, you know, a competitive open access solution for our customers. The timeline is, you know, we're right in the middle of it with the province, and, you know, this is going to take, you know, a few years of development in order to secure the right commercial constructs for our customers to move this project forward effectively.
spk02: Okay, thank you. I appreciate it. I'll turn the call back. Thanks. Thanks, Patrick.
spk10: The next question is from Patrick Kenny from National Bank Financial. Please go ahead.
spk07: Yeah, good morning. Just on NGTL, as you close in on completing the secured expansions through next year, any update on discussions with producers either on sanctioning further expansions on the system or perhaps the cadence of future maintenance activity to help further de-bottleneck the system?
spk00: Yeah, sure. Absolutely, Patrick. Appreciate the questions. Greg Grant, the Canadian gas business. As you've seen in the market and what we've seen over the last year, there's significant demand for the system. Bevan touched on a couple of the points earlier. As quickly as we can get assets into the ground, they're being used. And I think we've seen that through the great work our team has done on the 2021 program. We were able to safely bring online deep valley south and north here through September and October, which has added a significant amount of capacity to the system. So we're roughly bringing on about 1.3 BCF this year. That doesn't stop. We've had significant interest from customers. You've seen on the producer side receipts upwards of over a BCF. In fact, we hit another record here in October at 14.25 BCF per day. So you're really seeing the culmination of what we've been continuing to say on that world-class WCSB asset. It's very economic. We're seeing a ton of support, both from the producer's side and on the demand, as we've seen record levels of demand leaving the province. So quite supportive and seeing some great opportunities here for growth, both for us and our customers.
spk07: Okay, that's great, Keller. Thank you. And then... Maybe just a quick follow-up on CGL. Looks like there's a new disclaimer in the release regarding the recently revised capital costs, just citing current market conditions, inflationary impacts on labor. Just wondering if there is further upward pressure on that $11.2 billion budget through 2023, and your equity contributions end up being somewhere north of the 2.1. If that would push out your timeline to shut off the drip, or if you would like to use some of the asset sale proceeds to cover that additional overrun.
spk05: Yeah, Patrick, this is Bevan. I'll begin, and then I'll pass it off to Joel. So as Francois mentioned earlier in his remarks, approximately 75% of the project is completed. You know, 500 kilometers is welded. 400 of that is already backfilled in various stages of development. getting back to looking how it was when we started construction. This is one of the most complex projects that's executed in industry and certainly in my career, and we know the headwinds, and we have a clear line of sight to the project risks and continue to develop mitigation plans to limit the impact of those risks. Our commercial structure also has some provisions to manage those risks. So each day, you know, we're laser focused on delivering safely with high quality and zero impact to the environment and the communities that we're operating in. And this is a legacy project that will serve not only our upstream but our downstream customers for decades to come. We're laser focused on ensuring that we can deliver the project by the end of 2023 for our customers, LNG Canada. And those risks we're aware of and we're managing them day to day. And we're just being transparent about, as Francois earlier pointed out, about some of the inflationary environment that we are in. We're experiencing some of that in our labor force.
spk13: Ben Patrick, it's Joel here. We did increase the credit facility associated with CGL from $6.8 billion up to $8.4 billion, so we do have the funding in place. We do have a subordinated loan in place as well from TCPL into the project if need be, but we do have all the funding in place to the extent that if there were a cost to be higher than $11.2, we would look to utilize the subordinated loan agreement, which would be temporary in nature. Your question around the drip, we would see no change here with the drip. As I said in my prepared remarks, that we expect to turn that off with the dividend declared for June 30th of next year. To the extent that we see with our capital rotation, as Francois mentioned, That gets accelerated depending on the timing and the quantum of the proceeds, and we'll look at the drip at that point in time. So, again, with CGL, we don't see a need here to extend the drip. We would look to, if anything, bring that off sooner rather than later, depending on the level of capital rotation.
spk07: Okay, that's great. Thank you very much.
spk10: Ladies and gentlemen, this concludes the question and answer session. If there are any further questions, please contact Investor Relations at TC Energy. I will now turn the call over to Gavin Wiley. Please go ahead.
spk08: Thank you, Operator, and thanks, everyone, for participating this morning. We very much appreciate your interest in TC Energy, and, of course, we look forward to talking with you all soon again. Thank you.
spk10: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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