TC Energy - Q3 2023
November 8, 2023
Transcript
Operator (participant)
Thank you for standing by. This is the conference operator. Welcome to the TC Energy Third Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star, then zero. I will now turn the conference over to Gavin Wylie, Vice President, Investor Relations. Please go ahead.
Gavin Wylie (VP of Investor Relations)
Thanks very much, and good morning. I'd like to welcome you to TC Energy's 2023 Third Quarter Conference Call. Joining me, François Poirier, President and Chief Executive Officer, Joel Hunter, Executive Vice President and Chief Financial Officer, along with other members of our senior leadership team. François will begin with comments on our overall operational performance. Bevin will highlight progress made to date on our announced intention to spin off our liquids business. And finally, Joel will discuss our financial results and outlook. A copy of the slide presentation that will accompany their remarks is available on our website under the Investor section. Following remarks, we'll take questions from the investment community. We ask that you limit yourself to two questions, and if you're a media, 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 and Exchange Commission. Finally, during the presentation, we'll refer to certain non-GAAP measures that may not be comparable to similar measures provided 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 this presentation. With that, I'll turn it over to François.
François Poirier (President and CEO)
Thanks, Gavin, and good morning, everyone. I'll start by saying our team is making exceptional progress towards our 2023 priorities. Our focus on execution is paying off, demonstrated by our strong year-over-year increase in comparable EBITDA and with our major projects remaining on track or ahead of 2023 targets. This is setting us up extremely well for 2024. So far this year, we've placed approximately CAD 5 billion of assets into service, including the majority of our West Path project that went into service on November first. Importantly, the projects placed into service so far this year have largely been on budget. On the deleveraging front, we received CAD 5.3 billion in cash proceeds after closing the sale of a non-controlling minority equity interest in Columbia Gas and Columbia Gulf. This puts us firmly on the path to restoring our balance sheet strength and flexibility.
We also continue to evaluate an additional CAD 3 billion of asset sales. As a result, post-2024, we're committed to limiting our annual net capital expenditures to CAD 6 billion- CAD 7 billion, which will also support further organic deleveraging. We continue to see strong, sustained demand for our services, and that's maximizing the value of our assets through safety and operational efficiency. As a result, we now expect our 2023 Comparable EBITDA to be at the upper-end of our 5%-7% growth outlook compared to 2022. While our natural gas pipelines businesses do not carry any material volumetric or price risk, strong utilization rates do demonstrate the demand for our services and the criticality of our assets. On the NGTL System, for example, we continued to see strong receipts.
In fact, the system achieved its highest single-day record of 14.6 BCF on August 6. Same theme in the U.S. LNG deliveries averaged 3.1 BCF a day, year-to-date in 2023, about a 1.5% increase compared to last year's third quarter. In July, we achieved a new all-time record for deliveries to power generators of 5.2 BCF. Additionally, on our GTN system, we achieved an all-time delivery record of 2.96 BCF, and we're pleased to see that the GTN XPress project recently received FERC approval. This project will expand the GTN system to transport incremental contracted export, facilitated by the Foothills West Path delivery program. We continue to make meaningful progress in Mexico.
The lateral section of VDR has been placed into commercial service, and for the last remaining portion, the south section, we expect that to be in service by the second half of 2024. In our Power and Energy Solutions business, we achieved a significant execution milestone with Bruce Power's Unit 6, returning to service ahead of schedule and within budget. This highlights our shared commitment with the Bruce Power team on project execution excellence. In addition, Bruce Power also achieved 94% availability in the quarter, and we continue to anticipate annual availability in the low 90% range for the units that are not down for the MCR program. For reference, in 2019, before we started the MCR program, the average availability at Bruce was 84%....
So what we've been able to deliver over the last several years is a 10% increase in average availability, largely due to the steady decrease in the forced loss rate and the reduction in planned outages. Following the completion of the MCR program, we expect to continue to see increases in availability. Furthermore, on our Alberta Cogen fleet, we achieved approximately a 98% peak price availability during the third quarter, and that with Alberta power prices averaging CAD 152 per MW-hour. And on Keystone, operational reliability was close to 94% year-to-date, and Bevin will come back to that in just a few minutes. To sum up, our operational excellence, our unparalleled asset base, has been delivering strong operational results and strong availability, which has translated to solid, sustainable financial results through every phase of the economic cycle.
As I mentioned earlier, we've sharpened our focus on project execution. After 5 years of construction and 55 million hours worked, we've now achieved the monumental milestone of mechanical completion on Coastal GasLink, and we achieved this ahead of our year-end target. This means that 100% of the pipe has been welded, coated, lowered into the trenches. We've completed all 800 classified water crossings. We've hydro-tested the entirety of the pipeline, and incremental to our announcement on the project last week, we've now finished the documentation and additional engineering analysis associated with the mechanical completion milestone. Coastal GasLink is Canada's first pipeline to the West Coast in 70 years, and once operational, it will be the first direct path for Canadian natural gas to reach global markets.
The next steps on this project are introduction of natural gas, project commissioning, and the land reclamation work that has already begun across the route. As mentioned in our press release this morning, the project also remains on track with our approximately CAD 14.5 billion cost estimate. Now, turning to Southeast Gateway. Looking at progress on the onshore portion of 25 km, all land has been acquired and construction at all three landfall sites is progressing on plan. In preparation for offshore work, our engineering is complete and concrete pipe coating is well underway. We are expecting the 690 km offshore pipe installation to begin by the end of this year. Now, we continue to see benefits from our enhanced capital allocation governance process, and on Southeast Gateway, that means that that project remains on track to be placed into service, as expected, in mid-2025.
I want to take a moment to recognize our Board Chair, Siim Vanaselja, for his excellent leadership role during a time of significant change at TC Energy. By the 2024 Annual General Meeting, Siim will have served on our board for 10 years, and he's been chair for the last 7. I'm very grateful that Siim will continue to offer his knowledge and expertise as he steps down as chair, but continues to serve as a member of the board in a director capacity. As part of our board's ongoing succession program, John Lowe has been designated as TC Energy's next Board Chair. His significant midstream and energy experience and his role as a board director of TC Energy since 2015 make him ideally suited to take on this critical role. Now I'll pass the call over to Bevin.
Speaker 17
Thanks, François. In July, we announced the intention to spin off our liquids pipeline business into a standalone investment-grade entity in order to maximize the commercial potential of this highly competitive corridor. We've made important progress in just three months, and I wanna take a few minutes this morning to discuss some of the highlights. Today, I'm thrilled to share the name of the new Liquids Pipeline company, South Bow. South Bow symbolizes the historical roots of the company, established near the Bow River in Calgary. The name acknowledges the pipeline system's strategic corridor, which enables the company to deliver a premier-resource southward to the strongest U.S. refining markets in both the Gulf Coast and the Midwest. Last month, we also shared the news that Hal Kvisle has agreed to be appointed as the Chair of South Bow's Board of Directors.
Hal is a distinguished industry leader with extensive experience spanning a wide range of companies across the energy space. He was also TransCanada's President and CEO from 2001 to 2010, back when Keystone came into service. He knows our liquids assets and knows this business very well. We look forward to welcoming Hal's leadership and guidance in this key role at South Bow. I want to remind you of some important points around the value of the spin-off will bring to shareholders. We made this announcement last quarter. We received strong support from customers. There are a few reasons for this. The assets in our system are critical to meeting customers' needs, and we are seeing additional demand for incremental service that reflects the competitive nature of the corridor.
We connect some of the largest and most resilient supply, demand, and export markets, and offer the fastest, most cost-competitive pathways from the Western Canadian Sedimentary Basin to the Gulf Coast. We'll be able to direct cash flow flexibly without competing for capital in a company that's strategically focused on maximizing the synergies in its natural gas and power businesses. Our premium value is supported by our compelling and sustainable dividend yield and low-risk, highly contracted business, with competitive advantages and contract structures unlike any of our peers. Fundamental to our value proposition is that South Bow is expected to be an investment-grade entity at the time of spin. This expectation remains in the current interest rate environment. We will look to establish the capital structure in a constructive capital markets environment. Furthermore, there is no time limit for us to affect the spin.
We fully expect to have the capital structure in place prior to the spin. To the extent we have not stood up the capital structure in its entirety, we have various tools available, including access to the bank term loan markets and utilizing hedging instruments, if appropriate, to allow us flexibility to optimally implement the long-term capital structure at South Bow. Our team is also committed to excellence in our operations. Throughout the third quarter, our system continued to perform exceptionally well. We are seeing strong, sustained demand in the U.S. Gulf Coast for Canadian crude. We successfully completed 2 open seasons on Marketlink. This system is operating well. As François mentioned, Keystone's system operating reliability year-to-date is approximately 94%. As a result, year-to-date comparable EBITDA of CAD 1.1 billion from the liquids business was up approximately 8% versus the same time last year.
As of this past week, we've completed the cleanup at Milepost 14 and restored natural flow to Mill Creek. We thank the local community, Washington County, EPA, Kansas Department of Health and Environment, and the Army Corps of Engineers for their support and assistance as we concluded this work. We will maintain a presence at site to progress long-term reclamation activities and environmental monitoring. I invite you to look at our website for additional details. With respect to inspections across Keystone, we have completed in-line inspection across 60% of the entire system. The integrity digs program is 50% complete, and we anticipate being fully complete by early second quarter next year. No concerning circumstances have been identified, and we continue to deliver on our contracted volumes. You'll hear more details at our upcoming Investor Day in a few weeks. Now I'll turn it over to Joel.
Speaker 15
Thanks, Bevin. During the third quarter, we continued to deliver strong performance, leading to a 7% year-over-year increase in comparable EBITDA. Primary drivers include higher flow-through costs and increased NGTL rate-based earnings in our Canadian natural gas rate-regulated pipelines business, additional assets placed into service in our Mexico natural gas pipelines business, higher long-haul contracted volumes, as well as higher volumes on the U.S. Gulf Coast section of the Keystone Pipeline system, and the impact of a stronger U.S. dollar. As François mentioned, given our strong year-to-date performance, we now expect our 2023 comparable EBITDA to be at the upper end of the 5%-7% outlook compared to 2022. Comparable earnings per common share are expected to be generally consistent with 2022.
Year-to-date, we have placed approximately CAD 5 billion of projects into service, including capacity projects in our natural gas and liquids pipeline businesses and Bruce Power's Unit 6 MCR program. Total capital expenditures for 2023 are now expected to be approximately CAD 12 billion-CAD 12.5 billion. I want to note that the estimated costs of major projects remain consistent. The increase primarily relates to our decision to bring forward 2024 capital expenditures and work into 2023. This includes accelerating the timing of certain maintenance and growth capital expenditures to optimize efficiencies and mitigate project execution risk in our natural gas pipelines businesses, as well as the foreign exchange impact of a stronger U.S. dollar. We've also delivered meaningful progress towards our deleveraging target.
We have a clear path to achieving our 4.75x debt-to-EBITDA target by the end of 2024 and remain there beyond 2024. On October 4, we successfully completed the 40% minority equity interest sale in our Columbia Gas and Columbia Gulf systems. Cash proceeds from this transaction of $5.3 billion will be directed towards reducing our year-end 2023 debt-to-EBITDA metric by over 0.4 times. We're continuing to evaluate capital rotation opportunities in the range of $3 billion. Our deleveraging is further supported by organic comparable EBITDA growth as we place additional assets into service. As of November 1st, substantially all the West Path delivery program on our NGTL System has been placed into service. This brings our year-to-date total to approximately $5 billion.
In 2024, we expect to place approximately $7 billion of projects into service, including Coastal GasLink, GTN XPress, and the south section of the Villa de Reyes pipeline in Mexico. Looking to 2025, we expect to place $9 billion of assets into service at an average build multiple of approximately 8x. This includes our Southeast Gateway project in mid-2025, expected to contribute approximately $800 million in incremental annual Comparable EBITDA, along with an additional $3 billion of assets on our U.S. natural gas pipelines business, some of which include Gillis Access Extension, Virginia Reliability, and Wisconsin Reliability projects. Now, in light of volatility in the market, I want to remind you of the stability of TC Energy's low-risk business model.
We have a very manageable debt maturity profile, and 89% of our long-term debt portfolio is comprised of fixed-rate debt with an average maturity of 18 years and a weighted average pretax coupon of just over 5%. This largely insulates us from the impact of interest rate changes. Our Canadian and U.S. natural gas pipeline businesses are also underpinned by rate-regulated frameworks that further allow for the recovery of interest expense in tolls. This means the cost of debt is a direct flow-through in our regulated Canadian business and is factored into U.S. rate cases. This, in part, has allowed us to increase the earned returns on our sanctioned capital projects over the last few years and maximize the spread versus our cost of capital.
Based on our low-risk business model, in combination with net capital expenditures of CAD 6 billion-CAD 7 billion annually post-2024, we expect to continue to grow our business commensurate with our 3%-5% dividend growth rate. This is why, despite the challenges faced in the broader market, I am confident in the sustainability of our dividend through all parts of the economic cycle, which is further bolstered by one of the lowest payout ratios amongst our midstream peers. TC Energy's board of directors has declared a third-quarter dividend of CAD 0.93 per common share, equivalent to CAD 3.72 per share on an annualized basis. Our dividend will remain foundational to the enduring value proposition of TC Energy to further build upon 23 consecutive years of common share dividend increases. Thank you. I'll pass the call back to François.
François Poirier (President and CEO)
Thanks, Joel. Before we turn it over to Q&A, I just want to reiterate our long-standing value proposition. Our recent strategic announcements are all in direct service of our four pillars. We take a long-term view by maximizing the synergies of our natural gas and power businesses. Simultaneously, we are unlocking the full long-term potential of our liquids business through our intended spin. We're also remaining disciplined and refocusing on our well-established conservative risk preferences. We're restoring our balance sheet strength, and we're allocating capital thoughtfully and in a manner that balances our ability to grow the dividend while maintaining balance sheet strength and reinvesting in the business. You'll hear a lot more about this on our upcoming Investor Day on November 28th, and I hope you'll be able to join us. With that, I'll turn it over to the operator for questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. To join the question queue, you may press Star, then One on your telephone keypad. You will hear a tone acknowledging your request. Please limit your questions to two, and if you should have additional questions, please reenter the queue. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Star then Two. Our first question comes from Theresa Chen of Barclays. Please go ahead.
Theresa Chen (Senior Analyst of Midstream and Refining Equity Research)
Good morning, and thank you for taking my questions. First, I'd like to ask about the plans to manage Mexico exposure, pro-forma asset sales, and the South Bow spin, given that you already have cash flowing assets there, and come mid-2025, once Southeast Gateway starts up and contributes EBITDA, you're likely to be above that 10% exposure. How are you thinking about managing this and any, you know, comments related to asset sales, specifically within that segment would be great. Thank you.
François Poirier (President and CEO)
Thanks, Teresa. It's François. I'll take that one on. I'll just reiterate, you know, our commitment and our goal is to execute on an incremental CAD 3 billion of divestitures, and realize the cash proceeds thereof within 2024. Part of that program, you know, may include some discrete asset sales in the U.S., but in terms of entering into joint ventures, as we have with GIP on our Columbia assets, we can look to our Canadian assets and our Mexico assets for those types of transactions being contemplated. Obviously, we're going to be in conversations with investors around our Mexico projects, balancing valuations with where we are and the progress we're making around construction. And we've made the commitment to reduce our exposure to a more manageable level.
Over time, we'll be giving you all a little bit more clarity and granularity around the percentage post-spin, as well as, you know, a percentage of what. Is it EBITDA? Is it net assets? 'Cause we are looking at tools like project financing. We've actually raised nearly $4 billion of non-recourse debt over the course of the last year to fund about 2/3 of the Southeast Gateway project financing. So, more to come there, and as I said, we'll be looking to joint ventures in Mexico and Canada as potential tools to execute on our $3 billion divestiture program. Our goal is to reduce our exposure in Mexico as a percentage of the overall average.
Given the sensitivities of our conversations, we're going to, I guess, leave it at that at this point.
Theresa Chen (Senior Analyst of Midstream and Refining Equity Research)
Understood. Thank you. And on the remaining asset sales in general to execute, how are you thinking about the economics in today's environment in light of the you know recent announcements by some of your competitors in the market to also put their assets up for sale and some of the recent valuations paid for similar assets within the valuations that you operate in?
François Poirier (President and CEO)
Yeah, you know, you look at some of the announced transactions. I would suggest that there's a pretty wide range of risk profile, and therefore, the expected returns that buyers need to be able to realize, and that translates into purchase price. What I'd tell you is we are still in the same interest rate environment as we were a few months ago when we announced our transaction with GIP. We did make the objective of announcing a very sizable transaction at that time. I do believe that since we are proceeding with multiple transactions to achieve the balance of the $3 billion, that smaller bundles will garner more competitive tension.
And so, despite the fact that we are in a similar interest rate environment, smaller assets, more competitive tension, and then you have to account for the fact that the assets that we would make available, either for partial or full interests, are at very low risk, highly contracted, no commodity, volumetric, or price risk. And, you know, that will be factored into what, how people value the assets. But again, as I said, we're, we're still in the same interest rate environment as we were a few months ago, and so, you know, I think we have fairly conservative expectations in our plan.
Theresa Chen (Senior Analyst of Midstream and Refining Equity Research)
Thank you.
François Poirier (President and CEO)
Thank you, Theresa.
Operator (participant)
Our next question comes from Praneeth Satish of Wells Fargo. Please go ahead.
Praneeth Satish (Senior Equity Analyst)
Hi, good morning. With capital here, CapEx being constrained in the CAD 6 billion-CAD 7 billion range in 2024 and beyond, I'd imagine that you're becoming more selective on what projects you bring to FID and maybe turning down some of the lower return projects. So can you maybe help us understand whether there's been a shift here in terms of your corporate return target, which has historically been in the 7%-9% range, and whether that's trending higher?
François Poirier (President and CEO)
Thanks for that question, Praneeth. The answer is, we have definitely seen an upward trend in the IRRs for projects we've sanctioned. Clearly, as we'll be high grading, we have an opportunity set that is well in excess of the $6-$7 billion a year. We are resolute in living within that number, so that allows us, as you said, to be a bit more selective. And one of the important criteria is going to be the risk-adjusted returns. If you look back to 2019 or thereabout, the projects we sanctioned in that year were in that 7%-8% range, and that has gradually crept up over time to the point that in 2022, we saw sanctioning projects in that 9%-10% range.
In the environment we're in today, we do continue to see sanctioning projects in that range. That will be adjusted up or down, depending on the proportion of the portfolio that goes, for example, in Canada Gas, where the returns are a bit lower, versus in something like Bruce Power, where the returns are higher. So on an average basis, we have seen those returns increase, and we've been able to, in our conversations commercially with our customers, to sustain levels as we've seen over the last year or so.
Praneeth Satish (Senior Equity Analyst)
That's, that's helpful. And then switching gears, I wanted to ask about the next rate case for Columbia Gas in 2025. As we calculated, the ROE on Columbia Gas was only 10% based on the 2022 filings. So it seems like there's some headroom there to maybe boost the revenue in 2025. So I guess, how should we think about the magnitude of the next rate case on Columbia Gas versus the last rate case, where you got, I think a $200 million step up?
François Poirier (President and CEO)
Yeah. I'll ask Tina to cover that one.
Tina Faraca (EVP and COO)
Good morning. We have a moratorium currently on new rates going into effect prior to April 2025, and you may recall we also have a comeback for new rates effective April 1st, 2026. So we'll be working within those bounds for filing of our next rate case, and obviously, we'll be striving for a balance of recovering our capital and earning a fair return, and maintaining competitive rates with our customers.
François Poirier (President and CEO)
... I would add also here, Praneeth, just to remind you of the point Joel made before, this is the way in the U.S. by which we mitigate interest rate risk. Every time we go back for a rate case, we can incorporate the current, cost of our debt into our rates. The reason why you're seeing us increase the frequency of our rate case filings across our U.S. system is because, we want to reflect the capital, the interest rate environment that we're operating in, but also because we're investing a considerable amount of maintenance capital, which we want to make sure we're earning a return on and of that incremental capital as well.
Greg Grant (EVP and President of Power and Energy Solutions)
Thank you.
Operator (participant)
Our next question comes from Linda Ezergailis of TD Securities. Please go ahead.
Speaker 18
Thank you. I'm wondering, with Coastal GasLink mechanically complete ahead of schedule, how might we think of, your, discussions with LNG Canada in terms of maybe, them recognizing, that early completion with some sort of financial incentives? And, you know, phase II, how might the commercial activity differ, with Coastal GasLink than phase I? And, you know, just, just broader thoughts around timing as you get to FID on that and what might be the major sticking points, including maybe how compression is powered on your system.
François Poirier (President and CEO)
Thanks for that question, Linda. I'll ask Bevin to cover the items around the early completion of phase I, and then Greg to address your questions around phase II.
Speaker 17
Yeah. Thanks, Linda. This is Bevin. So first of all, you know, we're tremendously proud to achieve this milestone. It's a testament to the team's relentless focus on safety and protecting the environment and collaborating with our contractors, Indigenous and local communities and government to get to this point. So we're really proud to have achieved this early mechanical completion. Something that we didn't anticipate, but we're really proud we've got there. With respect to the next steps, we obviously have ongoing commercial dialogue with our contractors to make sure that we close out those contracts effectively. We have about 100+ km of reclamation work to be done next year.
The team is busy right now, introducing natural gas into the system to become ready for LNG Canada to call for that gas. We look forward to achieving that milestone here by year-end, where we're ready for our customer when they need it. As it pertains to phase II and those discussions, I'll turn it over to Greg.
Greg Grant (EVP and President of Power and Energy Solutions)
Yeah, thank you. You know, currently, I would just say we are progressing early development of phase II, as requested by LNGC, to assess that expansion opportunities. So early engineering, we're looking at different potential electrification options, but still a lot of work to do there, engagement with our local communities and Indigenous partners. So it's quite early. You might know that Cedar is actually a little more timely in terms of, the process on, completion of phase I, you know, where we have been working diligently with, our Cedar partners, which include, the Haisla. This will be Canada's first Indigenous majority-owned LNG facility. We were targeting FID, the end of this year. We think that may slip a little bit, as we head into Q1.
Just I wanted to leave a reminder with you that as it pertains to our CAD 6 billion-CAD 7 billion capital commitment, our FID is conditional on TC achieving project financing. That, combined with our 35% equity ownership, would ultimately require a fairly small amount of capital from TC.
Speaker 18
That's a helpful context. And just as a follow-up, in terms of your, your CapEx, recognizing that we'll probably get a more fulsome update later this month, but it would be helpful in updating our model to understand kind of with some of the 2024 capital accelerated into 2023, and you know, but there's probably some headwinds on, on the FX front for 2024 CapEx. How might we think of your current outlook for 2024 growth CapEx on a growth basis before netting out any sort of asset sales?
Speaker 15
Yeah. Good morning, Linda, it's Joel here. I would just say to offer to wait until our Investor Day here on November 28th, as it relates to our 2024 outlook for our capital spend, both on a gross and net basis. But I will remind you, post-2024, as we've been saying all along, that we adhere to capital discipline and maintain CAD 6 billion-CAD 7 billion per year post-2024. But we'll have more for you here at Investor Day on November 28th, as it relates to our outlook for 2024.
François Poirier (President and CEO)
What I might add to that, Linda, is our plan and the capital program that we've got in the works for 2024 does allow us to achieve getting below 4.75 debt-to-EBITDA by the end of the year, and then staying there on a go-forward basis. As Joel said, there'll be more color here in just a few weeks, but appreciate the question.
Operator (participant)
Our next question comes from Rob Hope of Scotiabank. Please go ahead.
Rob Hope (Managing Director of Equity Research)
Good morning. During the Q2 call, a number of kind of organizational changes were announced. Just want to get an update of how kind of the reorganization of the organization has changed, as well as where we are in terms of the CAD 750 million of synergies and how they're tracking overall, as well as in 2023?
François Poirier (President and CEO)
... Thanks, Rob. It's François. I'll just start with a little bit of context and then pass it over to Stan to address the specifics of your question. Just to remind you that, you know, these initiatives and thinking around this has been in the works for a couple of years. In terms of, you know, initiatives on Focus, we're really in the implementation phase. The, you know, consolidation of our gas businesses into one entity, as well as the spin. These are things that have been stood up and the teams have been working on for quite a long time. So over to you, Stan.
Speaker 16
Hey, Rob. Our Focus project, as we refer to the $750 million initiative, if you recall, is about fundamentally changing how we do our work, particularly around safety, operational excellence, and our capital and cost management, in order to ensure that we're deploying our cash as efficiently as possible and to maintain our competitiveness against our, our peers. So, you know, just to give you a couple of proof points, with respect to things like operational excellence and safety, we have simplified our operational management system by reducing over 1,400 historical requirements down to less than 100. This frees up the time for our field employees to increase tool-in-hand time and make them more productive, among other things.
On the cost of the capital management side, by combining our three gas businesses under one leader, and we have identified about CAD 750 million in run rate synergies to be realized by the end of 2025. You can think of the value that's linked to these synergies as materializing in a couple of different ways. It could be capital reductions, it could be expense reductions, or even revenue enhancements. Generically, you could think about 50% of the savings is gonna come from capital reductions, 40% from O&M reductions, and about 10% from revenues. But do keep in mind that as we file rate cases in our respective jurisdictions, a lot of this value is gonna flow back to our customers.
If you want a little bit more detail around how we get to CAD 750 million, I can offer a couple of proof points for you. For this year, for calendar year 2023, we're on track to generate CAD 130 million of in-year savings, which on an annual basis equates to about CAD 185 million. And we did this by things like reducing our IS spend by CAD 50 million to eliminate redundant or low-value projects. We've eliminated or combined our technical center into the business. That saved CAD 30 million. We reduced our legal and our insurance costs by CAD 30 million, so a lot of optimization on that front.
Over the next 2 years, in 2024 and 2025, we see another CAD 200 million of savings, primarily in our growth capital programs, by changing the way we're engineering our facilities, for example, and reducing our footprints. There's another CAD 85 million of reductions associated with our pipe integrity program, CAD 90 million of reductions in our maintenance capital projects, which will materialize starting in 2024 and is already baked into our 2024 forecast. As you think about the optimization on the organizational structure design, we think that there's probably about CAD 50 million worth of synergies as we go through and integrate and optimize our gas businesses under one umbrella.
Rob Hope (Managing Director of Equity Research)
Thanks for that. And then maybe just moving over to the NGTL System. There's a toll settlement through the end of 2024. When do you expect to kind of engage customers there? Could we see a higher ROE there? And then how does that balance with the potential for a partner?
François Poirier (President and CEO)
I'll ask Greg to take that one.
Greg Grant (EVP and President of Power and Energy Solutions)
Yeah. Thanks, Rob. So yeah, as a reminder, the NGTL settlement will end at the end of December 31st, 2024. Discussions with customers have started with the objective of defining a clear path towards another settlement mid-2024. While we are watching the market and ROE, I just mentioned ROE is not the only measure of value that we look at. We are looking to optimize the return on and of capital. There are many levers to do this while we can maintain a competitive toll and service offerings. So, you know, things like Project Focus are helping us minimize toll increases, which will allow us to enhance that return on and of capital.
Obviously, we won't get into the details of a confidential negotiation, but highly confident we can find win-win here with our customers, and likely won't be able to share more details on that until Q1, Q2.
Rob Hope (Managing Director of Equity Research)
Thank you.
Operator (participant)
Our next question comes from Robert Kwan of RBC Capital Markets. Please go ahead.
Robert Kwan (Managing Director of Global Research)
Thanks. Good morning. I'm going to start with the business. So, you know, you highlighted on, on the gas system, strong deliveries and, and record deliveries on a number of the systems. You've got a bunch of projects under construction, you've got some new regulatory approvals. I'm just wondering, as we look forward, as you look at the volumes on the system, are there new projects that are taking shape? And if there are, can you just talk about the magnitude of, of what that spending might look like and over what timeframe the spending might unfold?
François Poirier (President and CEO)
Yeah, Robert, it's François. Thanks for that question. I'll, I'll, I'll take that one. Just remind you that we're laser-focused on our CAD 6-7 billion a year, going forward, post-2024 on a, on a net basis. And as you know, in our business, we have the benefit of a fair bit of visibility into capital spend all the way out, really, to the end of the decade. When you think about the fact it takes a couple of years to commercially sanction a project, and then a couple of years to get the requisite permitting and regulatory approvals, and then you have to order the long lead items, and then, you know, you're, you're a year or two in the field doing construction.
So as we look out to the end of the decade, our goal is not only to live within our CAD 6 billion - CAD 7 billion, but also, you know, not to have more than one large project at a time. It's something. One of the key learnings for us here over the last couple of years is to manage the aggregate risk of the capital program annually, not just the risk of the individual projects. As we look at that program, and our performance, and, you know, case in point, as I mentioned, we've got $5 billion we put into service so far this year, largely on budget, and that means singles and doubles. And those are very manageable from a risk standpoint. We know the regulators, we have relationships in the communities, we know the ground.
So look to us executing as many of those singles and doubles as possible going forward, organic projects in corridor and a very select few of those larger projects that would span many, many years and large dollar amounts.
Robert Kwan (Managing Director of Global Research)
Got it. I guess, just thinking about the CapEx shift and the FX impact, have you talked to the rating agencies yet about this, just with respect to your FX rate hold? You're gonna get your debt marked this year at December 31st, but your EBITDA is gonna be trailing. So do you think that just with some of the outlook, you know... I get that 2024, you're still 4.75, but does it change anything here for you around the funding plan in the near term?
Speaker 15
Yes, Robert, it's Joel here. I'd say that, you know, I had conversations with all four agencies, as we do every quarter, just to give them, provide them with an update, and we provided them with this update as well. They're looking through really to the end of next year as it relates to getting our leverage metrics on side to that 4.75, as we've mentioned, and we do have a path to get there, and we're sticking to that plan. So, despite that the cost being slightly higher here, and what we're talking here is about a 4% increase from the midpoint, when you think about the increase in our outlook for this year.
But we're also seeing a stronger EBITDA, as you've seen us guide our EBITDA to be 7% higher year-over-year at the upper end of the 5%-7% range that we highlighted. So, you know, as we go into year-end, we don't have a, you know, we can't say where the debt-to-EBITDA will land, 'cause there are still some moving parts with EBITDA, where the CapEx ultimately lands and where FX lands. But really, the objective here, Robert, is to get to the 4.75, as we exit 2024. We clearly have a plan to get there, and the agencies know what our plan is, and we'll stick to it.
Robert Kwan (Managing Director of Global Research)
Okay, so in short, you don't expect any rating agency actions off of the change today?
Speaker 15
No, we can't speak to the agencies, obviously, but you know, based on our discussions, they, they're very, you know, pleased with you know, some of the you know, the things that we've accomplished this year. You think about where we started the year with our priorities being you know, $5 billion of asset sales. We completed CAD 5.3 billion, you know, advancing major projects like CGL, having that mechanically complete, Southeast Gateway moving along, and still continued strong operational and financial results. So we've hit on all of our priorities for the year, and that's not lost on them.
Robert Kwan (Managing Director of Global Research)
That's great. Thank you very much.
François Poirier (President and CEO)
Yeah, again, Robert, just want to underscore the increase in our capital program was because part of the benefit of merging our gas businesses is that we're looking holistically at our portfolio. And where there's opportunities to bundle work together to deliver it at a lower cost and more efficiently, we're gonna do that, and that's the decision we made. That's the visibility that having an integrated gas business affords us. And so, you know, Coastal GasLink, we delivered, we're delivering on our outcome, CAD 5 billion of assets on plan as well. So this is really about doing more work in 2023 than we were planning on doing, as opposed to, you know, you know, any inflationary impacts on our projects or FX driving us, driving the capital higher.
You know, our U.S. dollar program is our U.S. dollar program, so there's no inflationary effect because of foreign exchange translation rate, and the rating agencies are aware of that.
Robert Kwan (Managing Director of Global Research)
Got it. Thanks, François.
François Poirier (President and CEO)
Yep.
Operator (participant)
Our next question comes from Jeremy Tonet of JP Morgan. Please go ahead.
Jeremy Tonet (Research Analyst and Managing Director)
Hi, good morning.
François Poirier (President and CEO)
Morning.
Speaker 15
Morning, Jeremy.
Jeremy Tonet (Research Analyst and Managing Director)
Just wanted to start off with the asset sale program, if you could, turn back there for a minute. With regards to the CAD 3 billion being discussed, is there the chance that it could be a number larger than that? And if so, what would be the number of that? And if you think about asset sale or capital recycling in the future, is it largely just a function of rates of return that could be garnered through incremental new growth projects relative to the, you know, what returns are lost on asset sales? I was wondering if you could give us holistically more thoughts on, you know, how the asset sale program looks at this point?
François Poirier (President and CEO)
Thanks, Jeremy. As I said before, you know, we're gonna stick to the CAD 3 billion here in 2024. We're not gonna be looking to one transaction to realize the proceeds. We'll be looking to multiple transactions to do that. I think it's a good practice for us on an ongoing basis to have the discipline to mark our assets to market and rotate capital to the extent that creates value for our shareholders. So you know, beyond the CAD 3 billion, you know, you could see us selectively over time, if we have an opportunity to invest capital to proactively, ahead of time, monetize assets that we think are more mature or where we see some value.
So it is going to be an ongoing tool in our toolkit, but for 2024, the focus is on CAD 3 billion.
Jeremy Tonet (Research Analyst and Managing Director)
Got it. That's helpful there. Thanks. Just looking forward to the Analyst Day, wondering if you could provide any thoughts at this juncture as far as, you know, key updates that we should be looking for or any other thoughts you could share at this point?
François Poirier (President and CEO)
You know, I would say wait and see. Yeah, look, our goal here going forward is returning to no surprises. Just execute well, live within our means, demonstrate project execution excellence, demonstrate operational excellence. And we're very proud of what we've accomplished here in 2023. We'll be talking to you about what our 2024 priorities will be, but trust me, they will be around balance sheet integrity, operational excellence, and project execution excellence. And it shouldn't be any more exciting than that, if I'm honest, Jeremy.
Ben Pham (Senior Analyst)
That is helpful. Thank you very much. I'll leave it there.
François Poirier (President and CEO)
You bet.
Operator (participant)
Our next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead.
Robert Catellier (Energy Infrastructure Analyst)
Hi, good morning. I wonder if you could describe the agreement TC Energy entered into with the Ksi Lisims LNG partnership to work on the Prince Rupert Gas Transmission project, and what the company's appetite is like to undertake another major project like that, and how that might fit within your deleveraging goals?
François Poirier (President and CEO)
Thanks, Robert. It's François. I'll take that one. Look, we have a permitted path. We recognize there's value in that path. We've been asked by the Ksi Lisims group to preserve those permits. That is our contractual obligation. We're happy to do that, first of all, because it's an opportunity to create value for our Indigenous partners. Secondly, it's an opportunity to create value for our customers, and as we increase egress out of the basin, it increases value for our NGTL System. Those are all things that are to the benefit of TC Energy.
I wanna be very clear, however, that we are resolute around our CAD 6 billion-CAD 7 billion, and, to the extent we cannot fit, a PRGT project, or any project for that matter, within our portfolio, number one, and number two, to manage to, have less large, ambitious projects going forward. To the extent, you know, we can't fit, a project like PRGT within those, there won't be any allocation of capital.
Robert Catellier (Energy Infrastructure Analyst)
Okay, that's, that's pretty clear. And then, just wanted to move on. Question for Joel here. Just how do you see hybrids, fitting in, to your, your funding plan, both in 2023 as well as reaching your 2024 goals, sort of your appetite there and what, what you're seeing in, in the market?
Speaker 15
Yes, thanks, Rob. So as we think about hybrids, we're not seeing anything. We don't have any plans in the near term. We're running, you know, close to that 15% cap as it relates to our capital structure for, for this year and into 2024. As we do see the balance sheet grow post 2024, there will be capacity for future, hybrid issuance. But as we think about our 4.75 target for, for next year, you know, it doesn't contemplate any, any additional hybrids in, in that plan at this point in time.
Where we'll look to hybrids, though, is we'll work, you know, in conjunction with the liquids team here, or I guess the South Bow team, as we call it now, to look at their capital structure, where there might be a need for them there. As it relates to pricing right now, it's kind of in the high eights, so it's about 200 basis points back of where we would issue 10-year senior unsecured at this point in time.
John Mackay (VP Equity Research)
Okay, thank you.
Operator (participant)
Our next question comes from Ben Pham of BMO. Please go ahead.
Ben Pham (Senior Analyst)
All right, thanks. Good morning. On with the Coastal GasLink project now complete, does that open up a way for you NGTL opportunities in that post-2025 time frame?
François Poirier (President and CEO)
Thanks, Ben. I'll ask Greg to take that one.
Greg Grant (EVP and President of Power and Energy Solutions)
Yeah, sure. Thanks, Ben, for the question. As you're aware, we've done a substantial build on the NGTL System over the last few years. We delivered 1.3 BCF last year. Similarly, we're gonna add about the same this year. And just a shout-out to the team that it was talked about earlier, but on time and on budget performance again this year. So, great opportunity there. Going forward, however, I would say, you know, you should see a more normalized level of spend on NGTL.
We think we're set up for the next few years with the expansions that we've already done, and we're doing a lot of work through Project Focus in optimizing the system to see what extra capacity we can get out of the existing assets without capital, but we're in a great spot to handle the expansions going forward.
Ben Pham (Senior Analyst)
... Okay, and then my, my follow-up question on, I know you mentioned, there's a question around, returns and maximizing your returns in the NGTL System. Is there any thoughts or motivation on pushing of the deemed equity portion of the pipeline, where you can capture more cash and deleverage at the same time?
Speaker 17
Ben, you know, we're in the front end of, you know, a negotiation process with our customers. As Greg mentioned, we'll be providing some feedback and color as next year proceeds. It's too early at this point to provide any indication as to where those discussions are heading. But whenever we can, we will be sure to provide some color to our shareholders and to other stakeholders.
Ben Pham (Senior Analyst)
Okay.
Operator (participant)
Our next question comes from Brian Reynolds of UBS. Please go ahead.
Brian Reynolds (SVP of Wealth Management)
Hi, good morning, everyone. Maybe to follow up on Coastal GasLink, good news on the mechanical completion. So, maybe as we look ahead towards earnings expectations, next year, just kind of curious how we should think about EPS or EBITDA contribution as it relates to this asset, just given that LNG Canada won't be online. Does LNG Canada reimburse TC for maintenance costs, or is there kind of a regulated return framework embedded in there? Just wondering how we should think about Coastal GasLink earnings before LNG Canada comes online, hopefully in 2025.
Speaker 17
Thanks, Brian. I'll kick it off. This is Bevin. So, as you would appreciate, even in the Gulf Coast, LNG projects take a while to commission and bring into service. So we've done our part by bringing the project in on time and by the end of the year. And we'll have to wait and see how LNGC progresses. They're making strong progress, but I'd anticipate that a good part of next year is in commissioning process.
Speaker 15
Brian, I would just add, it's Joel here. When we think about the returns from CGL, you know, first of all, we own 35% today. That could go down to 25%, if First Nations pick up their 10% option. So we don't have, obviously, significant ownership in the project. And when we look at the amount that we've had to impair as it relates to this project, roughly CAD 3 billion last year and just over CAD 2 billion this year, you can read into that, that there's not gonna be a significant return for us here on this project, you know, going forward. You know, the key was really to get the project completed, you know, on schedule with a revised budget. That was critical to us and safely, obviously.
As we look at the amount of incremental equity income that we would generate from this investment, it's not gonna be that significant.
Brian Reynolds (SVP of Wealth Management)
Great. Appreciate other color. Maybe to pivot to the South Bow Corp, two-part question. If you could just discuss how, one, conversations are going with the agencies around being investment grade. You know, in the slide deck, you kind of allude to, you know, managing some floating interest rate exposure, and just kind of curious if 5x is still what the agencies are looking for. And then second part of the question, for the SpinCo, you know, looks like you have 2%-3% of DPS growth, reaffirmed from the spin, but only roughly CAD 200 million in secured capital backlog at this time. So, you know, clearly, the companies are gonna separate and be able to pursue different opportunities.
Just kind of curious if you can sensitize, you know, what that secured capital backlog at the liquids company could look like post-spin? Thanks.
Speaker 15
So Brian, it's Joel here. I'll take the first part of that question before handing it over to Bevin. You know, again, we are working, you know, closely with Bevin's team to support their financing. I would say to you that nothing has changed since the last update here at the end of July, when we went to the agencies with our deemed capital structure and got an indicative ratings at that point, which would be investment grade based on roughly five turns of a leverage. So nothing has changed up until now.
We would expect to go back to the agencies here, sometime kind of late winter, early spring, as we finalize things here as it relates to the capital structure, for South Bow, and to get firmed up ratings as South Bow would then look to after the spin has been approved, to start establishing the capital structure at that point in time. But I'll remind you, what is fundamental to this is that, South Bow will have an investment-grade rating no matter what.
Speaker 17
Then, Brian, I'll answer your second part. This is Bevin. So, just a reminder, our value proposition is a total shareholder return that we're seeking double digits for our shareholders. That's made up of a high-yield component through a very sustainable dividend, underpinned by best-in-class contracts and the connectivity of our core from the best supply basin to the strongest demand. That dividend, coupled with the 2%-3% growth that you've articulated, that comes from two points. First, it comes from operational and commercial excellence on our current systems. You've heard us move the bar on our system operating factor over the last 3 years by nearly 10%. There's a tremendous amount of additional opportunity we see in growing our EBITDA through our existing systems without capital.
And the proof point to that is that we've delivered all our contracts, even subject to the derate, this past year. The second lever that we have on growth are very low capital investment opportunities that surround our corridor. A great example of that is the Port Neches Link-
François Poirier (President and CEO)
... asset that we put into service this year on time and on budget. That has attracted a tremendous amount of flow, enhancing the value, again, of our market-linked system. So we believe we'll have, we have line of sight to a number of those types of capital opportunities that more than underpin our 2%-3% growth, but with very low execution risk. The third part of our value proposition, though, is that in our outflows of capital, we're going to reserve the ability, which ties to your first question around our balance sheet strength, the ability to continue to delever. It is critical that we maintain a very strong balance sheet at South Bow. So that hopefully that addresses your question.
Brian Reynolds (SVP of Wealth Management)
Yeah, thanks. Sounds like a lot of low multiple build-type projects looking forward. So, looking forward to hear some more at the Analyst Day here in a few weeks. Have a great rest of your morning.
François Poirier (President and CEO)
Thanks, Brian. So I think we have time for just one more question, please.
Operator (participant)
Our next question comes from John Mackay from Goldman Sachs. Please go ahead.
John Mackay (VP Equity Research)
Hey, good morning. Thanks for the time. Wanted to maybe just start on the success in bringing Unit 6 at Bruce online, kind of faster than scheduled. Any read-through for the rest of the MCR program, and maybe anything that could mean any learnings for, potentially moving forward with Bruce Site C?
François Poirier (President and CEO)
Okay, it's François. I'll start, and then I'll ask Annesley to fill in the question. Just first of all, we're very proud of the execution on Unit 6. That included over 100 force majeure days during COVID. So that asset was brought in ahead of schedule and on plan. And very proud of the execution. And of course, we're in a good place also on Unit 3, which is in the early part of its program, but over to Annesley for more detail.
Annesley Wallace (EVP of Strategy and Corporate Development)
Sure. So, in the near term, we certainly are very focused on the continued really strong execution of all 6 of the major component replacement projects. Seeing where Unit 6 has come in ahead of schedule and on budget, certainly gives us more confidence in the project execution for the remaining units. They are largely the same scope of work, and so, being able to have one fully complete and back in service, gives us a lot more insight into planning and optimizing the execution on the remaining projects. With respect to your question around a future new build at the Bruce site, it is still extremely early days. As we've talked about, our focus over the near term will be on executing the existing refurbishment program, and that's where the capital spend will be focused.
We are supportive of Bruce Power starting initial investigations into what a new build would look like, Bruce C, and that's on the back of extremely strong policy support in Ontario. So we're working closely with the government, really just to explore what the possibilities might be at this stage.
François Poirier (President and CEO)
I will remind you, John, and the rest of our listeners, as we laid out at our Sustainability Day at Bruce earlier this year, through the combination of price increases as well as bringing incrementally through the end of the decade more units back into service, we're expecting to see a fairly significant growth in the profit before tax from Bruce that is consolidated into our EBITDA.
John Mackay (VP Equity Research)
All right, appreciate that update. Maybe just one last quick one, staying on maybe later-dated projects. It looks like Ontario Pumped Storage FID timing may be 2025 versus 2024 prior, and I think we were looking for an kind of regulatory update end of this month. Maybe you could just comment, comment on on those two. Thanks.
Annesley Wallace (EVP of Strategy and Corporate Development)
Thanks for the question. It's Annesley. So the development of the Ontario Pumped Storage project is continuing. It's a project that we are excited about. Again, there's very strong policy support for it in Ontario. We also anticipate, and it would be a condition of us going ahead, a commercial model that would be rate regulated, which will provide us with a strong framework going forward. If we do move ahead, and you're right, we do anticipate feedback from the government before the end of this year. An FID date would likely not be before sometime in 2025, and major CapEx would be even post that date by the time we get into any significant construction.
John Mackay (VP Equity Research)
All right. Appreciate the updates. Thank you.
François Poirier (President and CEO)
Thanks, John.
Operator (participant)
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, Mr. Wylie.
François Poirier (President and CEO)
Yeah, thank you. And thanks, everyone, for participating this morning. As Ariel mentioned, if you have any questions or if we didn't get to your question, please contact the investor relations team. We're always happy to help. We very much appreciate your interest in TC Energy, and we look forward to our next update. Thanks again.
Operator (participant)
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.