TC Energy Corporation (NYSE:TRP) Q1 2024 Earnings Call Transcript May 3, 2024

TC Energy Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the TC Energy First Quarter 2024 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Gavin Wylie, Vice President, Investor Relations. Please go ahead.

Gavin Wylie: Thanks very much, and good morning. I'd like to welcome you to TC Energy's 2024 first quarter conference call. Joining me are Francois Poirier, President and Chief Executive Officer; Joel Hunter, Executive Vice President and Chief Financial Officer, along with other members of our senior leadership team. Francois and Joel will begin today with some comments on our financial results and operational highlights. A copy of the slide presentation that will accompany their remarks is available on our website under the Investors section. Following their remarks, we'll take questions from the investment community. We ask that you limit yourself to two questions, and if you're a member of the media, please contact our media team.

Before Francois begins, I'd like to remind you that today's remarks will include forward-looking statements that are subject to important risks and uncertainties. For more information, please see the reports filed by TC Energy with the Canadian Securities Regulators and with the US Securities Exchange Commission. Finally, during the presentation, we'll refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC Energy's operating performance, liquidity, and its ability to generate funds to finance its operations. A reconciliation of various GAAP and non-GAAP measures is contained in the appendix of the presentation. With that, I'll turn the call over to Francois.

Francois Poirier: Thanks, Gavin, and good morning, everyone. We set out with three clearly defined priorities for 2024 that’s focused on maximizing the value of our assets, project execution and enhancing our balance sheet strength and I’m please to report that we continue to deliver on all of these commitments. We saw another quarter of record earnings, with comparable EBITDA up 11% compared to the first quarter of last year. With a relentless focus on safety and operational excellence, the company saw high availability and utilization across our asset base, including multiple first quarter all-time records. Our secured capital program continues to progress on plan, and we are tracking the cost and schedule with our major projects, Southeast Gateway and the Bruce Power Unit 3 MCR.

In March of 2024, the U.S. $300 million Gillis Access project was placed into service with a bill multiple of approximately 6 times. This greenfield pipeline system connects gas production source from the Gillis hub to downstream markets in southeast Louisiana. Gillis, along with projects on our NGTL system mean that we've placed approximately $1 billion of projects into service so far this year, largely on budget. Additionally, $200 million of maintenance capital was placed into service over the quarter. We continue to execute against our $3 billion asset divestiture program with the recent sale of PNGTS for expected pre-tax proceeds of approximately Canadian $1.1 billion, which includes the assumption by the purchaser of U.S. $250 million of senior notes outstanding at PNGTS.

We also continue to progress the proposed spinoff of South Bow. As you saw a couple of weeks ago, we released our management information circular and the shareholder vote is scheduled for June 4th. Finally, we're pleased to announce Sean O’Donnell as our Incoming Executive Vice President and Chief Financial Officer effective May 15th following Joel's decision to pursue another opportunity. We're grateful for Joel's 26 years with TC Energy and the incredible impact he has made on the company. And I'll reserve a few more thank you’s for Joel in my closing remarks. As for Sean, he joined TC Energy six months ago as part of our succession planning and brings 30 years of invaluable energy industry experience, including past roles as CFO. This, paired with his tenure in corporate finance and private equity, aligns directly with our clear set of strategic priorities.

In Mexico, we continue to achieve milestones in the construction of Southeast Gateway. The total offshore pipe installation is now over 70% complete. The offshore portion represents about 670 kilometers of the total 715 kilometers of pipeline length. Onshore, all critical permits for construction have been obtained and we have completed construction on all three landfall sites. Importantly, the project continues to track schedule and expected cost of U.S. $4.5 billion. Continued high utilizations across our integrated natural gas system in the first quarter reflect continued demand growth for natural gas in the markets we serve. Total NGTL system deliveries in Canada averaged 15.3 Bcf a day, with a new daily record high of 17.3 Bcf achieved in January.

In the U.S., daily average flows of 30 Bcf were up 5% compared to the first quarter of last year. Once again, various pipelines achieved record throughput volumes, including in our Columbia Gas, Columbia Gulf, and Great Lakes systems. Natural gas demand growth is continuing, empowering the U.S. as electricity demand grows. 2023 was a record year for power burn across the U.S. and that strength is continuing into 2024. Mirroring that, our assets continue to support the record demand and we set a first quarter record for deliveries to power generators of 2.9 Bcf per day, up 11% versus the first quarter of 2023. New growth drivers like data centers will help continue that positive growth momentum. In Mexico, average daily throughput was nearly 3.0 Bcf per day, up 13% versus the first quarter of last year.

In our power business, our power assets were available to deliver power when it was needed most resulting in an increase to comparable EBITDA of 14% versus the first quarter of last year. As you all know, Bruce Power produces 30% of the electricity in Ontario. And Bruce met continued demand in the first quarter by providing and delivering availability of 92%. We continue to expect average availability in the low 90s percent range for 2024, which is a significant and gradual improvement over the last decade or so. The Bruce Power major component replacement program to extend the asset life for the next 40 years continues to progress on plan. Unit 3 is tracking, cost and schedule, and Unit 4 received the ISOs approval to begin in early 2025. Our Alberta cogeneration fleet also delivered strong performance and reliability in the quarter with overall portfolio availability of 98.7%.

There continues to be strong demand for our transportation service in our liquids business, and Keystone is meeting this demand, achieving 96% operational reliability in the first quarter. This operational strength supported a 28% increase in comparable EBITDA as compared to the first quarter of last year. Turning to South Bow and the proposed spin-off of the liquids pipeline business, Bevin and the South Bow team continue to make meaningful progress towards the South Bow business, transitioning to a standalone public company. We are confident we will have a successful launch of an independent South Bow in late Q3 or Q4 of this year. We do not anticipate any material dis-synergies related to South Bow as the liquids business was operated mostly as a standalone business within the broader TC Energy and we intend to offset any potential dis-synergies in the year in which they would have otherwise been incurred.

Further, the team plans to develop the Blackrod Connection project. This project is expected to underwrite a meaningful portion of South Bow's near-term comparable EBITDA growth targets. We issued our Management Information Circular on April 16, and you may have seen that leading proxy advisor, ISS, has come out with a supportive recommendation for the transaction. As described in the circular, favorable tax rulings have now been received in both Canada and the U.S. Our 2024 annual and special meeting will be held on June 4. I hope you take the time to look at the information in the circular and on our website to support your voting decision. And now, I'll turn the call over to Joel.

Joel Hunter: Thanks, Francois, and good morning. Exceptional operational performance during the first three months of the year delivered 11% year-over-year growth in comparable EBITDA. As Francois mentioned, we saw strong year-over-year increases across all of our business units, including a 14% increase in power and energy solutions, driven by increased availability, and in our liquids business, a 28% increase in comparable EBITDA driven by higher utilizations on both the Keystone and Marketlink systems. We also delivered a 4% increase in quarterly comparable earnings relative to Q1 of last year. This largely resulted from increased comparable EBITDA, partially offset by higher net income attributable to non-controlling interests following the Columbia sale in 2023, and higher interest expense primarily due to long-term debt issuances, net of maturities, partially offset by reduced levels of short-term borrowings and higher capitalized interest.

We reaffirm our outlook for 2024, which does not take into consideration the proposed liquids pipeline spinoff. As a reminder, in 2024, we expect comparable EBITDA to be between $11.2 billion and $11.5 billion. This growth is primarily driven by an increase in the NGTL system, the full year impact of projects placed into service last year, and approximately $7 billion of new projects expected to be placed into service this year. As a reminder, the $7 billion includes Coastal GasLink, which is expected to be placed into commercial in-service later this year. At the end of April, we placed approximately $1 billion of projects into service, including Gillis Access and the Columbia Gas Virginia Electrification project. Comparable earnings per common share is expected to be lower than 2023, largely due to higher net income attributable to non-controlling interests related to the Columbia sale.

Total net capital expenditures for this year are expected to be approximately $8 billion to $8.5 billion. We continue to actively manage our fixed floating interest rate mix, which helps to insulate us from rising rates. Approximately 92% of our debt is fixed with an average term to maturity of approximately 17 years and a pre-tax weighted average coupon of approximately 5.3%. We are making progress towards our asset divestiture program with the announced sale of PNGTS, which will put us over a third of the way towards our $3 billion target for 2024. This transaction implies a valuation multiple of approximately 11 times 2023 comparable EBITDA. We remain committed to achieving our 4.75 times debt to EBITDA target in 2024, the upper limit to which we will manage to and expect to announce incremental asset sales in the coming months.

Related to the Liquids spin-off, shareholders of TC Energy as of the distribution record date established for the spin-off will receive one new TC common share and 0.2 South Bow common shares in exchange for each TC common share. As highlighted on this slide, dividends are expected to remain whole following the Liquids spin-off. In addition, we expect to have the capital structure in place prior to the spin-off, subject to a successful shareholder vote on June 4. Anticipated proceeds from the senior and subordinated debt issued at South Bow were used to repay approximately $7.9 billion of TC Energy debt and help meet future funding requirements. Our longstanding value proposition sets the foundation for continued operational and financial strength, insulating us well from volatility we see in the broader market.

Our stable, low-risk business model and highly utilized asset portfolio provide stability in our comparable EBITDA and cash flows. TC Energy's Board of Directors has declared a second quarter 2024 dividend of $0.96 common share, which is equivalent to $3.84 per share on an annual basis. As we look ahead, both TC Energy and South Bow are expected to maximize respective value propositions in a manner that will benefit shareholders for years to come. I've had a great career here at TC Energy. As you know, I'm moving on to a new opportunity, but I am truly grateful for my time with the company. TC Energy has been a great place to work, and I appreciate everything I've been able to accomplish during my time here. As Francois mentioned, effective May 15, Sean O'Donnell will step into the role of Executive Vice-President and Chief Financial Officer, and I'll remain part of the team as an Executive Advisor until my last day on July 1 to support a seamless transition.

TC Energy is in good hands with Sean, who has tremendous amount of experience in the energy industry and expertise across North America. Now, with that, I'll pass the call over to Sean for a few words.

Sean O’Donnell: Thanks, Joel, and good morning, everyone. As I've mentioned to many of our stakeholders over the past several weeks, I am very excited for the opportunity to succeed you as the next CFO of TC. For our shareholders I want to highlight that I, like Joel, will be focused on the continued successful execution of the 2024 strategic priorities that Francois detailed earlier. I look forward to connecting in person with as many shareholders as possible over the coming months. But for now, I'll turn the call back over to Francois for his closing remarks.

Francois Poirier: Thanks, Sean. I'm happy to share that we've once again delivered record results, supported by our relentless focus on safety and operational excellence. Our priorities for this year are very clear. First, continue to maximizing the value of our assets through safety and operational excellence. Second, remaining focused on project execution, delivering our projects on time and on budget, including Southeast Gateway and Bruce Powers Unit 3 MCR. And third, we will continue on our path to achieving and sustaining our 4.75 debt to EBITDA upper limit by the end of the year by advancing our divestiture program and continuing to streamline our business through efficiency efforts. Before I turn it over to the operator, I would like to take a moment to thank Joel for his contributions to TC Energy over his 26 years with the company.

Joel, you've been a valued member of the TC Energy team. I know you share our passion and commitment to the strategic path we're on and I look forward to working with you until mid-year. Also, on behalf of the entire team, we wish you the best in your next opportunity. I'll now turn the call back to the operator for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ben Pham of BMO. Please go ahead.

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