Q4 2023 Earnings Summary
- TC Energy is open to exceeding its $3 billion asset sale target for 2024 if compelling valuations are available, which could further reduce leverage and strengthen the balance sheet.
- The company is making significant progress on its Project Focus initiative, aiming to realize $750 million in efficiencies by the end of 2025. They have already captured $230 million and expect to achieve a cumulative $500 million by the end of this year, indicating they are on track and could improve profitability.
- TC Energy is well-positioned to capitalize on LNG demand growth due to its dominant footprint in all three North American countries and access to all shores, making LNG exports a significant source of future growth.
- Potential Difficulty in Achieving Leverage Targets: TC Energy indicated that to stay below its 4.75x leverage target in 2025, it requires either incremental divestitures or an additional $400 million in EBITDA. Failure to achieve these may prevent the company from meeting its leverage goals.
- Regulatory Uncertainty for Keystone Pipeline: The return of the Keystone pipeline to its original operating pressure depends on approval from regulators (PHMSA in the U.S. and the CER in Canada). The decision is up to them, and delays or unfavorable outcomes could impact operational performance.
- Near-term Headwinds in Liquids Business: The company anticipates headwinds in Q1 due to accounting differences between physical and financial trades in its liquids marketing affiliate, which may temper near-term results.
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Asset Sales and Deleveraging
Q: How will interest rates affect asset sale timing?
A: Management plans to achieve at least $3 billion in asset sales in 2024 to meet their deleveraging target of below 4.75× debt to EBITDA by year-end. While interest rates impact valuations, they are disciplined and not in a rush, noting they have until the end of 2024. They are open to exceeding the $3 billion target if they receive compelling valuations. -
Reducing Mexico Exposure
Q: What's the plan to lower Mexico EBITDA exposure?
A: The company is committed to reducing Mexico exposure to 10–12% of consolidated EBITDA over the next 2–3 years. They are progressing on the Southeast Gateway project but will take their time to transact in Mexico to preserve shareholder value. -
Keystone Pipeline Performance
Q: Can you update on Keystone's operating pressure?
A: The Keystone pipeline has achieved record operational performance, with full in-line inspections on over 80% of the system. No integrity issues were found, and while regulators will decide on restoring original operating pressure, the pipeline continues to deliver all contract capacity and spot volumes. -
Coastal GasLink Cost Recoveries
Q: What's the status of CGL cost recoveries from contractors?
A: They expect net recoveries from contractors on Coastal GasLink and are on track to the $14.5 billion cost estimate. Potential recoveries are factored into their funding plan but specific amounts aren't disclosed. -
LNG Export Outlook
Q: How does the US LNG moratorium affect your plans?
A: The company sees US LNG exports growing from 14 Bcf/d to over 30 Bcf/d by decade's end, with additional growth in Canada and Mexico. The moratorium impacts projects in the approval queue, but their approved projects like Gillis and East Lateral Xpress are unaffected. Their diversified network positions them to capitalize on LNG growth across North America. -
Capital Spending Plans
Q: Any changes to your capital expenditure outlook?
A: Capital spend is focused on $2 billion/year in maintenance, $800–900 million/year in Bruce Power, and growth projects. They aim to keep annual CapEx at the lower end of the $6–7 billion range, reallocating any underspend to deleveraging or share buybacks. -
Earnings Guidance
Q: Could recent performance lead to higher EBITDA growth?
A: They reaffirm a 2–3% long-term EBITDA growth target. Some growth anticipated in 2024 was accelerated into 2023, but they caution on near-term results due to accounting headwinds. -
Productivity Initiatives
Q: Update on cost efficiency initiatives?
A: Through Project Focus, they've realized $230 million in efficiencies by end of last year and expect another $270 million this year, targeting $750 million by end of 2025. -
Regulatory Environment
Q: How might regulatory changes affect your strategy?
A: They don't anticipate drastic changes from challenges to the Chevron Doctrine. Most rate cases are settled with customers, and they'll continue to file rate cases more frequently to minimize regulatory lag. -
South Bow Spin-off
Q: How will South Bow's debt impact TC Energy?
A: Post-spin, South Bow aims for an investment-grade rating. Proceeds estimated at $8 billion will allow TC Energy to retire debt at a discount, potentially taking out more debt than the proceeds due to current market conditions. -
Data Center Demand
Q: Is data center growth impacting gas demand?
A: Yes, data centers are a growing demand source. The company is exploring opportunities across its footprint, including serving Microsoft's new data center indirectly in Wisconsin.
Research analysts covering TC ENERGY.