TC Energy Corporation (NYSE:TRP) Q4 2022 Earnings Call Transcript

TC Energy Corporation (NYSE:TRP) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the TC Energy Fourth Quarter 2022 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. 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, everyone. I’d like to welcome you to TC Energy’s 2022 fourth 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 their remarks, we will 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 Jaimie Harding. Before Francois begins, I’ll remind you that remarks today will include forward-looking statements that are subject to important risks and uncertainties.

For more information, please see the reports filed by TC Energy with Canadian securities regulators and with the U.S. Securities and 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’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 now turn it over to Francois.

Francois Poirier: Good morning, everyone. In the fourth quarter of 2022, we continued to deliver strong utilization and availability across our system when people need energy most, setting multiple records along the way. And by extension, we also achieved record financial results in 2022, including a 6% year-over-year increase in comparable EBITDA. We see this positive momentum continuing into 2023 and expect our industry-leading $34 billion secured capital program and portfolio of high-quality utility-like assets will continue to deliver sustainable cash flow growth. We are reaffirming our 2023 financial outlook with comparable EBITDA expected to be 5% to 7% higher than in 2022, and we’ve increased our dividend for the 23rd consecutive year.

We are advancing our $5-plus billion asset divestiture program that will provide funding for our portfolio of high-quality growth opportunities while at the same time, accelerating our deleveraging. While 2022 was a record-setting year in many ways, we were faced with challenges. On December 7, we activated our emergency response protocols after detecting an oil release on our Keystone System. Our priorities are clear: keep people, the environment and our assets safe every day. Serious events such as this are never acceptable. From the initial detection to valve isolation, it only took seven minutes to shut down the pipeline. The response from our front line was nothing short of exceptional, and I want to thank our team for their incredible preparation, training and decisive action.

And I also want to thank the community of Washington County, Kansas, who welcomed and cared for our teams on the ground. The collective response allowed us to safely return the majority of the system back into service within seven days, and we replaced, repaired and restarted the remaining Cushing segment within three weeks. We continue to diligently restore the area to its original condition and have recovered 90% of the release volume. We continue to investigate the root cause of the incident, and we are committed to apply those learnings going forward. While our primary focus remains safe resumption of operations, we do expect to continue to fulfill our Keystone Pipeline contractual commitments, and we do not anticipate a material financial impact on our 2023 comparable EBITDA outlook.

The value of our Liquids business remains high. reflecting its significant free cash flow generation, direct link between critical markets and additional in-corridor growth opportunities. As an example, the Port Neches Link project is expected to be in service in the first quarter and will provide last mile connectivity to North America’s largest refinery. In our U.S. natural gas business, we achieved an all-time delivery record of 36.6 Bcf on December 23. And in 2022, our average daily volumes increased 5% year-over-year. In 2022, we placed approximately USD 2.1 billion of projects into service. The majority of those were aligned with increasing our share of U.S. LNG feed gas deliveries from 25% to about 30%, and we plan to increase our market share to 35% in a growing market over the next 5 years.

This month, as evidence of that, we used our competitive footprint to sanction the 1.4 Bcf per day extension of our Gillis Access Project to further connect the Haynesville basin to Louisiana markets, including the rapidly expanding LNG market. In Mexico, our first-of-its-kind strategic alliance with the CFE allowed us to resolve arbitrations and integrate multiple pipeline systems into one. The addition of the Southeast Gateway pipeline also provides an opportunity to increase our total return on invested capital once it’s in service. And I’m pleased to update that we are tracking to both schedule and cost on Southeast Gateway. We recently completed a critical path milestone by executing the main land acquisition agreements required for landfalls and compressor stations in Veracruz and Tabasco.

We will continue to provide progress updates throughout the year for this strategic pipeline that will support delivering vital natural gas supply to the growing Central and Southeast regions of Mexico. In Canada, our natural — our NGTL system continued to perform very well, with average deliveries up 6% to 13.4 Bcf a day compared to 2021. In 2022, we placed $3.2 billion of capacity projects into service, growing our NGTL investment base by 12% year-over-year, and we expect to place approximately $3 billion of additional facilities into service in 2023. Earlier this month, we had announced our revised cost estimates for the Coastal GasLink project at approximately $14.5 billion. The project has now reached 84% overall progress, and we have line of sight to our mechanical completion target of year-end 2023.

While we have faced significant challenges, our teams in the field are working tirelessly to complete the project in the highest safety and quality standards in the pipeline industry while executing the remaining scope at the lowest possible cost. In our Power and Energy Solutions segment, we produced exceptional results with 2022 comparable EBITDA up 36% year-over-year, and this segment continues to play a greater role in our diversified portfolio of energy assets. From an operational excellence standpoint, our Cogen operations had strong performance that resulted in peak power plant availability during the coldest days in December, where Alberta saw record power pool prices. Bruce Power achieved 87% availability in the fourth quarter, while the Unit 4 planned outage was completed 22 days ahead of schedule.

We expect to place Unit 6 back into service in late 2023 following completion of its MCR program, while Unit 3 MCR is expected to commence next month. Unit 4, the third unit in the MCR program is expected to reach its final investment decision in the fourth quarter of 2023. Bruce Power remains the largest emissionless investment in our portfolio. Its capital requirements are largely funded from Bruce distributions, and we expect it to deliver significant free cash flow following the completion of the MCR program as well as our project 2030. Thank you. I’ll now turn the time over to Joel for a few comments.

Joel Hunter: Thanks, Francois. Our fourth quarter 2022 results continue to demonstrate the solid execution and high utilization across our portfolio with comparable EBITDA up 12% year-over-year and comparable earnings increasing 10%. 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. Looking at comparable EBITDA, a main contributor to the outperformance was driven by the strength in our Natural Gas Pipelines businesses in Canada, the U.S. and Mexico. Growth in our Canadian Natural Gas Pipelines business was largely underpinned by the increase in the NGTL System rate base as we placed $3.2 billion of capacity projects in service during the year.

In the third quarter of 2022, we placed the North section of the Villa de Reyes pipeline in the east section of the Tula pipeline in service, contributing to increased results for our Mexico business. Switching to comparable earnings. Following the strategic partnership announced with the CFE in August, we began booking AFUDC on our Mexico projects under construction. The AFUDC amount will continue to grow as we execute our Southeast Gateway capital program. We are well positioned to deliver strong results in 2023 and continue to expect our 2023 comparable EBITDA to be approximately 5% to 7% higher than 2022 and comparable earnings per common share to be modestly higher than 2022. We are confident in this outlook despite the environment of rising interest rates and inflation.

Approximately 80% of our debt is fixed rate and has a weighted average maturity of approximately 20 years, an average pretax coupon of 4.9%. As such, changing interest rates have only a modest impact on our comparable EPS. Strength in the U.S. dollar predominantly serves as a tailwind given approximately 60% of our comparable EBITDA is generated in U.S. dollars. Our 2023 U.S. dollar net income is largely hedged at around 130, which minimizes the impact to our comparable EPS from fluctuations in foreign exchange rates. As we’ve stated before, we are largely insulated from inflation. Every 1% move equates to approximately $0.01 per share. Of course, any fluctuations in these variables and other factors could impact our 2023 outlook, and we’ll look to revise throughout the year if necessary.

Looking to specific segments of our 2023 outlook. We expect our Canadian and Mexico Natural Gas Pipelines businesses to deliver higher comparable EBITDA compared to 2022, largely driven by continued growth on the NGTL system and full year contributions from the BDR North and 2 East pipelines, respectively. In Liquids, I’ll note that we expect comparable EBITDA to be modestly lower than 2022. Our outlook incorporates the impact of the Milepost 14 incident and expectation of continued lower margins on Marketlink. That said, we expect to continue to be able to fulfill our Keystone pipeline system contract commitments. Finally, we anticipate our U.S. Natural Gas Pipelines and Power and Energy Solutions segments to be consistent with 2022. Additional information is contained in our 2022 annual management’s discussion and analysis.

We delivered 6% comparable EBITDA growth in 2022 and expect similar levels in 2023 and through 2026, excluding the potential impact of asset sales. Similar to today, approximately 95% of our EBITDA will continue to come from regulated and long-term contracted assets, which provides a high level of certainty around our future cash flows. Our growth outlook is underpinned by our industry-leading $34 billion fully sanctioned secured capital program. Turning to our funding program. We’ve updated our sources and uses of funding that was shown at our Investor Day to incorporate the revised cost estimate for Coastal GasLink. In 2022, we sanctioned $8.8 billion of projects that are expected to generate a weighted average unlevered after-tax IRR that is above our historical range.

While we expect to sanction additional high-quality opportunities, novel projects sanctioned will have significant capital requirements over the next few years. We will be disciplined around capital allocation, with a goal deferring certain project spending and finding capital reductions where possible without sacrificing operational safety or reliability. Reiterating Francois’s earlier comment, we are confident in our asset divestiture program, will allow us to accelerate our deleveraging target. Our plans have us reaching 5x debt to EBITDA in approximately 12 months with 4.75 times remaining our target that will provide us with additional financial strength and flexibility. Our sustainable cash flow growth will also drive our deleveraging and support incremental long-term debt and hybrid capacity to further fund accretive growth opportunities where our capital spending exceeds our targeted annual range of $5 billion to $7 billion, we will continue to utilize capital rotation without the reliance on common equity.

Participation in our dividend reinvestment plan was approximately 33%, resulting in $607 million reinvested in common equity from the dividends declared in 2022. As a reminder, the dividend reinvestment plan is expected to be in place through dividends declared for the quarter ending June 30, 2023. These two charts capture the resiliency of our value proposition. First, as Francois mentioned, TC Energy’s Board of Directors has declared a first quarter 2023 dividend of $0.93 per common share, which is equivalent to $3.72 per share on an annual basis. representing a 3.3% year-over-year increase. This is the 23rd consecutive year of common share dividend increases and truly reflects confidence in our outlook. Second, we have delivered strong results and sustainable growth in comparable EBITDA, reflecting the strength of our utility-like business model, our focus on safety and operational excellence, the value of our long-term relationships and partnerships and North America is increasing demand for our essential services.

We have created value despite market volatility and macroeconomic challenges, and I’m confident in our ability to continue to do so going forward. With that, I’ll pass it back to Francois.

Francois Poirier: Thanks, Joel. Just a few closing comments before we turn it over for questions. For 2023, our team is laser-focused on execution. Firstly, maintaining safe and reliable operations is always our number one priority; second, executing and progressing our major projects, such as Coastal GasLink and Southeast Gateway; third, enhancing our balance sheet by actively managing our capital spending and advancing our $5-plus billion asset divestiture program; and then lastly, ensuring operational excellence to drive higher returns on existing assets. Given the quality of our assets, we see strong market interest and expect compelling valuations that we anticipate will allow us to size our divestiture program to support achieving our deleveraging target and fully fund our secured capital program.

Going forward, we will continue to use capital rotation, as Joel mentioned, beyond 2023 as a mechanism and as a tool to create long-term shareholder value. This is an exciting time for TC Energy. We have an unparalleled opportunity set. And I’m confident that we have the people and the financial capacity to prosecute our secured project backlog and continue to deliver superior long-term shareholder value. I’ll now pass the call back over to the operator for questions.

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Q&A Session

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

Rib Hope: First question is on the asset sale process that are ongoing. As we’ve seen the cost increase for Coastal GasLink, have you seen kind of the — or internally, have you changed your views of which assets could potentially be for sale, just given the higher capital requirement? And then secondly, on that, just given the market conditions, have you seen any changes in bidding activity from your counterparties?

Francois Poirier: Rob, it’s Francois. I appreciate the question and I understand that there’s a lot of interest on what we’ll be selling and when we are in market with number of different processes and conversations. We’re at a very sensitive time in those processes. I’m sure many of those counterparties are listening to this call. And so we’re going to refrain from commenting specifically on any process. But what I will tell you is we are confident in our ability to achieve our $5-plus billion program and even upsizing that program to the extent we see attractive valuations Joel mentioned, we have a near-term target within the next 12 months to achieve 5 times debt-to-EBITDA. And based on the conversations we’ve been having, we don’t foresee any change in tone from conversations that would cause us to conclude that those goals are not achievable.

Secondly, I would say that our focus as part of this process hasn’t changed, which is we have an excellent quality business portfolio in terms of business risk. And we want to maintain that diversity, and we want to maintain the quality of the portfolio. It’s an important underpinning of our credit quality and the stability of our dividends. And we don’t see the need to disproportionately monetize any portion of our portfolio that would affect its composition. I hope that helps.

Rib Hope: No, that’s a great answer. I appreciate that. And then just moving over to coastal. I understand that you gave us an update a couple of weeks ago, but we’re midway through February. Can you provide an update on how the winter construction has gone for those key gating factors that could potentially push the project into 2024?

Bevin Wirzba: Rob, this is Bevin. Thanks for the question. Our progress has been very strong. We’ve had — the productivity that we’re seeing in the field has not only been very safe, but we had post-Christmas, the majority of our cruz over 6,000 return to our right away. We’re highly confident in the contract visibility to continue to manage through some pretty challenging sections are remaining on the project. But as we provided in our update just a few weeks ago. We’ve got a very solid execution plan that allows us to achieve our target, we believe, by the end of 2023 for mechanical completion. We’re introducing gas here shortly to Wilde Lake compressor station. It’s fully mechanically complete, which is a very significant milestone as that is where we’ll introduce gas for the beginning of the commissioning of the project.

Operator: Our next question comes from Ben Pham of BMO. Please go ahead.

Ben Pham: I’m wondering, you mentioned you expect your debt-to-EBITDA to move to 5 times in 12 months. I’m curious what factors or assumptions you’re using to get to that? And is that a run rate expectation? And maybe just for context to what was your debt to EBITDA in 2022 adjusted for the credit rating adjustments?