TC Energy - Q4 2022
February 14, 2023
Transcript
Operator (participant)
Thank you for standing by. This is the conference operator. Welcome to the TC Energy Fourth Quarter 2022 Financial Results Conference Call. As a reminder, all participants are in 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 would now like to 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, everyone. I'd like to welcome you to TC Energy's 2022 fourth quarter conference call. Joining me today are François Poirier, President and Chief Executive Officer, Joel Hunter, Chief Financial Officer, along with other members of our senior leadership team. François and Joel will begin today with some comments on our financial results and operational highlights. Copy of the slide presentation that will accompany the remarks is available on our website under the Investors section. Following their remarks, we will take questions from the investment community. We ask that you limit yourself to two questions, and if you're a member of the media, please contact Jaimie Harding. Before François begins, I'll remind you that remarks today will include forward-looking statements that are subject to important risks and uncertainties.
For more information, please see the reports filed by TC Energy with Canadian Securities Regulators and with the U.S. Securities and Exchange Commission. Finally, during the presentation, we refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC's operating performance, liquidity, and its ability to generate funds to finance its operations. A reconciliation of various GAAP and non-GAAP measures is contained in the appendix of the presentation materials. With that, I'll now turn it over to François.
François Poirier (President and CEO)
Morning, everyone. In the fourth quarter of 2022, we continued to deliver strong utilization and availability across our system when people need energy most, setting multiple records along the way. By extension, we also achieved record financial results in 2022, including a 6% year-over-year increase in comparable EBITDA. We see this positive momentum continuing into 2023 and expect our industry-leading CAD 34 billion secured capital program and portfolio of high-quality utility-like assets will continue to deliver sustainable cash flow growth. We are reaffirming our 2023 financial outlook, with comparable EBITDA expected to be 5%-7% higher than in 2022, and we've increased our dividend for the 23rd consecutive year. We are advancing our CAD 5+ billion asset divestiture program that will provide funding for our portfolio of high-quality growth opportunities, while at the same time accelerating our deleveraging.
While 2022 was a record-setting year in many ways, we were faced with challenges. On December 7th, we activated our emergency response protocols after detecting an oil release on our Keystone system. Our priorities are clear: keep people, the environment, and our assets safe every day. Serious events such as this are never acceptable. From the initial detection to valve isolation, it only took seven minutes to shut down the pipeline. The response from our front line was nothing short of exceptional, I wanna thank our team for their incredible preparation, training, and decisive action. I also wanna thank the community of Washington County, Kansas, who welcomed and cared for our teams on the ground. The collective response allowed us to safely return the majority of the system back into service within seven days, and we replaced, repaired, and restarted the remaining Cushing segment within three weeks.
We continue to diligently restore the area to its original condition and have recovered 90% of the release volume. We continue to investigate the root cause of the incident, and we are committed to apply those learnings going forward. While our primary focus remains safe resumption of operations, we do expect to continue to fulfill our Keystone Pipeline contractual commitments, and we do not anticipate a material financial impact on our 2023 comparable EBITDA outlook. The value of our liquids business remains high, reflecting its significant free cash flow generation, direct link between critical markets, and additional in-corridor growth opportunities. As an example, the Port Neches Link project is expected to be in service in the first quarter and will provide last-mile connectivity to North America's largest refinery. In our U.S. natural gas business, we achieved an all-time delivery record of 36.6 BCF on 23rd December.
In 2022, our average daily volumes increased 5% year-over-year. In 2022, we placed approximately $2.1 billion of projects into service. The majority of those were aligned with increasing our share of U.S. LNG feed gas deliveries from 25% to about 30%, and we plan to increase our market share to 35% in a growing market over the next 5 years. This month, as evidence of that, we used our competitive footprint to sanction the 1.4 BCF per day extension of our Gillis Access project to further connect the Haynesville Basin to Louisiana markets, including the rapidly expanding LNG market. In Mexico, our first of its kind strategic alliance with the CFE allowed us to resolve arbitrations and integrate multiple pipeline systems into one.
The addition of the Southeast Gateway pipeline also provides an opportunity to increase our total return on invested capital once it's in service. I'm pleased to update that we are tracking to both schedule and cost on Southeast Gateway. We recently completed a critical path milestone by executing the main land acquisition agreements required for landfalls and compressor stations in Veracruz and Tabasco. We will continue to provide progress updates throughout the year for this strategic pipeline that will support delivering vital natural gas supply to the growing central and southeast regions of Mexico. In Canada, our NGTL system continued to perform very well, with average deliveries up 6% to 13.4 BCF a day compared to 2021. In 2022, we placed CAD 3.2 billion of capacity projects into service, growing our NGTL investment base by 12% year-over-year.
We expect to place approximately $3 billion of additional facilities into service in 2023. Earlier this month, we had announced our revised cost estimates for the Coastal GasLink project at approximately $14.5 billion. The project has now reached 84% overall progress, and we have line of sight to our mechanical completion target of year-end 2023. While we have faced significant challenges, our teams in the field are working tirelessly to complete the project in the highest safety and quality standards in the pipeline industry while executing the remaining scope at the lowest possible cost. In our Power and Energy Solutions segment, we produced exceptional results with 2022 comparable EBITDA up 36% year-over-year, and this segment continues to play a greater role in our diversified portfolio of energy assets.
From an operational excellence standpoint, our cogen operations had strong performance that resulted in peak power plant availability during the coldest days in December, where Alberta saw record power pool prices. Bruce Power achieved 87% availability in the fourth quarter, while the unit four planned outage was completed 22 days ahead of schedule. We expect to place unit 6 back into service in late 2023 following completion of its MCR program, while unit three MCR is expected to commence next month. Unit four, the third unit in the MCR program, is expected to reach its final investment decision in the fourth quarter of 2023. Bruce Power remains the largest emissionless investment in our portfolio. We expect it to deliver significant free cash flow following the completion of the MCR program as well as our Project 2030.
Thank you. I'll now turn the time over to Joel for a few comments.
Joel Hunter (CFO)
Thanks, François. Our fourth quarter 2022 results continue to demonstrate the solid execution and high utilization across our portfolio, with comparable EBITDA up 12% year-over-year and comparable earnings increasing 10%. Our assets are largely rate regulated or underpinned by long-term contracts that provide certainty and stability of our cash flow through various economic cycles. Looking at comparable EBITDA, a main contributor to the outperformance was driven by the strength in our natural gas pipelines businesses in Canada, U.S., and Mexico. Growth in our Canadian natural gas pipelines business was largely underpinned by the increase in the NGTL system rate base as we placed $3.2 billion of capacity projects in service during the year.
In the 3rd quarter of 2022, we placed the north section of the Villa de Reyes pipeline and the east section of the Tula pipeline in service, contributing to increased results for our Mexico business. Switching to comparable earnings, following the strategic partnership announced with the CFE in August, we began booking AFUDC on our Mexico projects under construction. The AFUDC amount will continue to grow as we execute our Southeast Gateway capital program. We are well-positioned to deliver strong results in 2023 and continue to expect our 2023 comparable EBITDA to be approximately 5%-7% higher than 2022 and comparable earnings per common share to be modestly higher than 2022. We are confident in this outlook despite the environment of rising interest rates and inflation.
Approximately 80% of our debt is fixed rate and has a weighted average maturity of approximately 20 years and an average pre-tax coupon of 4.9%. As such, changing interest rates have only a modest impact on our comparable EPS. Strength in the U.S. dollar predominantly serves as a tailwind, given approximately 60% of our comparable EBITDA is generated in U.S. dollars. Our 2023 U.S. dollar net income is largely hedged at around 1.30, which minimizes the impact to our comparable EPS from fluctuations in foreign exchange rates. As we've stated before, we are largely insulated from inflation. Every 1% move equates to approximately CAD 0.01 per share. Of course, any fluctuations in these variables and other factors could impact our 2023 outlook, and we will look to revise throughout the year if necessary. Looking to specific segments of our 2023 outlook.
We expect our Canadian and Mexico natural gas pipelines businesses to deliver higher comparable EBITDA compared to 2022, largely driven by continued growth on the NGTL system and full-year contributions from the VdR North and Tula East pipelines, respectively. In liquids, I'll note that we expect comparable EBITDA to be modestly lower than 2022. Our outlook incorporates the impact of the Milepost 14 incident and expectation of continued lower margins on market length. That said, we expect to continue to be able to fulfill our Keystone Pipeline system contract commitments. Finally, we anticipate our U.S. natural gas pipelines and Power and Energy Solutions segments to be consistent with 2022. Additional information is contained in our 2022 annual management's discussion and analysis.
We delivered 6% comparable EBITDA growth in 2022 and expect similar levels in 2023 and through 2026, excluding the potential impact of asset sales. Similar to today, approximately 95% of our EBITDA will continue to come from regulated and long-term contracted assets, which provides a high level of certainty around our future cash flows. Our growth outlook is underpinned by our industry-leading CAD 34 billion, fully sanctioned, secured capital program. Turning to our funding program, we've updated our sources and uses of funding that was shown at our Investor Day to incorporate the revised cost estimate for Coastal GasLink. In 2022, we sanctioned CAD 8.8 billion of projects that are expected to generate a weighted average unlevered after-tax IRR that is above our historical range.
While we'll expect to sanction additional high-quality opportunities, not all projects sanctioned will have significant capital requirements over the next few years. We will be disciplined around capital allocation with the goal of deferring certain project spending and finding capital reductions where possible without sacrificing operational safety or reliability. Reiterating François' earlier comment, we are confident in our asset divestiture program will allow us to accelerate our deleveraging target. Our plans have us reaching 5x debt-to-EBITDA in approximately 12 months, with 4.75x remaining our target. That will provide us with additional financial strength and flexibility. Our sustainable cash flow growth will also drive our deleveraging and support incremental long-term debt and hybrid capacity to further fund accretive growth opportunities.
Where our capital spending exceeds our targeted annual range of CAD 5 billion-CAD 7 billion, we will continue to utilize capital rotation without the reliance on common equity. Participation in our dividend reinvestment plan was approximately 33%, resulting in CAD 607 million reinvested in common equity from the dividends declared in 2022. As a reminder, the dividend reinvestment plan is expected to be in place through dividends declared for the quarter ending 30th June 2023. These two charts capture the resiliency of our value proposition. First, as François mentioned, TC Energy's board of directors has declared a first quarter 2023 dividend of CAD 0.93 per common share, which is equivalent to CAD 3.72 per share on an annual basis, representing a 3.3% year-over-year increase.
This is the 23rd consecutive year of common share dividend increases and truly reflects confidence in our outlook. Second, we have delivered strong results and sustainable growth in comparable EBITDA, reflecting the strength of our utility-like business model, our focus on safety and operational excellence, the value of our long-term relationships and partnerships, and North America's increasing demand for our essential services. We have created value despite market volatility and macroeconomic challenges, and I'm confident in our ability to continue to do so going forward. With that, I'll pass it back to François.
François Poirier (President and CEO)
Thanks, Joel. Just a few closing comments before we turn over for questions. For 2023, our team is laser-focused on execution. Firstly, maintaining safe and reliable operations is always our number one priority. Second, executing and progressing our major projects, such as Coastal GasLink and Southeast Gateway. Third, enhancing our balance sheet by actively managing our capital spending and advancing our CAD 5+ billion asset divestiture program.
Lastly, ensuring operational excellence to drive higher returns on existing assets. Given the quality of our assets, we see strong market interest and expect compelling valuations that we anticipate will allow us to size our divestiture program to support achieving our deleveraging target and fully fund our secured capital program. Going forward, we will continue to use capital rotation, as Joel mentioned, beyond 2023 as a mechanism and as a tool to create long-term shareholder value.
This is an exciting time for TC Energy. We have an unparalleled opportunity set, and I'm confident that we have the people and the financial capacity to prosecute our secured project backlog and continue to deliver superior long-term shareholder value. I'll now pass the call back over to the operator for questions.
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. We ask that you please limit your questions to two, and if you should have additional questions, to please re-enter 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 Rob Hope of Scotiabank. Please go ahead.
Rob Hope (Managing Director of Equity Research)
Good morning, everyone. First question is on the asset sale process that are ongoing. You know, as we've seen the cost increase for Coastal GasLink, have you seen kind of or internally, have you changed your views of which assets could potentially be for sale, just given the higher capital requirement? Secondly on that, you know, just given the market conditions, have you seen any changes in bidding activity from your counterparties?
François Poirier (President and CEO)
Hi, Rob. It's François. I appreciate the question and understand that there's a lot of interest on what we'll be selling and when. You know, we are in market with a number of different processes and conversations. We're at a very sensitive time in those processes. I'm sure many of those counterparties are listening to this call, so we're going to refrain from commenting specifically on any process. What I will tell you is, we are confident in our ability to achieve our $5 billion+ program and even upsizing that program to the extent we see attractive valuations. Joel mentioned we have a near-term target within the next 12 months to achieve 5x debt-to-EBITDA.
Based on the conversations we've been having, we don't foresee any change in tone from conversations that would cause us to conclude that those goals are not achievable. Secondly, I would say that our focus as part of this process hasn't changed, which is we have an excellent quality business portfolio in terms of business risk, and we wanna maintain that diversity, and we wanna maintain the quality of the portfolio. It's an important underpinning of our credit quality and the stability of our dividends, and we don't see the need to disproportionately monetize any portion of our portfolio that would affect its composition. Hope that helps.
Rob Hope (Managing Director of Equity Research)
Nope, that's a great answer. Appreciate that. Then just moving over to Coastal. Understand that you gave us an update a couple weeks ago, we're midway through February. Can you provide an update on how the winter construction has gone for those key gating factors that could potentially push the project into 2024?
Speaker 16
Yeah, Rob, this is Bevin. Thanks for the question. Our progress has been very strong. We've had the productivity that we're seeing in the field has not only been very safe, but we had post-Christmas the majority of our crews, over 6,000 people, return to our right of way.
We're highly confident in the contractor's ability to continue to manage through some pretty challenging sections that remain on the project. You know, as we provided in our update just a few weeks ago, we've got a very solid execution plan that allows us to achieve our target, we believe, by the end of 2023 for a mechanical completion. We're introducing gas here shortly to Wildlake Compressor Station.
It's fully mechanically complete, which is a very significant milestone as that is where we'll introduce gas for the beginning of the commissioning of the project.
Rob Hope (Managing Director of Equity Research)
Thank you.
Operator (participant)
Our next question comes from Ben Pham of BMO. Please go ahead.
Ben Pham (Managing Director of Pipelines and Utilities Analyst)
Hi. Thanks. Good morning. I'm wondering, you mentioned that you expected debt-to-EBITDA to move to 5x in 12 months. I'm curious what factors or assumptions you're using to get to that. Is that a run rate expectation? Maybe just for context, too, what was your debt-to-EBITDA for end 2022 adjusted for the credit rating adjustments?
François Poirier (President and CEO)
Thanks, Ben, for the questions. Joel here. As we exited 2022, our debt to EBITDA based on S&P's calculation was around 5.35x as we exited the year. As we go forward here, again, the assumptions to get to the 5x the next 12 months are asset sales, obviously, that, you know, François mentioned that we have a high degree of confidence around to achieve that interim target of 5x. On a run rate basis, though, going forward, nothing changes with the 4.75. That is our ultimate goal here for our debt to EBITDA. That's gonna create additional financial strength and flexibility for us going forward, and that is still our goal.
In the interim, we want to get to the 5x in the next 12 months and then ultimately get down to the 4.75x.
Ben Pham (Managing Director of Pipelines and Utilities Analyst)
Okay, great. Your, your funding slide, doesn't contemplate any equity beyond the DRIP. I'm wondering to that is what scenarios, could drive you potentially to extend the DRIP or even tap the external equity markets?
François Poirier (President and CEO)
I'm gonna take that one then. It's François. There are no scenarios that we can foresee that are realistic that we would be extending the DRIP or issuing new common equity in 2023. We saw a 6% growth in EBITDA in 2022. We see comparable growth in 2023. We have, you know, industry-leading, low payout ratios of AFFO for our dividend. When you have CAD 110 billion approximately of assets, there's a lot of optionality in there for us to realize our divestiture program of CAD 5 billion+. When you look at those different variables, we don't see a scenario, and we are resolute actually, in not issuing any new common shares beyond the DRIP that runs through June of this year.
Ben Pham (Managing Director of Pipelines and Utilities Analyst)
Okay, great. Great. Thank you.
Operator (participant)
Our next question comes from Theresa Chen of Barclays. Please go ahead.
Theresa Chen (Managing Director and Senior Equity Analyst)
Good morning. Evan, I just wanted to follow up on the Coastal GasLink update. With the activities done at this point, what is your confidence in that CAD fourteen and a half billion number, and what would it cost to go beyond CAD 15.7 billion if it does go well into next year?
Speaker 16
Theresa, we, you know, towards the end of 2023, we had a significant amount of scope to complete. We accomplished over 30% of construction last year, which was a significant accomplishment for the project, made it very clear what scope is remaining, and we took the time to diligently look through all the execution plans, all the different risks that are inherent in the remaining scope. We've developed mitigation plans for those risks and are confident that we've incorporated not only cost, but schedule risks into our execution plan to deliver the mechanical completion this year. That said, it's a linear project with some very challenging activities.
We made an allowance for if in the event that we're not able to achieve the scope that we have planned this year, that we do anticipate that there could be activities that extend into 2024 and 2025, that being restoration and kind of cleanup activities. In our range of estimates from that $14.5-$15.7, that $15.7 includes costs that extend well into 2024. Right now, our focus is to safely deliver the project this year for our customers to be ahead of the plant, and we're confident that we can do that safely this year.
Theresa Chen (Managing Director and Senior Equity Analyst)
Got it. Turning to Southeast Gateway, would you mind telling us, you know, what % of the offtake goes to Dos Bocas versus power gen downstream, just given the delays, lack of clarity on the refinery start date, as well as the, you know, below industry average utilization of the existing six Pemex refineries?
Speaker 15
Yeah. This is Stan. As things sit right now, no volumes are planned to go to the refinery at Dos Bocas. Virtually all of it is going to go to power gen facilities that CFE is currently constructing.
Theresa Chen (Managing Director and Senior Equity Analyst)
Thank you.
Operator (participant)
Our next question comes from Linda Ezergailis of TD Securities. Please go ahead.
Linda Ezergailis (Managing Director of Equity Research)
Thank you. Just as a follow-up to the Coastal GasLink, just to help us better understand the next few months. At what point in March or April will you have a clear sense if you completed all the critical path elements before your construction windows close? When would typically those windows reopen later this year?
Speaker 16
Linda, a great question. There are certain activities that are winter-only construction. Right now, we've got plans in place to deliver those here in February and March, as you say. Some of those scopes, in the event that they're not accomplished, would drift into the early 2024 timeframe if we're not able to accomplish them. We have, though, developed mitigation plans and have developed a path to see good visibility into whether we'll be able to complete those here in the next month or so. The best visibility though that I can give you to whether we'll complete mechanically, by the end of the year is probably in the June-July timeframe.
There are some winter scope items that even if we can't complete here on plan, we can recover through the balance of the year. Not all of the winter scope that is currently planned needs to be pushed into a new season.
Linda Ezergailis (Managing Director of Equity Research)
Thank you. Just as a follow-up, as it relates to some of the challenges that your contractors have been having, can you give us an update on what contingencies and mitigants you have there? Have you entered into any new agreements with new contractors? Have you revised some of your commercial arrangements?
Realign them with the new realities for some of the other contractors. Can you just help us understand what's going on in that work stream?
Speaker 16
Yeah, great question. you know, as I mentioned earlier, the productivity last year and what we were able to accomplish was tremendous, but it put not only ourselves, but our contractors in some challenging situations. we've repositioned our contracting strategy in 2023 with those contractors to better align the risks that are going forward and ensure that those contractors are able to complete successfully. we've repositioned our contractor base. all of our workforce came back after the Christmas break. We're seeing some ability to attract higher quality talent, which has been a strong indicator that we can complete by the end of this year.
Operator (participant)
Thank you. Our next question comes from John Mackay of Goldman Sachs. Please go ahead.
John Mackay (VP of Equity Research)
Hey, good morning. Thanks for the time. Maybe, staying on the, on the funding side, you talked a little bit about the ability to maybe defer some CapEx or push out some projects or kind of reduce scope here or there. Maybe you can just share some more detail on what you're thinking about there. How much could be in 2023 versus what could be more of a, 2024-plus impact?
Joel Hunter (CFO)
John, it's Joel here. Yes, we continue to look at our portfolio and look to ways to optimize it. I would say to you that we did move some projects from 2023 into 2024. We're not gonna give you the specifics around that. You know, obviously, as we optimize portfolio, the important thing to remember is that we're not gonna jeopardize the reliability or the integrity of our system, nor our to meet the needs of our customers. We continue to refine the portfolio, and I would just point you to our outlook for this year, which is that CAD 11.5 billion-CAD 12 billion of capital spend.
John Mackay (VP of Equity Research)
Okay. Fair. Thank you. Maybe, a follow-up on Keystone. Could you spend a second just talking about what you're kind of assuming for 2023 in terms of being able to get back to prior run rates or not? The $650 million of potential costs or I guess the liability you took, how much of that do you think can come back through insurance? Is any of that assumed in guidance right now?
François Poirier (President and CEO)
Thanks, John. It's François. I'll start off, and then pass it on to Richard. All I wanna do is again, say thank you to our workers. We still have 800 people plus in the field. They've done great work. They've done it safely. I also wanna thank the community in which we're working, who has been terrific in receiving and welcoming our workers and has been very supportive of our efforts. With that, I'll pass it over to Richard.
Speaker 16
Thanks, François. A couple of other things I'd mention on that respect, too, is I'd also pass our thanks on to a couple of agencies that have participated in the response through our incident command structure, you know, that being the EPA and the Kansas Department of Health and Environment. They've both been, you know, very helpful and instrumental in terms of us progressing the work that we've been able to on the ground in our cleanup and reclamation. I'd say, you know, our near-term focus right now is safely operating the system and completing the cleanup and remediation efforts on site. As François mentioned, we've recovered 90% of the oil, and we continue to make very good progress there.
We did release last week as part of our overall root cause investigation, the results of the metallurgical lab analysis. What that did conclude is that the failure was a result of a weld flaw and bending stress that were both, you know, had to be present in the area in order for the failure to occur. Importantly, though, it also did confirm that there were no issues with the pipe and fitting strength or material properties, and the system was operating well within its design and permit requirements at the time of the incident. We are thinking, and that the evidence is suggesting here, that this is a localized issue, but we're still taking a system approach to assessing a risk, and our engineers are actively evaluating across the Keystone system, you know, where a similar circumstance could potentially occur.
As part of our root cause assessment, we're also working through our remedial actions and, you know, what next steps that we're gonna have to take in order to confirm we, you know, both to ourselves, to our regulators and our customers that we continue to operate the pipeline safely. In the meantime, we are operational to all delivery points, but we are operating the pipeline under some additional operating mitigation measures, which includes a deep pressure derate, which is also required from PHMSA in the Corrective Action Order. Commercially, we're able to deliver all of our contracted volume requirements, but we're limited in our ability at this time to move uncommitted or spot volumes. Just to give you some perspective on that, you know, Keystone is 94% contracted.
We're required to leave 6% of our space for uncommitted or spot capacity by the regulator, it's that 6% of the volume that at this time we're not able to move. We're working through these remedial actions. It is gonna take some time for the root cause investigation to play out and for us to determine, you know, not just what caused the failure, but why those circumstances were in place at the time. Once we work through that
At that time, we'll be getting with PHMSA on a path towards how we return the system back to baseline operations. At this point in time, I don't have a timeframe that I can communicate on that, but we'll continue to be transparent, as we've been up to date, and we'll continue to update our website, and we'll keep our customers and all stakeholders up to date as new developments occur. With regards to your question around the cost estimates, to complete this work, we recorded a liability of $480 million, which is our current cost estimate of the total cost, both to repair the site and to complete all the environmental remediations.
We do have appropriate insurance coverage in place for these types of events. We're working with our insurances on this. It's probable that the majority of the estimated costs are going to be eligible for full recovery.
John Mackay (VP of Equity Research)
That's very thorough. Appreciate all the color. Thank you.
Speaker 16
Yep.
Operator (participant)
Our next question comes from Robert Kwan of RBC Capital Markets. Please go ahead.
Robert Kwan (Managing Director, Head of Global Power of Utilities and Infrastructure Research)
Thank you. Good morning. If I can come back to CGL and Bevin. You talked about a lot about the winter construction activities. Are those the only or are those the biggest critical path items i.e., or by the time you get to June and July or put differently, the Q2 reporting in August, that you've got pretty much a very good picture on timing and costs? Are there other critical path items in the summer and into the fall? What would those be?
Speaker 16
Robert, we've moved to a part of the project now or a point in the project with 84% complete that we're not executing large spreads, you know, hundreds of kilometers of pipelay. We're really in a series of crossings, tie-in-tie-ins, hydro testing, discrete scopes of work that we've been able to, A, contract appropriately, B, put mitigation plans where we've brought in additional tie-in type crews, other kind of specialty expertise to help us accomplish these discrete scopes of work. They are throughout the project, so there's not a day that goes by that is not critical. We aren't reliant on one or two scopes of work. We have to execute as we have been safely and efficiently through the entire year.
Our focus is relentless on this. There's not one or two critical path items that are going to stop us. We just have to remain focused on executing the plan that's in front of us today.
Robert Kwan (Managing Director, Head of Global Power of Utilities and Infrastructure Research)
Got it. If I can turn and finish with asset sales here. You've got the messaging of where you are with the 5+. I'm just wondering, you talked about being able to get to 5x by the end of 2023. Does that plan, in terms of your internal numbers and the discussions you've had with the rating agencies, I know that gets you to that 5x, you're messaging that and then your 2026 4.75 target, but does it adequately manage the metrics in the years in between, leading up to 26 based on, again, your numbers versus the rating agency targets in your discussions with them?
Speaker 16
Yeah, Robert, it's Joel here. To simply answer your question, yes, it does. You know, you have to recall that, you know, when you look at our EBITDA growth, 6% year-over-year, 2022 relative to 2021. You know, going forward here, 2023, we expect 5%-7% and then 6%, you know, going forward here. We have to factor that into the calculus here. We start to see our capital spend drop down over time here as we complete the CAD 34 billion capital program. Certainly what we see here on a run rate, as I mentioned earlier, that, you know, we expect to hit that 5x in the next 12 months, and then going forward to get to that 4.75.
When we look at our model, you know, that is our run rate, is to get to 4.75, but in the interim is get the 5x, and we're gonna stay there. Again, we're not gonna go higher, as we've talked about before. You know, 4.75 is the appropriate level here. Again, when you look at our model, it's certainly we're able to achieve that with the capital rotation.
François Poirier (President and CEO)
Robert, it's François. Just to add a comment to that. In terms of our business development and growth strategies, we are going to continue to be very disciplined around adding capital spend in those years in the interim. Capital discipline is very important to us.
Really when you're looking at many of the types of projects that we pursue, they get sanctioned and then, you know, have one or two years of regulatory approvals to go through. Really unlikely to see us sanctioning significant amounts of incremental capital in that period of time. Where we do, we will be looking to capital rotation to maintain our balance sheet metrics.
Robert Kwan (Managing Director, Head of Global Power of Utilities and Infrastructure Research)
Got it. the 23 program holds you at 5 and gets you to 4.75 by 2026, and anything 2024 and beyond is basically color-coded against additional CapEx.
Speaker 16
Yeah. I would say though that the 4.75, our expectation is we accelerate that beyond 2026. You know, we showed you at Investor Day getting there by 2026 without any capital rotation. We expect to accelerate that into 2024 would be our expectation right now. In the next 12 months, it's to get to the 5x, but as we look at exiting 2024, possibly getting to the 4.75.
Operator (participant)
Our next question comes from Praneeth Satish of Wells Fargo. Please go ahead.
Praneeth Satish (Senior Equity Analyst)
Thanks. Good morning. On Coastal GasLink phase two, I know the project's still under evaluation, but I'm wondering how you think about the economics for phase two in the context of phase one cost overruns. Can you look to earn a higher return on phase two to partially offset the lower return on phase one, so that, I guess, if we look at phase one and phase two, collectively, the blended return of both projects could be back into your targeted 7%-9% range? Just curious for your thoughts on that.
Speaker 16
Praneeth, you know, Coastal GasLink is basically Canada's LNG corridor, and we're working with our customer, LNG Canada, who's developing not only their first trains, but they've asked us to begin the evaluation of phase two. As you say, we're very excited to be contemplating the expansion of our system. This would not be a linear development. It's the addition of six compressor station sites, which we've demonstrated at Wildlake that we've just brought to mechanically complete, that we can deliver those on schedule and on time.
The project economics, those are obviously confidential, but we're encouraged by the possibility of advancing to an FID stage that, as you say, would bring the total investment in that LNG corridor to returns that are more commensurate with what our expectations would be.
The other project, in addition to phase two that's important to note, is, the support of the Haisla-led Cedar LNG project, which would be the largest single indigenous-led investment in Canada's history. We're working with them as a customer as well as an offtaker off of CGL. Very exciting opportunity. Getting this corridor in the ground is really very similar to our broader footprint in that we've established the right corridors to the right markets, connecting supply and demand.
Praneeth Satish (Senior Equity Analyst)
Got it. Thanks. You touched on asset sales and CapEx as options to help the funding program. I'm wondering about dividend growth and whether slowing dividend growth is a lever that you'd consider to accelerate or manage deleveraging.
Speaker 16
I think with respect to the comments I made earlier, Praneeth, around our payout ratios being among the lowest in our peer group, when we look at our CAD 34 billion capital program going forward, we look at the divestiture program that is well underway. We don't see a scenario where we will need to change our dividend policy. We expect to continue to grow the dividend in that 3%-5% range. I'll remind everyone that that is a board decision. In terms of what management would be recommending, we don't foresee any need to make any changes to our long-term dividend growth range, even after giving effect to the divestiture program.
Praneeth Satish (Senior Equity Analyst)
Got it. Thank you.
Operator (participant)
Our next question comes from Harry Mateer of Barclays. Please go ahead.
Harry Mateer (Research Analyst)
Hi, good morning. As you're advancing the asset sale program, can you talk a bit about your financing strategy in the meantime? I saw you guys borrowed on a term loan in 4Q. Are you thinking of using the bank debt market as an interim measure to bridge until asset sales close, maybe with some pre-payable, you know, debt in the mix? Or are you more inclined to take advantage of the inverted rates curve right now and issue some term debt?
Joel Hunter (CFO)
Yeah, Harry, it's Joel here. As you've noted, you know, we did do a term loan for $1.5 billion here in December. You know, going forward, we do have normal course refinancing that we would do here. We'd look to the capital markets, debt capital markets, both in Canada and the U.S., moving forward. To your point, when you look at the curve right now, obviously funding levels look pretty attractive further out, when you're in 10-year and 30-year space. We'll look to that, potentially the front end of the curve. We'll still do normal course financings in the debt capital markets here, going forward. Keeping in mind, though, that we will have cash proceeds coming in from asset sales.
We factor that into our calculus, but we'll use a combination of funding in the debt capital markets and short-term debt.
Harry Mateer (Research Analyst)
Okay, thanks for that. My follow-ups, with respect to hybrid capacity, you've been very close to S&P's maximum. Can you just update us on how you see that hybrid capacity evolving in the next year or so and, you know, what that might mean for your ability to tap that market?
Joel Hunter (CFO)
To your question, it's 15% of our total capital structure. That's the S&P methodology, and that's what we adhere to. As the balance sheet grows, obviously there's going to be additional capacity that's created. We'll still look to that market for additional funding going forward. I just remind everyone that we do get 50% equity credit when we do issue hybrid securities, so it's an attractive way to help with our deleveraging, if you will. We did do $800 million of hybrids last March to replace our preferred shares that we redeemed at par in May. Again, as the balance sheet grows, so does our hybrid capacity, and we'll still adhere to around that 15% threshold.
Harry Mateer (Research Analyst)
Okay. Thanks, Joel.
Operator (participant)
Our next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead.
Robert Catellier (Executive Director and Energy Infrastructure Analyst)
Thanks. Maybe I'll start with the NGTL system. I'm curious what you're hearing from shippers about the implications of the Blueberry River First Nations agreement on their development plans and any additional expansion that you might need there?
Greg Grant (President of Canadian Natural Gas Pipelines)
Sure. Thanks, Robert. This is Greg Grant. I'm President of Canadian Gas Business. To start out with, I actually just want to congratulate the Blueberry River First Nation and the other Treaty eight nations on the signing of the implementation agreement with the province of British Columbia. Some of us were lucky enough to be up there for the signing in Prince George, and just to see how meaningful and emotional it was for the communities, not only today, but for generations to come.
It is fairly new, Robert. You know, while we understand it may take time for industry players to analyze the agreement, we do think the clarity and the certainty will allow the continuation of disciplined and responsible growth in the region, and it's an important step towards mutually beneficial development.
We've already seen the outcome of this. There's actually been substantial increase in licenses and permits that have been approved in January. We view this as, you know, continuing to feed the growth we've already seen in NGTL over the last year of over a BCF of production, and will allow us in the future to continue to add disciplined capital growth. We'll continue to work with the customers as we review more details as they become available. Really wanna note that we really view this as a positive development, not only for our system, but the basin and the other BC First Nation communities.
Robert Catellier (Executive Director and Energy Infrastructure Analyst)
Okay. Thanks for that, Greg. Also, François, I can't let you go without an asset sale question. Maybe you can just describe how you're weighing the possibility or the ability to sell a core asset against the desire to maintain your business risk profile, as you touched on earlier, not change the investment proposition. What factors go into that process, other than price? Also, how significant a valuation do you need to justify selling an interest in a core asset?
François Poirier (President and CEO)
I'm not sure if I wanna say thanks for the question or not. Robert, it's a great question, and as we said before, you know, the factors that will, you know, influence our decisions around divestitures, first and foremost, deleveraging is our number one priority. I just wanna be clear on that. The other side of the coin around leverage, credit metrics, though, is the quality of your, and stability of your cash flows. It's very important for us to maintain the high quality and stability of cash flow going forward. We like the diversity of our portfolio. We like the composition of our portfolio among our different businesses.
When you have CAD 110 billion in assets, you're looking to monetize CAD 5+ billion, you have an opportunity and optionality to, you know, divest of whether it's discrete assets or interests in other larger assets in a way that you can preserve the high quality composition of your portfolio. That's how we're gonna go about it. You know, some of the other things we mentioned are pro forma impacts to per share cash flow and earnings growth. Of course, we want to continue to progress our emission reduction, emission intensity reduction between now and 2030.
Robert Catellier (Executive Director and Energy Infrastructure Analyst)
Yep. Okay. Thank you.
François Poirier (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Patrick Kenny of National Bank Financial. Please go ahead.
Patrick Kenny (Managing Director and Research Analyst)
Thank you. Yeah, good morning. Joel, just to follow up on the hybrids question, sorry if I missed it, but after the write-down on CGL, if you could just confirm how much room you still have today within the cap structure to issue additional hybrids. Then I guess, you know, whether or not upsizing the asset sale program beyond $5 billion might limit your capacity to issue additional hybrids at least over the next year or so.
Joel Hunter (CFO)
Pat. Today we're around 14% of our capital structure, following the impairment charge with regard to CGL. As we go forward, though, yes, as we divest assets, but we're still growing, right? If you think about, for example, you know, we expect to have about $6 billion of assets into commercial and service this year. You have that coming in, and then obviously you're gonna have some asset sales. Overall, we see the capacity continuing to increase here over time. But again, the way to think of it Every $1 billion, it's around $150 million of additional capacity that you get as the balance sheet grows. Again, this will be a tool that we'll use going forward to fund ourselves.
We like the product, again, we'll look for opportunities going forward here to issue in that market.
Patrick Kenny (Managing Director and Research Analyst)
Okay, that's great. Thanks for that additional color. Then I guess with respect to the negative outlooks on the BBB+ credit rating, I know in the past, the A rating was very much touted as a, you know, competitive advantage for the company, at least up until when the goalposts were moved on you. Obviously, a lot has changed since that last downgrade, but I'm just curious, you know, how important it is to protect the BBB+ rating going forward, even if the goalposts are moved on you again for whatever reason.
Joel Hunter (CFO)
We can never factor, you know, how the ratings, these are gonna you know, move the goalposts around as you've, as you've noted, Pat. We had that happen a few years ago where the key metrics to, you know, adhere to the A- rating were moved to the point where it just didn't make any sense. We value our ratings, and we have a finance plan in place here that we believe gets us to maintain our BBB+ ratings. The key point of this is our leverage, as I've stated earlier, that we wanna get to the 5x in the next 12 months, and then ultimately down to that 4.75x.
You've heard François mention that we're not gonna compromise our business risk 'cause the left-hand side of the balance sheet is important here with our ratings as well. Again, with the portfolio management, we don't see any change to our business risk profile nor our value proposition. Again, it's very important for us, and again, the capital program that we have in place, our capital rotation program that is, we view that we can get to that 5x leverage target. That's our objective right now. Again, the BBB+ rating is very important to us.
Patrick Kenny (Managing Director and Research Analyst)
Okay, that's great. Thanks, Joel.
Joel Hunter (CFO)
Yeah.
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.
Joel Hunter (CFO)
Yeah. Thank you, operator, and thanks everyone for your participation this morning. We always appreciate your time and interest in TC Energy, and we look forward to our next update in a few months. Thanks again.
Operator (participant)
This concludes today's Conference Call. You may disconnect your lines. Thank you for participating, and have a pleasant day.