TC Energy Corporation

to welcome you to TC Energy's 2020 Fourth Quarter Conference Call. Joining me today are Francois Poirier, President and Chief Executive Officer, Don Marchand, Executive Vice President, Strategy and Corporate Development, and our Chief Financial Officer, Tracy Robinson, President, Canadian Natural Gas Pipelines and Coastal GasLink, Stan Chapman, President, U.S. and Mexico Natural Gas Pipelines, Bevan Worspa, President, Liquids Pipelines, Corey Hessen, President, Power and Storage, and Glenn Meneus, Vice President and Controller. Francois and Dawn will begin today with some opening comments on our financial results and certain other company developments. A copy of the slide presentation that will accompany their remarks is available on our website. It can be found in the investor section under the heading events and presentations. Following their prepared remarks, we will take questions from the investment community. If you are a member of the media, please contact Jamie Harding following this call and she'd be happy to address your questions. In order to provide everyone from the investment community with an equal opportunity to participate, we ask that you limit yourself to two questions. If you have additional questions, please re-enter the queue. Also, we ask that you focus your questions on our industry, our corporate strategy, recent developments and key elements of our financial performance. If you have detailed questions relating to some of our smaller operations or your detailed financial models, Hunter and I would be pleased to discuss them with you following the call. Before Francois begins, I'd like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by TC Energy with Canadian Securities Regulators and with the U.S. Securities Exchange Commission. And finally, during this presentation, we'll refer to measures such as comparable earnings, comparable earnings per share, and comparable funds generated from operations. These comparable measures are considered to be non-GAAP measures, and as a result, they may not be comparable to similar measures presented by other entities. These measures are used to provide you with additional information on TC Energy's operating performance, liquidity, and its ability to generate funds to finance its operations. With that, I'll turn the call over to Francois.

Thanks David and good afternoon everyone and thanks for joining us this afternoon. While 2020 presented some of the greatest global challenges in recent history, we quietly and reliably continue to deliver the energy millions of people rely on every day. Notably, the services we provide in Canada, the United States, and Mexico were deemed essential Given the important role our infrastructure plays in the functioning of the North American economy and the well-being of people across the continent, we take that responsibility seriously. And as always, we conducted our business in a safe and reliable manner, employing thousands of workers and supporting communities wherever we operate. And we delivered strong financial results for our shareholders. As you're accustomed with our risk preferences, approximately 95% of our comparable EBITDA comes from regulated and or long-term contracted assets, largely insulating us from the short-term volatility associated with the volume throughput and commodity price fluctuations. As a result, our $100 billion portfolio of high-quality, long-life energy infrastructure assets produced record results again in 2020. Highlighting the resiliency of our assets and our utility-like business model. At the same time, we continue to advance a capital program that will help power the North American economy for decades to come. More specifically, we placed $5.9 billion of growth projects into service in 2020 and advanced another $20 billion of secured capital projects, and that's excluding Keystone XL. In addition, we continue to progress more than $8 billion of projects under development as well as numerous other opportunities. Looking forward, we expect our solid operating and financial performance to continue with ongoing growth in EBITDA. We also expect comparable earnings from common shares in 2021 will be generally consistent with the record results we produced in 2020. Finally, We know our ongoing success will depend on our ability to balance profitability with safety, environmental, and social responsibility. Society expects its energy to be delivered with care for people and our planet, and we also demand this of ourselves. We have a 70-year track record of safe and reliable operations, but we recognize we can always do better. And so as a result, We are focused on continuous improvement, including potential paths to reducing our GHG emissions and understanding shifting long-term fundamentals to ensure our business remains sustainable and resilient in an ever-evolving energy landscape. Now, with that as an overview, I'll expand on some recent developments, beginning with a brief review of our 2020 results. Excluding certain specific items, comparable earnings reached a record $3.9 billion or $4.20 per common share in 2020 compared to $3.9 billion or $4.14 in 2019, an increase of 1.5% on a per share basis. Comparable EBITDA of $9.4 billion was similar to last year, while comparable funds generated from operations also hit a record high of $7.4 billion, which is a 4% increase over 2019. Each of these amounts reflect the solid performance of our legacy assets as well as contributions from the $5.9 billion of new assets we placed into service during the year. Based on the strength of our financial performance and our promising outlook for the future, TC Energy's Board of Directors declared a first quarter 2021 dividend of 87 cents per common share, which is the equivalent of $3.48 per share on an annual basis. This represents a 7.4% increase over the amount declared in 2020 and is the 21st consecutive year that our board has raised the dividend. Next, a few comments on our five operating businesses. First, in Canadian natural gas pipelines, customer demand for our services remained strong in 2020. And this manifested itself in the volumes transported across our network with the NGTL system field receipts averaging 12.1 BCS per day and Canadian mainline deliveries averaging 4.5 BCS per day. Both amounts were similar to the volumes we transported in 2019. At the same time, we placed $3.4 billion of NGTL's system growth projects into service, we invested approximately $600 million in maintenance capital on our Canadian assets, which also forms part of Ratebase, and we received final approval for NGTL's 2021 expansion program. As a result, today we're advancing $6.7 billion of commercially secured projects on NGTL. that will provide an incremental 3.2 BCF a day of capacity for our customers between now and 2024. Finally, in Canadian natural gas pipelines, we also continue to advance the 2.1 BCF per day coastal gas link project that will connect WCSB natural gas reserves to the LNG Canada export facility in Kitimat, BC. Due to COVID-19, In late December, the BC Provincial Health Officer issued an order restricting the number of workers on industrial project sites in the Northern Health Authority Region of British Columbia. We're working with the provincial health authorities to safely resume construction activities in accordance with that order. We are also working with LNG Canada on establishing a revised project plan for Coastal GasLink. We expect that project costs will increase and the schedule will be delayed due to scope increases, permit delays and the impact of COVID-19 including the provincial health order. Coastal Gas Link will continue to mitigate these impacts to the extent possible and these incremental costs will be included in final pipeline tolls subject to certain conditions. Turning now to our U.S. natural gas pipeline business where our broad network moved record volumes, averaging approximately 25 BCF per day in 2020, an increase of 1% over 2019 deliveries. Now during the polar vortex that covered most of the U.S. over the past week, we experienced unprecedented sustained demand for our pipeline capacity as we set a record for coincidental three-day peak deliveries. of over 101 BCF from February 14th to the 16th, that being our prior mark set in January of 2019 by about 2.5 BCF per day. And I'd like to extend a big shout-out to our employees who've been managing trying personal circumstances yet continue to ensure that we deliver the energy people need every day. Thank you. Over the past year, we also placed U.S. $1.9 billion of projects in service, including the completion of the Modernization II program on our Columbia gas transmission system, while adding nearly U.S. $1 billion of growth projects to our backlog. Each of those projects is underpinned by long-term contracts, and they are great examples of the in-corridor expansions that will allow us to meet growing demand while also reducing our emissions. Also in U.S. pipelines, in late July, our Columbia gas transmission system filed a Section 4 rate case with FERC. The rate case is progressing as expected while we continue to pursue a collaborative process to find a mutually beneficial outcome with our customers through settlement negotiations. Finally, In U.S. natural gas pipelines, in late 2020, we entered into a definitive agreement and plan of merger to acquire all of the outstanding common units of TC Pipelines LP, not beneficially owned by us or our affiliates, in exchange for TC Energy common shares. A vote on the plan of merger by unit holders is scheduled for February 26th. The transaction is expected to close in late first quarter. Approval by the holders of a majority of outstanding common units of TCP is the remaining significant closing condition. Turning now to our Mexican natural gas pipelines, where our five operating pipelines moved approximately 1.8 BCF per day during 2020. In addition, we advanced the Villa de Reyes project, although a phased-in service of the pipeline has been delayed due to COVID-19. Subject to the timely reopening of government agencies, we now expect to complete construction during 2021. Finally, in Mexico, we completed a project to allow bidirectional flows on our Guadalajara pipeline. It's a good example of our ongoing collaboration with the CFE on a project that provides access to either LNG imports from the Manzanillo terminus or access to low-cost continental natural gas supply at the Guadalajara terminus for delivery to regional markets. Turning now to our liquids pipeline business, which generated solid results despite extraordinary volatility in global crude oil markets. While the volatility has a significant impact on our market link and liquid marketing business, Keystone continues to produce strong results. The system moved an average of 555,000 barrels per day last year, underscoring its role as an important conduit between abundant North American reserves and key markets. Also, in liquid pipelines, on January 20th, the U.S. President revoked the existing presidential permit for the Keystone XL pipeline. As a result of this disappointing decision, we suspended the advancement of the project and ceased capitalizing costs, including interest during construction, while we assess our options, along with our partners and other stakeholders. We wish to thank our customers, American and Canadian workers, our partners, the Government of Alberta and Natural Law Energy, labor organizations, industry, the Government of Canada, and countless other supporters of this project over the past decade. Turning to our power and storage business where Bruce Power once again produced solid results as its strong operating performance continued. Last January, work commenced on the Unit 6 Major Component Replacement or MCR program when we took the unit offline. We expect to invest approximately $2.6 billion in the program, with Unit 6 expected to return to service in 2023. While COVID-19 has presented some challenges, good progress is being made on the project, achieving a major milestone on October 1st with the commencement of the fuel channel and feeder replacement program. We also continue to advance work on the refurbishment of another five reactors as part of Bruce Power's long-term life extension program. Finally, in Power, we continue to engage various stakeholders in an effort to advance a large pumped storage opportunity in Ontario. The project is designed to store emission-free electricity and provide backstop to the intermittency associated with the energy provided by a renewable generation. In summary, today we're advancing $20 billion of secured projects that are expected to enter service by 2024. All are underpinned by cost of service regulation or long-term contracts, giving us visibility to the earnings and cash flow they will generate. Approximately $4.2 billion of these projects are expected to be completed in 2021 including $1.7 billion of maintenance and modernization initiatives tied to our regulated pipelines. Looking forward, our goal is to continue to invest $5 to $6 billion annually to deliver on our long-term growth plans. As you can see on this slide, our starting point is our $20 billion secured capital program. Beyond that, we expect to continue to invest One and a half to two billion dollars annually in maintenance and modernization programs across our extensive pipeline network, approximately 85% of which is recoverable through our rate-regulated businesses. We're also developing a significant suite of future opportunities, including several projects that will allow us to deploy capital along our extensive pipeline corridors. and we see opportunities in renewables and the firming resources needed to manage their intermittency, electrifying our fleet as well as emerging technologies such as hydrogen. In summary, I believe we will continue to be opportunity rich and I believe that our challenge will be to allocate capital thoughtfully to those projects that are aligned with our capabilities, our risk preferences and our return requirements while playing a role in the evolving energy landscape. Based on the continued strong performance of our base business, combined with our organic growth plans, we expect to continue to grow our dividend at an average annual rate of 5% to 7%. And I want to make it clear that there is no assumption of M&A embedded in our growth rates, nor is M&A a current area of focus for us. As always, the growth in dividends is expected to be supported by sustainable growth in earnings and cash flow per share and strong coverage ratios. In closing, I'd like to leave you with the following key messages. Looking forward, I expect our assets will continue to provide an essential service to the functioning of the North American economy, and demand for our services will remain strong for decades to come. We have five significant platforms for growth, our Canadian, US, and Mexico natural gas pipelines, our liquid pipelines, and our power and storage business. As we advance our $20 billion of secured capital projects and various other organic growth opportunities, we expect to build on our long-term track record of growing earnings, cash flows, and dividends per share. We will also continue to focus on safety, sustainability, Thanks, Francois, and good afternoon, everyone.

As outlined in our results issued earlier today, net income attributed to both common shares was $1.1 billion or $1.20 per share in the fourth quarter of 2020, compared to $1.1 billion or $1.18 per share for the same period in 2019. Fourth quarter 2020 included an income tax valuation allowance release of $18 million related to reassessment of our ability to utilize certain prior years' U.S. tax losses, An additional $18 million income tax recovery related to state income taxes on the sale of Columbia midstream assets in 2019 and an incremental after-tax loss of $81 million to sell remaining post-closing obligations on the sale of the Ontario natural gas-fired power plants in April 2020. Fourth quarter 2019 results also included several specific items outlined on the slide and discussed in the fourth quarter 2020 financial highlights release. All of these specific items, as well as unrealized gains and losses from changes in risk management activities, are excluded from comparable earnings, which reached $1.1 billion in fourth quarter 2020, or $1.15 per share, $110 million, or 12 cents higher than last year. Change of business segment results on slide 18. In the fourth quarter, comparably the DAF from our five operating segments was approximately $2.3 billion, consistent with 2019 results. Canadian Natural Gas Pipelines, comparable EBITDA of $682 million, was $64 million higher than the same period last year. Given the net effect of increased rate-based earnings, flow-through depreciation, and flow-through financial charges on the NGTL system, as our investment program advanced and additional facilities were placed in service, personal gas link development fee revenue recognized in 2020, and lower flow-through income taxes on the NGTL system and the Canadian mainline. I would note that for Canadian natural gas pipelines, changes in depreciation, financial charges, and income taxes impact comparably with that but do not have a significant effect on net income if they are almost entirely recovered in revenues on a flow-through basis. Net income for the NGTL system increased $17 million compared to fourth quarter 2019, mainly due to a higher average investment base from continued system expansions. Net income for the Canadian mainline decreased $2 million year over year. The U.S. natural gas pipelines comparable EBITDA of $706 million U.S. or $919 million Canadian in the quarter rose by $58 million U.S. or $64 million Canadian compared to the same period in 2019. The increase was mainly due to strong operating cost management across a number of our pipelines. Mexico natural gas pipelines comparable EBITDA of $128 million U.S. or $166 million Canadian rose consistent with results in fourth quarter 2019. Liquid pipelines comparable EBITDA declined by $64 million to $408 million in the fourth quarter of 2020, primarily due to lower contributions to liquid marketing activities, largely from reduced margins. Power and storage comparable EBITDA fell by $49 million year-over-year to $161 million, primarily due to the net effect of the removal from service of Bruce Power Unit 6 in January 2020 for its MCR program, and lower Canadian power earnings largely as a result of the sale of our Ontario natural gas power plants in April 2020, partially offset by fewer plant outage days on the remaining Bruce units and improved results from our Alberta cogeneration plants. For all our businesses with U.S. dollars in nominated income, including U.S. natural gas pipelines, Mexico natural gas pipelines and parts of liquids pipelines, EBITDA was translated into Canadian dollars using an exchange rate of 1.30 in fourth quarter 2020 compared to a rate of 132 for the same period in 2019. As a reminder, our U.S. dollar denominated revenue streams are in part naturally hedged by interest on U.S. dollar denominated debt. We then actively manage the residual exposure on a rolling two-year forward basis with realized gains and losses on this program reflected in comparable interest income and other in the corporate segment. Now turning to the other income statement items on slide 19. Appreciation and amortization of $652 million increased $27 million versus fourth quarter 2019, reflecting new assets placed in service in Canadian natural gas pipelines, which amounts are fully recoverable in tolls on a flow-through basis, partially offset by lower depreciation in power and storage, mainly due to a 2019 reassessment of the use of life of certain components at our Alberta cogeneration plants. Interest expense of $539 million for fourth quarter 2020 was $56 million lower year over year, primarily due to the net effect of higher capitalized interest related to Keystone XL. Lower capitalized interest due to the completion of DAPNI in the first quarter of 2020 and the application of equity accounting to Coastal GasLink upon the sale of a 65% interest in the project in May 2020. Lower interest rates on short-term borrowings. and the foreign exchange impact from a weaker U.S. dollar on translation of the U.S. dollar denominated interest. The AFEDC decreased $22 million to $95 million for the three months ended December 31, 2020 compared to the same period in 2019 primarily due to NGTL system expansion projects placed in service and the suspension of recording AFEDC on TULA affected January 1, 2020 due to ongoing construction delays. This was partially offset by continued investment in our growth projects on Columbia Gas. Comparable interest income on other was $86 million in the fourth quarter, up from $77 million for the same period in 2019, primarily due to realized gains in 2020 compared to realized losses in 2019 on derivatives used to manage our net exposure to foreign exchange rate fluctuations on U.S. dollar denominated income. This was partially offset by lower interest income in 2020 Related to the PESO-denominated intra-affiliate loan receivable from the Surge of Texas Joint Venture due to low interest rates and the foreign exchange impact of the week of PESO, a proportionate share of the offsetting interest expense on this loan is reflected in income from equity investments in our Mexico Metro Gas Pipeline segment with no resulting impact on consolidated net income. Income tax expense included in comparable earnings was $134 million in fourth quarter 2020 compared to $211 million for the same period last year. The $77 million decrease was mainly on account of lower flow through income taxes and Canadian regulated pipelines and higher foreign tax rate differentials. Comparable net income attributable to non-controlling interest of $69 million in the fourth quarter decreased by $7 million relative to the same period last year. Non-controlling interest primarily captures public unit holder ownership in TC Pipelines LP and the Government of Alberta investment in Keystone XL. And finally, preferred share dividends were comparable to fourth quarter 2019. Now turning to slide 20. During the fourth quarter, we invested approximately $2.2 billion in our capital program, primarily on NGTL system expansions, various U.S. natural gas pipeline projects, and Keystone XL prior to suspending its advancement. Our investing activities were largely funded with comparable funds generated from operations of $2.1 billion and partner equity contributions to Keystone XL. For the full year, comparable funds generated reached a record $7.4 billion. Our balance sheet, liquidity, and financial flexibility are all in their historical position of strength. We exited 2020 with debt to EBITDA in line with the high fours and FFO to debt of approximately 15%. that we have targeted and we are well positioned to fund our $20 billion secured capital program through our strong internally generated cash flow and debt capacity without increasing share count. As we have suspended the advance from the Keystone XL, we no longer expect to issue hybrid securities or common shares to our dividend reinvestment program for the purpose of funding the project. Finally, we extinguished U.S. $2 billion of 364-day committed bilateral credit facilities which had been established in second quarter 2020 at the onset of the pandemic as they were no longer needed. Now turning to slide 21, this graphic highlights our forecasted sources and uses of funds for 2021 through 2023 which is similar to the slide we presented at Investor Day but updated to remove Keystone XL going forward. Starting in the left column, the total funding requirement over the next three years is projected to be approximately $28 billion comprised of dividends of $11 billion, capital expenditures including maintenance capital of $15 billion, and $2 billion attributed to the pending TC Pipeline's LP acquisition. The second column highlights expected internally generated cash flow of $21 billion, which leaves a residual need of approximately $7 billion in the far right column, of which approximately $2 billion is attributed to the pipe LP share for unit exchange. The remaining $5 billion will be funded through a combination of incremental debt, commercial paper, and other, including capital recoveries. The program is consistent with our goal of maintaining debt to EBITDA in the high force range and FFO to debt at 15%. Now turning to slide 22, next I'd like to spend a moment on our 2021 comparable earnings outlook. Additional information is contained in our 2020 annual management's discussion and analysis, which is being filed on CDAR today and will be available on our website. Overall, comparable earnings per share in 2021 are expected to be generally consistent with results achieved in 2020 due to the net impact of the following. Canadian natural gas pipelines earnings are anticipated to be higher mainly due to continued growth in the NGTL system, higher incentive earnings in the Canadian mainline, and increased coastal gas link development fee revenue due to an expected rise in project activity. U.S. natural gas pipelines earnings are also expected to grow due to an increase in transportation rates on Columbia Gas, which is dependent on the outcome of the Section 4 rate case filed with FERC. In Mexico, we forecast earnings to be lower year-over-year due to fees recognized in 2020 associated with the completion of the certain Texas pipeline. In liquids, earnings are anticipated to be lower than 2020 due to continued challenging market conditions impacting uncontracted volumes on the Keystone pipeline system and margins in the liquids marketing business. Operable earnings for the power and storage segment are expected to decline primarily due to a lower contribution from bruised power as a result of greater planned outage days and higher operating costs, as well as the sale of our Ontario natural gas fired power plants in 2020. Bruised power availability excluding Unit 6 was 88% in 2020 and is expected to be in the mid-80% range in 2021. Other items impacting earnings include the suspension of AFUDC on Villa de Reyes effective January 1st, 2021, given ongoing delays, and reduced capitalized interest due to the revocation of the Keystone XL presidential permit, which occurred on January 20th. With respect to income taxes, excluding Canadian rate-regulated pipelines, where income taxes are a flow-through item and can be quite variable, along with equity AFUDC income in U.S. natural gas pipelines, We expect our 2021 full-year effective tax rate to be in the mid to high teens. Finally, as part of the 2021 outlook, I would note that our exposure to interest rate, foreign exchange, and commodity price variability remains quite limited in our diversified portfolio, given approximately 95% of EBITDA coming from contract and regulated assets, various flow-through insuring mechanisms, as well as natural and active hedges in place. We do expect to record an impairment charge in 2021 related to the suspension of advancement of Keystone XL, and as previously noted, we have stopped recording IBC for the project effective January 20th. In terms of capital spending, we expect to invest approximately $7 billion in 2021 on growth projects, maintenance capital, and contributions to equity investments, with the majority attributable to NGTL system expansions, U.S. Nitrogas Pipelines project, the Bruce Power Life Extension Program and Normal Course Maintenance Capital of which approximately 85% is invested in regulated rate base or otherwise recoverable. We do not believe disruptions related to COVID-19 will be material to our overall 2021 capital program, but recognize that uncertainty exists in both the short and longer term. Lastly, turning to slide 23, closing, I offer the following comments. Our solid financial and operational results in the fourth quarter once again highlight our diversified low-risk business strategy and reflect the robust performance of both our blue-chip legacy portfolio along with the incremental contribution of equally high-quality assets from our ongoing capital program. Today, we are advancing a $20 billion suite of secured projects and have five distinct platforms for future growth, including U.S. and Mexico natural gas pipelines, liquids pipelines, and power and storage. Our portfolio of critical energy infrastructure projects is poised to generate high-quality long-life earnings and cash flow for our shareholders, as well as offer further attractive and executable in-corridor opportunities. That is expected to support annual dividend growth of 5% to 7% in the future. Finally, we will continue to maintain financial strength and flexibility at all points of the economic cycle and as a proven shock absorber to unforeseen market events. That's the end of my prepared remarks. I'm now turning the call back over to David for the Q&A.