TC Energy Corp (TRP) 2023 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the TC Energy Second Quarter 2023 Financial Results Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Gavin Wylie, Vice President, Investor Relations. Please go ahead.

Yes. Thank you very much. And good morning, everyone. I'd like to welcome you to TC Energy's 2023 second quarter conference call. Joining me are Francois Poirier, President and Chief Executive Officer; Joe Hunter, Executive Vice President and Chief Financial Officer, along with other members of our executive team.

Francois will begin with comments around the announcement we've made this week. Bevin will provide additional details around the spinoff of our Liquids Pipelines business, and Joe with our financial and operational results.

A copy of the slide presentation that will accompany the remarks and additional presentation materials on the announcement are 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 2 questions and if you are a member of the media, please contact our media team.

I'd like to remind you that remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information, please see the reports filed by TC Energy with Canadian Securities Regulators and with the U.S. Securities Exchange Commission.

Finally, during the presentation, we'll refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC Energy's operating performance, liquidity and its ability to generate funds to finance its operations. A reconciliation of various GAAP and non-GAAP measures is contained in the appendix of the presentation.

With that, I'll now turn over to Francois.

Thanks, Gavin, and good morning, everyone. Well, it's been a busy week, but an extremely transformative one that sets out our company's path for the next decade. TC Energy's long term strategy is focused on unlocking disciplined growth, having financial strength and operating safely and efficiently. And the announcements we've made this week all align to that vision.

As we've said all along, energy fundamentals drive our strategy and our decisions. And what we're seeing is that all forms of energy will be required to meet demand. And we are very fortunate to have incumbency across a wide range of energy infrastructure platforms.

We're an incumbent in transporting natural gas from the western Canadian basin. We're an incumbent transporting natural gas from the Appalachian Basin. We are an incumbent with the shortest transit time for crude oil to Gulf Coast refineries. We're building incumbency and importing natural gas into Mexico. And of course, we have incumbency in nuclear generation in Ontario.

That incumbency brings growth opportunities and superior returns, and we need to protect it by continually investing capital and pursuing that growth.

Simply put, the number of attractive opportunities we are seeing is accelerating. In fact, it's exceeded our financial and human capacity to pursue them as a single company. And with our renewed commitment to an annual limit on net capital spend to $6 billion to $7 billion per year, this left us with a simple conclusion. Separating into 2 businesses with separate mind and management, each with a strong balance sheet, and their own currency will allow us to pursue more growth for the benefit of our shareholders than we could today.

So why now? Global events have reminded us of the need to balance reliability, affordability, and sustainability and that all forms of energy will be required. Long-term fundamentals have shifted, and that has created significant opportunities for Liquids business that we've had to turn down, and that value should be captured.

This spinoff allows Bevin and his team the opportunity to fully leverage the growth opportunities that we are seeing, and doing so in a tax efficient manner.

The second value proposition comes from greater efficiencies we can capture that are catalyzed by separation. As a premier North American energy company, TC Energy will leverage the complementary synergies across our Natural Gas and Power and Energy Solutions businesses.

Now earlier this week, we announced a first step in -- with the sale of a 40% interest in our Columbia Pipeline to GIP. This sets up the new TC Energy for success. Both businesses have enormous growth opportunities. And the beauty of that is that we see ourselves migrating to a more regulated business model.

Our operational results continue to demonstrate that decarbonization and increasing reliance on renewables requires greater firming, and natural gas will play a key role for decades to come. We see this in Europe, which has been a driver behind the growth in LNG exports.

Our Power and Energy Solutions business is expected to derive more than 75% of its 2030 comparable EBITDA from nuclear and firming resources, likely to be underpinned by rate regulation.

We're also advancing the development of [CCUS] projects in Canada and the U.S. with projects like the Alberta Carbon Grid, and project Tundra in North Dakota. Beyond this, we see extended capabilities to leverage the complementary nature of our gas assets in areas like hydrogen.

Critical to the adoption of any new technology will be expertise and relationships with regulators, stakeholders and customers, and this is a deep skill set and competitive advantage for us. TC Energy will continue to optimize our capital allocation processes to leverage the mutual benefits across our businesses. Our value proposition and low risk preferences are unchanged and we are increasingly utility weighted in our business.

At close of the spinoff transaction, we expect that 96% of our adjusted EBITDA will be either rate regulated or long term contracts. Post transaction, our 2022 comparable EBITDA is expected to grow at a 7% compound annual growth rate through 2026. And with the transaction with GIP, and then with the spinoff, we believe that only an incremental $3 billion of additional divestitures over the course of the next 18 months will be required for us to get below 4.75 debt-to-EBITDA by the end of 2024.

Separately, our Liquids business has an unrivaled commercial construct. We had the longest tenured contracts among its peer group, the lowest cost path to market with the fastest transit times. It delivers the highest quality crude for our customers to the refining market, and that is what drives the opportunity to create more value as separate entities.

Now let's come back to our 2023 priorities that we stated at the onset of the year. These announcements this week are in direct service of those commitments, and we've made significant progress.

First, we are safely delivering on our major projects such as Coastal GasLink, and Southeast Gateway on the planned cost and schedule. Second, we've significantly accelerated our deleveraging goal, with the announced sale of a 40% equity interest in the Columbia Pipeline systems for total cash proceeds of $5.2 billion, which will go directly to reducing our debt to the tune of 0.4x debt-to-EBITDA. And third, we continue to safely and reliably operate our assets and provide essential services across North America.

Now we also realized that the spinoff of our Liquids businesses creates an opportunity to simplify our gas organization. That's the second value proposition with the spin and allows us to operate our systems in an integrated natural gas network across North America.

We've promoted Stan Chapman to Executive Vice President and Chief Operating Officer of our Natural Gas Pipelines to integrate our geographically dispersed natural gas businesses into a single unified structure.

This is something that we have been working on for many months with our consultants and we have a credible and detailed plan that we are already implementing.

So as our spinoff transaction proceeds, we will remain focused on safety, operational excellence, and business continuity for all of our valued customers and stakeholders.

Now we are firmly moving towards our desired future state. We'll have 2 separate entities with strong a management to pursue incremental growth, and both companies will be free to pursue their own distinct opportunity sets.

One will be increasingly utility weighted growth vehicle that's natural gas, nuclear, hydro storage and new technologies. It will have a stable balance sheet above average per share growth that supports a stable dividend growth rate of 3% to 5% at attractive and conservative payout ratios.

The other, our Liquids Pipeline Company led by Bevin, will be a highly contracted business with stable and robust cash flows supported by long term customers. To me, this is how we create incremental value for our shareholders.

Now with that, I'll turn it over to Bevin to speak a bit more about the Liquids Pipeline Company.

Thanks, Francois, and good morning, everyone. Now this is a monumental moment for the entire TC Energy organization and the new Liquids Pipeline Company. The liquids for our liquids -- the vision for our Liquids business has always been to be the premier Liquids backbone for North America, sustainably fueling quality of life.

Yesterday's announcement to spinoff the Liquids business will allow us to continue to deliver on that vision. And as a stand-alone entity, we will have greater flexibility to use our significant free cash flow to add shareholder value.

In its new form, the Liquids Pipeline Company will continue to offer one of North America's most competitive Liquids platforms, connecting some of the largest and most resilient supply, demand and export markets.

Our focus to deliver on our value proposition is on safety and operational excellence as we continue to deliver on the premium value proposition that has served our business well historically.

Across 3 pipeline systems, we operate 4,900 kilometers of pipe or over 3,000 miles of crude oil infrastructure. Since its inception, the Keystone System has delivered over 3.9 billion barrels, and we transport 16% of crude oil exports out of the Western Canadian Sedimentary Basin.

By delivering stable, responsible WCSB supply to the most resilient refining markets in PADDs 2 and 3, we see a long runway of opportunities supported by long-term energy market fundamentals. We also remain highly committed to ESG, including safety and reducing our emissions by decarbonizing our power consumption.

We have stable, robust cash flows supported by 96% investment-grade counterparties. Our comparable EBITDA is approximately 88% contracted with a weighted average contract length of approximately 8 years.

We also have the shortest transit times and maintain industry-leading product quality for our customers. And recall that over 90% of the product we transport from the oil sands is committed also to net 0 by 2050. With minimal volumetric and commodity price risk, we have an unrivaled, low-risk business model that differentiates us from our peers.

Initially, our team's focus will be accelerating, deleveraging to drive additional value for our shareholders while identifying low-risk in-corridor growth projects that enhance and extend the system's reach. We will focus on optimizing latent capacity. A good example of this is our successful open season on Marketlink which we just closed in July. And based on that success, we're going to run another one here shortly.

We are also looking for strategic, accretive in-corridor growth opportunities that we can flexibly access in this new structure without the need to compete with internal businesses for capital dollars.

Our 2022 comparable EBITDA of $1.4 billion is expected to grow at a 2% to 3% compounded annual growth rate through 2026. And don't forget, as a business, we have very minimal sustaining capital requirements. That means we have significant free cash flow to pursue these opportunities and support an attractive dividend for shareholders.

With our strong commercial underpinning and initial capital structure, the Liquids Pipeline Company is expected to be investment grade. Following the spinoff, we will establish approximately $8 billion of senior debt and junior subordinated notes. You can think about the split as being approximately $6 billion of long-term debt and approximately $2 billion of junior subordinated notes, which received 50% equity credit. Proceeds will be used to repay TC Energy debt.

This works out to be 5x debt-to-EBITDA, and we plan to prioritize deleveraging to the tune of a quarter to half turn within 3 years. Our annual dividend growth is expected to be commensurate with our comparable EBITDA growth outlook at 2% to 3%, while adhering to conservative dividend payout ratios.

With the significant cash flow this business generates, we will continuously evaluate deleveraging against the benefits of share buybacks in terms of what will serve our shareholders.

I'm honored to have been endorsed by the TC Energy Board of Directors to lead the new Liquids Pipeline Company as the intended President and CEO. And you're familiar with my partner and our Intended Chief Operating Officer, Richard Pryor from our previous analyst calls.

The Liquids business already has a strong operational team in place. We have the capabilities, infrastructure and resources to successfully stand as an independent company, and the spinoff will enable us to maximize the full value and potential of our talented team and our high-quality assets.

I'm very excited that a Board chair has been selected, and we will be announcing our broader management team and Board of Directors in the coming months.

I want to highlight some of our operational successes that the Liquids business has had in the second quarter of 2023. Comparable EBITDA of $363 million was up 6% versus the same time last year. The strong demand for U.S. Gulf Coast capacity resulted in an increase in Marketlink throughput by over 150,000 barrels per day. And through the first half of the year, the Keystone Systems operational reliability was approximately 95%.

I'll wrap things up by saying, this is already a differentiated business. We have significant free cash flow and a long runway of future opportunities. As a distinct entity with the ability to focus on operational excellence and disciplined growth, I believe we can further unlock shareholder value.

Now I'll turn it over to Joe.

Thanks, Bevin. During the second quarter, we continued to deliver strong performance with comparable EBITDA up 4% year-over-year and 10% on a 6-month basis. Our base business remains robust. As Bevin mentioned, the Liquids Pipeline business performed exceptionally well during the quarter, resulting in 6% comparable EBITDA growth year-over-year. And we also saw the highest Marketlink throughput since early 2020.

In Power and Energy Solutions, we continue to see solid performance. Bruce Power achieved 94% availability and our cogeneration fleet achieved 93% availability. We are pleased to see the Ontario government announced that the Minister of Energy will begin the final evaluation of the Ontario Pumped Storage Project. We look forward to receiving the final decision later this year.

In our Canadian Natural Gas Pipelines business, our NGTL System continued to see strong receipts. The system achieved its high single day record of 14.6 Bcf on April 21. Also on April 21, U.S. Natural Gas achieved record LNG feed gas deliveries of 3.8 Bcf, which represents over 30% of current U.S. LNG exports.

We're making steady progress on our projects in Mexico. The lateral section of our Villa de Reyes Pipeline has achieved mechanical completion and is expected to be commercially in service in third quarter 2023.

In alignment with our 2023 priorities, we continue to safely execute major projects like Coastal GasLink and Southeast Gateway. We have made tremendous progress on Coastal GasLink this year. The project is now approximately 91% complete and nearly 98% of all pipe has been welded. We continue to expect mechanical completion by year-end, and our $14.5 billion estimate remains unchanged.

Southeast Gateway is also progressing according to planned milestones. We have begun onshore installation and facilities construction in Veracruz and Tabasco. We expect to start offshore pipe installation by year-end.

Following the partial sale of Columbia Gas and Columbia Gulf, we continue to expect 2023 comparable EBITDA be 5% to 7% higher than 2022. Comparable earnings per common share is now expected to be generally consistent with 2022, primarily due to higher expected net income attributable to common -- to noncontrolling interest, partially offset by a lower interest expense.

So far this year, we have placed approximately $2.1 billion of capacity capital projects into service, progressing to the $6 million of projects we expect to place into service this year. This includes North Baja XPress, which entered service in June and $1.5 billion in Canadian Natural Gas projects.

Now turning to our funding program. Our key priority continues to be capital disciplined. Limiting our annual net capital spending to $6 billion to $7 billion beyond 2024 allows us to grow our business at a commensurate rate with our annual dividend growth outlook, while also providing optionality to further reduce leverage or buy back shares.

I'll note that there has been minimal credit spread impact following credit rating outlook changes back in February and more recently, following this week's credit actions where we saw less than a 5 basis point impact.

We have demonstrated competitive access to the capital markets this year in both Canada and the U.S. as evidenced by the $4 billion that was issued back in March.

Now while a lot has been announced this week, I want to provide clarity on our engagement with the credit rating agencies. We engaged all 4 to present our plan in its totality, which included the Colombia asset monetization and Liquids spinoff. We remain confident in our plan that we can achieve our deleveraging goals and remain committed to our 4.75x target.

To wrap up this slide, as we previously committed, subsequent to the dividends declared on April 27, 2023 that are being paid on July 31, 2023, our discounted DRIP has been discontinued.

Now I'm going to take some time here to walk you through how we will achieve our 4.75x debt-to-EBITDA target and stay there. $5.2 billion of cash proceeds from the 40% monetization of Columbia Gas and Columbia Gulf are expected to result in an approximate 0.45x reduction in our debt-to-EBITDA metric.

Over the next 18 months, we will continue to evaluate capital rotation currently in the range of $3 billion. And given our expected time line for the Liquids spinoff, in 2024, we anticipate 8 to 10 months of Liquids comparable EBITDA contribution. So as Bevin said, Liquids Company will issue approximately $8 million of long-term debt and junior subordinated notes, the proceeds of which will be used to repay debt to TC Energy.

Our deleveraging is further supported by assets that will be placed into service between now and 2026, further bolstering our comparable EBITDA.

For example, our Southeast Gateway project, which has a targeted in-service date of mid-2025, it is expected to contribute approximately $800 million in incremental comparable EBITDA. We believe we have a credible plan and a clear path to achieve our deleveraging goals.

TC Energy's Board of Directors has declared a third quarter common dividend of $0.93 per common share, equivalent to $3.72 per share on an annualized basis. I'm excited as we look to the future, and I'm confident that we'll continue to deliver a sustainable dividend growth rate of 3% to 5%. This will remain core to the enduring value proposition of TC Energy and Liquids Company to further build upon 23 consecutive years of common share dividend increases.

Thank you for your time, and I'll pass the call back to Francois.

Thanks, Joel. The series announcements that you saw this week are a complementary effort. Taken together, spinning off our Liquids business, integrating our Natural Gas businesses under single leadership and creating a strategic partnership with GIP, all directly serve our 2023 priorities and our long-term strategy to create value and prosecute growth.

With that, I'll turn it over to the operator for questions.

(Operator Instructions) Our first question comes from Rob Hope of Scotiabank.

Just wanted to get a sense of how you're thinking about operational capacity as well as the manpower within the organization? What you announced yesterday, realigning the Natural Gas business units as well as spinning off the Liquids business units are quite a large endeavor. You have delevering in play as well as a number of large pipelines under construction right now.

How do you ensure that -- or how do you think about the ability for the organization to engage in all of these different items? And why not push off the spinoff a little bit a couple of quarters just to better allow you to focus on the construction [season]?

I'll start and then I'll pass it over to Stan for some commentary on our execution. First of all, literally hundreds of people have been working on this for 6-plus months. We have a separation management office that's been stood up. We've been working with Bain on this for nearly 1 year. And I'll point to our performance in terms of operating our assets right now. Our availability of our overall system is actually up. Our performance around project execution, we've been bringing in our projects. We brought in 5.5 billion of projects last year, 2.1 billion into service so far. This year, we are on track to bring in 6 billion for the full year.

CGL is on plan. So we are performing very well. I'm very confident in our team's ability to absorb and have all these work streams because we've been doing so in a very planful manner and a very organized manner. And Stan, over to you.

Very good question, Rob, and it's something that is on the forefront of our mind. And I would just say that we were very careful to make sure that we're setting up a dedicated team to help us capture and process these synergies and keeping that separate from the rest of the workforce that's accomplishing our day-to-day tasks. So there's a little bit of a separation of duties between the 2. So there's not a lot of overlap.

And then just maybe a follow-up on the Coastal GasLink. We're well into the construction season. When you take a look at the downside scenarios, I would imagine you have a pretty good understanding of productivity and weather has been okay. What are the kind of variables or scenarios where you can miss the end of your mechanical completion and the existing cost estimate?

Yes. I'm very -- well, first, I'll start with -- we've had a tremendous record on safety the first 7 months of this year. And the reason why I start with safety is that the weather has also allowed us to have tremendous productivity through the first half of this year and through the summer construction season.

We've had our share of really complex and risky parts of the project to accomplish, and I'm really proud that the team has delivered upon all of them.

We've been in parallel to working the plan, putting in contingency plans for the balance of the risks that we see going forward. And so the remaining scope is not without execution risk. But we are -- we've been able to navigate these challenges week by week, and it's a daily task.

So your question around the scenarios around finishing the project. Well, our plan is to finish strong. We do have what I would call single point risks. There's a number of critical paths that are all jocking for position to be the critical path. But they don't -- at this point in the project, I'm happy to say that none of the single-point risks have significant materiality in us being able to deliver to our targeted cost or schedule.

And so that's why we've maintained our target. And we believe that we have all the plans in place to deliver the projects strong and finish strong here in the year-end. Hopefully, that gives you an answer to your question.

Our next question comes from Patrick Kenny of National Bank Financial.

Just on the business mix pro forma, the spinoff, looking into 2026 with Southeast Gateway online, Mexico contributions will be well through your previous 10% max threshold. So I know you're looking at rotating another $3 billion of capital.

But if you could just comment on how you're thinking about managing your 10% comfort level there for Mexico with the spinoff?

So we're really pleased with the execution on Southeast Gateway thus far. At the outset, when we announced the sanctioning of the project, we had 70% of the project costs fixed. And really the risk in terms of cost and schedule was front-end loaded, and it was around acquiring land and getting the permits.

And we have hit all of our marks in that regard over the course of the last year, which is why we are now under construction at the compressor stations on land, and we will have the requisite pipe delivered in time for a late in year start to the offshore pipeline construction.

So what's important for us to deliver value to our shareholders is to meet cost and schedule on that project, and we believe that we will derive maximum value for that investment after we achieve in-service.

So in terms of managing our exposure in Mexico, we remain committed to making sure that, that's an appropriate portion of our business mix.

There are other tools to manage our capital exposure in Mexico to help us stay below that 10%, other than what the accounting says, the portion of EBITDA on a consolidated basis is, and I'll ask Joel to maybe talk about that a little bit.

Sure. So some of the tools that we're using right now, Pat, include in-country financing. So for example, we issued $1.6 billion at Sur de Texas last year. We did another $2.3 billion here in January. So think of that as a total of almost $4 billion of in-country financing which basically takes care of most of the funding for the Southeast Gateway project. We also have other tools such as political risk insurance. We actually put some in place in Mexico as well.

So when we look at this in totality, along with our partnership with the CFE at 15% along with these tools, including project financing and PRI, we have a way here to really manage the exposure to what we've targeted before, which is around that 10% area of total exposure once Southeast Gateway is in-service in 2025.

And then maybe just on the $8 billion of debt to be issued at the new Liquids company. How should we be thinking about the tenure on the new debt to be issued relative to the weighted average contract life of 8 years?

And is there anything you might be contemplating or looking to implement from a credit quality or backstopping perspective just to help solidify a strong investment-grade credit rating for the Liquids Company?

So Pat, one of the things we did that is fundamental to our decision around the spin of the Liquids business was engaging with the rating advisory services with the credit rating agencies to ensure that -- with the spinoff that this entity would have investment-grade ratings.

And it's indicative at this point in time. We did present the finance plan to them that contemplated, as we talked about here, approximately $8 billion of total funding, as Bevin outlined, which includes $6 billion of long-term debt and $2 billion of subordinated debt that would achieve 50% equity credit.

So that was presented, and we do have indicative ratings that would be investment grade. We won't have final ratings until we actually have an entity that is up and going once we have approval from our shareholders here kind of mid next year.

When we look at tenure, it will be across the curve. The strong business risk profile of Liquids will allow us to issue debt from right at the front end of the curve, say, 3 years, right out to 60 years and you think of -- the way you think of the form of supporting the capital when they have a 69 [call] 10 type structure.

So we'll be able to issue right across the curve based on the business risk profile being strong and having indicative ratings that are investment grade.

And Bevin, if I could ask you to comment on the competitive position of Keystone and our ability to renew contracts and such?

Yes, absolutely. So as Joel alluded to, we have rough average of just over 8 years of contract life left. The contract terms themselves are very differentiated in terms of the startup contracts we have under supporting our systems are -- don't have volume or commodity price risk.

And when you look at our system and how competitive it is to serve the supply basin and then into the Gulf Coast and Midwest in terms of pricing time to deliver. We don't -- we believe that barrels will flow to our system. So when we think of the recontracting profile out 7, 8 years from now, we believe that we can remain very competitive against the demand markets that both TMX and the Mainline will serve, given that we'll still be able to deliver to the strongest market quicker, more competitively and under more favorable terms.

And Bevin, I know you're in the middle of another open season for Marketlink, but just curious if there's an opportunity to integrate more of a blend and extend service offering all the way down from Alberta through the Gulf Coast just to mitigate some of that longer-term recontracting risk?

Yes. Right now, we're focused on -- we have latent capacity on our Marketlink system, and we're very happy with the demand that we've seen. For 2024, we see incremental demand due to the strategic reserves needing to be refilled. That is going to be a nice tailwind for us.

When you look at the blend and extend, our long-haul barrels were sold out. Right now, that is a very competitive offering and the premier delivery vehicle for those barrels. So as we move closer to recontracting, and that is 5 to 7 years away before we get there, there is an opportunity to blend and extend, and we think we can do so very competitively.

Our next question comes from Jeremy Tonet of JPMorgan.

Just wanted to start with a high-level question, if I could here. Just with regards to the portfolio of growth CapEx at RemainCo. Just wondering if you could talk a bit -- or for the company as a whole, rather, how the mix between natural gas CapEx versus energy transition opportunities -- how you see that mix shifting today versus over time at this point? I want to get a current check in, I guess, what type of opportunities you're seeing and over what time frame that could shift?

I'll take that one. Right now, our capital is almost fully committed for the next 3 or 4 years, our $34 billion program. Right now, the weighting of that is about 80/20 between Natural Gas and Power and Energy Solutions, and the Power and Energy Solutions portion is predominantly made up of the major component replacement program at Bruce Power.

As we look to sanction capital projects beyond them and remaining within our $6 billion per year of net capital, I think you're going to see a gradual migration of that weighting to things like more nuclear and more pumped hydro, but also balanced quite well with more attractive opportunities to extend our natural gas system to connect to more LNG facilities for export.

We will be bringing our MCR Unit 6 back into service later this year on or ahead of schedule and on budget, is our expectation. We are about 0.5 year into the MCR on Unit 3, and we will be sanctioning the MCR on Unit 4 by roughly January or February of next year.

So you're going to see more capital being allocated to Bruce as per our refurbishment schedule over the course of the next decade. As we mentioned at our Sustainability Forum, we have some price increases built into the schedule in our contract with the ISO. So you're going to see the EBIT contribution coming from that business growing significantly over the balance of the decade.

The ISO has been directed by the Ministry of Ontario to make its final determination on our OPS project. That is a 0 emitting pumped hydro project. It may be the largest emissions reduction project in the federal government's portfolio, given that we are citing that project on federal land.

And so -- but this is going to be very gradual. 80/20 might move to 70/30 over the back half of the 2020s. And then if and only if new technologies become affordable and reliable, will we be allocating meaningful capital to new technologies. And when we do that, we will use project financing and make sure that we limit our exposure only to our equity investment in those types of projects.

And then just want to pivot towards the design initiative as put in the release today, and as you discussed. I -- wondering if you could provide a bit more detail on what's being realized in that $750 million, specifically the $150 million that's online. What's happening there?

And I think there's a potential for $250 million upside down the road. Just wondering what that could look like? Just any specifics that you could provide there would be very helpful.

I'll just start, Jeremy, and tell you that we've been working on this for almost 1 year. We have a separation management office in place. We have a Chief Transformation Officer who's been working on a bottom-up basis with our teams across every function and every business to do this in a very planful manner. So we're very well organized and already in the early phases of execution. And I'll pass it over to Stan for some detail.

We've been working with Bain over the past 9 months or so to effectively rethink the way that we work. And one conclusion we came to is that our processes and our structure are really preventing us from reaching our full potential.

This is really not that atypical with companies like ours that have been aggregated by various acquisitions over time and different work processes had to be integrated. So that was really the driver behind doing what we did in combining our 3 gas businesses, and our technical center. And that's something that we've never done before under a single unified structure.

Doing so is going to allow us to leverage best practices across our footprint and really create value by focusing on one way of doing things, advancing our commitment to safety, asset management and operational excellence, making us more agile and really leveraging innovation, which is a great opportunity for us.

So in recognition of the unique regulatory and commercial constructs, under our new structure, we're still going to have a business unit President for each of our jurisdictions in Canada, U.S. and Mexico, and they're going to lead our commercial, regulatory and operations teams.

But what's new that we're doing here is we're going to create 2 new shared services or cross-border groups. One group is going to focus on safety and integrity, and you could think about them as optimizing our $2 billion annual maintenance capital spend. The other group is going to focus primarily on executing our projects on time, on budget.

So examples of how we're going to do this include things like relooking at our in-sourcing and outsourcing mix. Quite honestly, we're spending too much money on external spend. And we're not leveraging the $10 billion spend across the supply chain footprint that we have as efficiently as we can.

So after doing this analysis, we've identified about $750 million of annual run rate opportunities across our gas businesses and corporate support functions that will be realized by the end of 2025 with about $150 million of that realized in 2023.

Simply, if you wanted to unpack the $150 million a little bit, think of it as $70 million of reductions in our IS spend, $30 million of reductions just by aggregating the technical center into a common group in eliminating redundancies and efficiencies. And all of that together is going to more than offset any dyssynergies from the spin.

So think of these opportunities as primarily in the form of capital reductions and other efficiencies, which primarily are going to flow back to our customers, but they're going to enhance our competitiveness at the end of the day, and they are included into our $6 billion to $7 billion capital expenditure outlook.

Now on top of that, we just started a second initiative, and we believe that there's an additional $250 million of opportunities that, in part, will get flowed back to our customers, but also in part going to flow back to our bottom line. And those are the proof points that we're going to be working on, on finalizing over the balance of the year.

Our next question comes from Andrew Kuske of Credit Suisse.

There's lots of spins to look at over the years as [precedents]. But maybe if we just sort of focus conceptually on one when EnCana spun off Cenovus. The spin, the oil sands business was largely viewed as not being able to grow. And so with your spend, you clearly have a segment of the capital market, there's an ESG segmentation, and you're going to have 2 different currencies in the future.

And so I know that's a lot of intertwined issues. But how do you think about the ability to grow the Liquids business with a separate currency? And then effectively -- and this is, Francois, one of your points over the last few quarters of high grading [traps] returns.

I'll start. So let's start with the value proposition of what the Liquid SpinCo will be right out of the gate. First, it will have a very compelling dividend, that dividend fully covered by contracted EBITDA. So 88% of our EBITDA is contracted in the Liquid SpinCo. So you'll have what we believe is a very strong income yield out of the gate with this entity.

The free cash flow out of this -- out of the assets is extremely strong, and so it not only covers dividend, but it also can support some modest capital growth, capital-light because we have the pre-investment in the Gulf Coast system in Grand Rapids, developments like what we put in place with the Port Neches Link that serves the Port Arthur refinery in Motiva. That's the largest North American refinery.

We've already seen significant movements of volumes through that link. Those types of opportunities we can develop at 6 to 8x EBITDA build. The Port Neches Link was at a 7x build. Those are very strong and compelling returns. So that is again under our free cash flow.

And then finally, the value proposition includes accelerating our deleveraging. And so with the balance of the cash flow that can be generated, we can choose to slowly pay down debt that will be in place at time of spin. The capacity of what we see in our plan is that we can reduce that by up to half a turn of leverage in 3 years. But we'll balance that with share buybacks or other ways to return value back to shareholders.

With respect to the separate currency, absolutely. We haven't had a separate currency to look at inorganic opportunities, but we don't need those to deliver our value proposition, and we want to put some points on the board first to demonstrate to shareholders that what we're providing as a new equity is a very compelling investment.

But we have seen, and we have seen a number of opportunities over the last number of years that we didn't participate in because we didn't have a currency to pursue. So we'll be very -- capital allocation is going to be extremely disciplined because we can't forgo the risk, our value proposition to shareholders. And so we're going to generate a low-risk high-quality return asset for our shareholders.

And Andrew, on the second part of your question around high-grading returns. Yes, absolutely. One of the benefits of being opportunity-rich but limiting your cash flow -- pardon me, your capital investment to $6 billion a year is that you get to choose the projects that deliver the highest weighted average returns.

We saw returns for the projects we sanctioned in '22. The returns were higher than in '21. And the returns in '21 were higher than the returns in '20. So we continue to see a positive trend in our ability to earn premium returns.

And that's really -- I go back to my opening remarks, the value of having franchises is that you're able to earn premium returns in the businesses you operate.

If I could sneak in one more and just really on the duration of the Liquids spend. If you think about the oil sands, you're going to be like-for-like with the other competitors from an oil sands basin, but we think of the duration of the volumetric flows versus what you see out of the U.S. basin. Just your thoughts on that and how that translates into multiple?

Yes, absolutely. I think we'll be extremely differentiated. We're the only system that is not a supply push, which would be like the Permian Basin is into the Gulf Coast, where both a supply push and demand pull asset, meaning our customers are participating in both sides of that equation.

And so when you think about the enduring nature of the asset, we're not chasing declines on the upstream, and the PADDs that we're serving in terms of refining markets are the ones that are extending their lives and looking for those crude slates that will be enduring for the next decades to come.

Additionally, we can deliver to export markets now through 5 different export points out of the Gulf Coast, and we broadened capability internally to deliver those barrels to Tidewater.

So when we compare ourselves to other systems, our system is basically -- we already have regulatory approval for our recontracting from both the FERC and the CER. Those are market-based rates. And again, they don't have any volumetric or commodity price risk. So that is extremely unique compared to any peer liquid system out there.

And so while there will be other flows -- and we're happy that our customers can have the opportunity to flow out west on to the TMX system that's getting close to being complete, and through Mainline. But we remain the shortest and most competitive pathway to the strongest demand markets.

Our next question comes from Robert Kwan of RBC Capital Markets.

You previously outlined that the Liquids Pipelines, that segment generates a lot of cash flow given the relatively low maintenance CapEx. So I'm just wondering, can you talk about the mechanics that allow the reiteration of the ability to internally fund at max 7 billion CapEx post spin? Effectively, the 2 entities can pursue more CapEx than you previously articulated?

And then for RemainCo, is there still a firm commitment to the internal funding model given the already secured capital is mostly RemainCo projects?

Robert, I'll start with the second one first because it's simpler. Yes, the commitment remains. Frankly, we had an eye on the knowledge that we may be pursuing a spin when in April we made the commitment to limit our capital spend of $6 billion per year, and we tested our ability to continue to maintain that commitment for what I would call RemainCo after the spin has taken effect. So that commitment had that eventual or potential announcement in mind.

Look, the Liquids business generates a tremendous amount of free cash flow. It will bring to its capital structure going forward its pro rata share of debt, and it will bring forward its pro rata share of the dividend with a payout ratio that is higher than what the payout ratio will be for the RemainCo portion.

So in the materials that we gave you in the investor presentation, and we walk through the free cash flow generation of RemainCo after dividends payable, you see that we can support a $6 billion to $7 billion capital program on the RemainCo side of it because there's an $8 billion reduction in debt as well as roughly $0.55 reduction in dividend that is borne by the Liquids entity.

And then I can just finish the question on the operating and funding model. So one of the benefits you highlighted as part of the Columbia transaction, this ability to flexibly operate the assets, but reduce the capital intensity with GIP funding its 40% share of the future capital there.

So recognizing you already have some partners for potential future capital, do you see this type of structure as more of a template to be an attractive way to pursue growth? And if so, you envision this occurring more as a joint venture going into a specific project or selling down an existing asset with future growth as you did with Colombia?

I think it would depend on the circumstance, Robert. We're very experienced and comfortable in joint ventures. We have partners on [Jericho] and PNGTS, and now with GIP. And so given -- as I talked at the opening the importance of continuing to invest capital to protect the competitiveness of our franchises, and that need and that opportunity set being in excess of our $6 billion per year. Joint ventures are a great way for us to actually defend the franchise value and still live within our means.

So you could expect to see us do more of those going forward. Obviously, we felt it was important for us to honor our 2023 commitment to significant deleveraging of $5-plus billion. We achieved that with a single transaction with GIP. Don't expect us to be pursuing such a sizable dollar amount or percentage in an individual transaction for the balance of our $3 billion portfolio.

And with respect to other potential joint ventures, I think in new energies, that's also a really good fit for that. But it's more around finding partners that have the ability to mitigate the risks that come with a new investment in a new area. For example, if we're building a hydrogen hub, it would be only natural to partner with the purchaser of the commodity at the end because they deal with the commodity price risk and the volumetric risk.

So those types of joint ventures would be less financially driven and more getting people together who can manage and mitigate risk on the new types of energy technologies.

Our next question comes from Robert Catellier of CIBC Capital Markets.

I just wanted to have a follow-up on the cost saving initiative. I'm glad to see you have that ambitious goal. I wonder if you could delineate that savings between capital items or items that will improve your EBITDA. And as you mentioned earlier, Stan, some of that is going to be shared with shippers. So I wonder how much is being -- of that target is going to be retained in [healthy] EBITDA outlook for TC Energy?

Yes, Rob, within the $750 million, think about somewhere between 1/3 to half of that as capital efficiencies. Think of a majority of the balance as items that are openly going to flow through back to our customers given the regulatory paradigms in our respective jurisdictions.

With respect to the second part, the additional $250 million, and again, we have a little bit more work to do there, that is where I think we'll realize opportunities to be incremental to our plan in addition to certain dollars that get it flowed back to customers or capital efficiencies. But that work is yet to be done. We still have to prove out some of the concepts. And then once we do that, we'll be able to give you a better line of sight on exactly what you're looking for by the end of the year.

And then last question. Post the spinoff, obviously, there's some currency impacts until -- related to how much currency is at SpinCo, U.S. dollar exposure at SpinCo versus TC Energy. So I'm wondering if that changes how you look at the hedging currency or risk mitigation?

Yes, Rob. It doesn't change anything as it relates to how we hedge our currency. The way we do it now is we do it on a rolling 3-year basis with primary focus over the next 12 months because we're structurally long U.S. dollars given that we are a C dollar functional currency.

When you think about Liquids today, roughly 2/3 of its EBITDA comes from the U.S., but 1/3 comes from Canada. So what it means for us going forward, it doesn't really change the program. It might shrink it a bit with that currency going away, but it doesn't change how we hedge the currency going forward.

Our next question comes from Brian Reynolds of UBS.

Maybe just a follow-up on the NewCo and the leverage profile, just given that the company's earnings mix will be primarily U.S. focused. Just kind of curious if you can talk about the decision for 5x leverage versus some of the U.S. midstream peers of less than 4x, for even some 3?

Yes, I can start on that one, Brian. We went through the [RES/RAS] process and what I referred to earlier is we have a very differentiated contract profile compared to our U.S. peers. Fundamentally, you'll see in the deck that we posted that our underlying -- our counterparties are 96% investment grade. Our contracted portfolio on EBITDA is materially higher and the nature of those contracts is extremely different compared to those U.S. peers.

And so when we went through the ratings process, it's certainly the investment grade, at least indicative analysis done, highlighted that at 5x. That was -- really matched well the underlying contract profile that we had.

But that -- as I mentioned earlier in my remarks, the intent is to accelerate the deleveraging for our shareholders as part of the spin for between RemainCo and SpinCo. This is one of the key elements of the value that we're giving back to shareholders is by having a separate entity, we can help accelerate that deleveraging in the SpinCo.

So starting at 5x, but getting it down a quarter to half turn in 3 years is going to be, I think, a great value back to shareholders. And so that was the essence of starting at that point because our Liquids business can support it.

Just to -- further to Bevin's comments. What is fundamental in our decision around everything we've talked about here or action this week, think about the partial monetization of Columbia, the Liquids spin and $3 billion of capital rotation is that we have investment-grade ratings at both entities.

And so in the case of SpinCo, we did present as a scenario, our plan, if you will. They didn't contemplate $8 billion of debt, as Bevin mentioned, and we would have strong ratings as a result of that. So again, fundamental to the decision here that we'd have strong ratings coming out of the gate for both entities.

And then as my follow-up. In your prepared remarks, you just talked at length about maximizing long-term shareholder value for TC Energy. You have an asset base on a combined basis, that is very complementary to one or another.

So kind of curious in the context of the dividend level, how is that considered in the SpinCo in terms of maximizing value versus perhaps reevaluating the dividend level to aggressively pursue some of this very large low-carbon growth backlog?

I want to make sure, Brian, we understand the question. Are you asking on the SpinCo side or the RemainCo side or both?

Just keeping the dividend effectively flat between -- on a total basis.

Well, I think, in our view, it was important to make sure that from a value standpoint, 1 plus 1 equals more than 2. We think 1 plus 1 equals 3 or more here from a value creation standpoint. And that starts with ensuring that our shareholders in aggregate holding to securities at the outset are kept whole with respect to the dividend trajectory with 2 separate securities as opposed to a single one.

We expect -- and what you see on the RemainCo side is you see a higher growth rate on a pro forma basis for the spin than you do in the consolidated entity. We're going to conservatively keep our dividend growth in RemainCo at that 3% to 5% for some time. We want to make sure that we put some proof points on the board in terms of living within our means, staying at [$6 billion] or below in terms of capital spend on an annual basis.

And what you see from the materials is that in -- even with limiting our capital spend of $6 billion a year, we are growing our AFFO and our EBITDA at a CAGR that is at or above the upper end of that 3% to 5%.

So it's important for us to make sure that we'll be able to maintain stable and very conservative payout ratios. We'll be at about 50% of cash flow per share, and we want to stay there. So that's -- we feel that with the allocation of the dividend that we came up with -- to both companies, we struck the right balance.

Our next question comes from Ben Pham of BMO.

Could you maybe comment as you observed maybe -- since you've started the divestiture program about 1 year ago, maybe some of the takes that you've gained price discovery on our existing assets and a price discovery earlier this week. Maybe some observations from that, whether it's changing not from initial expectations, especially with how you think about your existing assets, the arbitrage between the private and public markets and then maybe even a comment on your shift in cost of capital?

Yes. I'll make a few comments, but I'll start with the fact that we're really actually really pleased with the valuation and the transaction we effected with GIP. It's not only about the multiple, it's about the ability of our partner to fund the pro rata portion of our growth going forward. It's alignment in long-term views on the strategic direction and importance of natural gas in a low-carbon economy.

As to the multiple, I'll remind you, is the minority interest. You look at other minority interest transactions that have been done recently in energy infrastructure. They are done at multiples below our multiple on this transaction. So we're very happy with the multiple we achieved.

Look, if you've been around this game as long as I have, 35 years valuations in public markets ebb and flow as to which are higher at which point in time. And I think it's fair to say right now with a 300 or 400 basis point increase in interest rates over the last year that valuations in the public markets are higher than they are in the private markets.

Nonetheless, we were very clear. We were turning off the DRIP after the July 27 dividend declaration, and we are not going to issue any further equity because in the long run, issuing more equity, we have to serve those dividends and those dividends are going to grow.

So we actually create more value entering into a transaction with a private sector buyer for cash and avoiding further dilution from equity issuance.

And then the third thing I'd say is the size of the transaction. If we had been looking for a 10% minority interest for $1 billion, we would have had a broader buyer universe and maybe realized a different valuation, but it was really important for us this year to meet our commitment to $5-plus billion in cash for debt reduction as one of our 3 top priorities for the year.

And there are really only a handful of PE firms that could transact and write a check for CAD 5 billion and commit to 40% of $1 billion a year of capital on a go-forward basis.

That's really right context. And maybe a follow-up, your comments around the separation enhancing growth opportunities. But then I guess you got this -- or you have this threshold of $6 billion to $7 billion. Does -- the separation effectively, does it enhance supply for you? Or is it you needed to do it to get to the $6 billion to $7 billion?

No, I think our $6 billion to $7 billion would be whether we're a single entity or we're in 2 separate vehicles. The $6 billion to $7 billion would have been the cap for the company, very important for us to live within our means.

Giving our Liquids business, its own currency and its own mind and management to pursue opportunities means that as 2 separate entities, we can actually pursue more and deliver more growth to our shareholders than we could as a combined company.

As I said before, the returns we've been realizing on our projects, primarily in Gas and Power have been increasing over the last 3 years. We're seeing an acceleration of opportunities. Our Ontario Pumped Storage Project, if the ISO supports it and brings a recommendation to the province later this year, we'll be under a regulated construct.

So not only are you going to see us continue to delever and continue to grow our backlog increasingly to hydro and nuclear, but you're going to see us moving to an increased weighting on regulated assets and regulated investments.

So all of those things, I think, make our risk return proposition pretty attractive going forward, which is why we're so excited about this transaction. And we view today as a very transformational day for the company and sets the company up for the next 10 years on both sides.

Our next question comes from Keith Stanley of Wolfe Research.

I wanted to start just to take a step back, high level on the spin. And the rationale laid out is focused on the increasing opportunity set for growth projects and 2 companies being able to better pursue that and keep the incumbent advantage, which makes sense.

Can you also talk about how much of the spin is trying to get the market to value certain businesses differently or somewhat of a sum of the parts value unlock story as part of the rationale? Or is this more about strategic move around growth?

Fundamentally, it's the latter, Keith. This is a growth story. And this is a decision to spur on a consolidated basis, or with 2 entities more growth -- delivering more growth than we could as a combined entity.

In my view, if there's a clear strategic path for each of the 2 entities and has its more natural shareholder base to pursue the type of growth it's pursuing, I think that's better for everyone. But we don't make strategic decisions on the basis of multiple expansion. We make strategic decisions on the basis of fundamentals and delivering growth for our shareholders.

And just a follow-up on the Columbia sell-down. Can you give any more details on the proposed recapitalization? It's too soon, I understand. And then just any tax impacts from that sell-down? Or was it pretty tax efficient?

Yes, Keith. First of all, from a tax perspective, there is some leakage, but what we're seeing is around probably 11% to 12%, so not that significant. As it relates to the recapitalization, the way to think of it, there's 2 entities. There's a holding company and then there's the operating company. And combined, we'll see -- again, kind of going back to our 4.75x target, the leverage would be capped at 4.75x as we recapitalize that business at the operating company and holding company.

And just to be clear, on a net basis, there is no new debt being issued. Debt that will be issued at the operating company and that holding company just above it, those proceeds will funnel back to TCPL to reduce debt at the TCPL level by the exact amount.

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 Wylie. Please go ahead.

Thank you, and thanks, everybody, for participating this morning. So just a reminder, we have put a fairly detailed presentation regarding the announced spin posted to the Investor Relations section of our website. As you work through that material or for any additional questions that we didn't get to today, and forgive us for that, please contact the Investor Relations team. We thank you for your interest in TC Energy, and we look forward to our next update.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.