TC Energy Corporation (TRP) Q4 2022 Earnings Report, Transcript and Summary

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 a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Gavin Wylie, Vice President, Investor Relations. Please go ahead.

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 Francois Poirier, President and Chief Executive Officer; Joel Hunter, Chief Financial Officer; along with other members of our senior leadership team. Francois and Joel will begin today with some comments on our financial results and operational highlights. A copy of the slide presentation that will accompany their remarks is available on our website under the Investors section. Following their remarks, we 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 Francois 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'll refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC'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 Francois.

Good 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. And 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 $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% to 7% higher than in 2022, and we've increased our dividend for the 23rd consecutive year. We are advancing our $5-plus 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 7, 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, and I want to thank our team for their incredible preparation, training and decisive action. And I also want to 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 December 23. And in 2022, our average daily volumes increased 5% year-over-year. In 2022, we placed approximately USD 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. And 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 natural -- 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 $3.2 billion of capacity projects into service, growing our NGTL investment base by 12% year-over-year, and 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 4 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 3 MCR is expected to commence next month. Unit 4, 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. Its capital requirements are largely funded from Bruce distributions, and 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.

Thanks, Francois. 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, the 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 third quarter of 2022, we placed the North section of the Villa de Reyes pipeline in 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% to 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, an average pretax 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 130, 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 $0.01 per share. Of course, any fluctuations in these variables and other factors could impact our 2023 outlook, and we'll 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 BDR North and 2 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 Marketlink. 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 $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 $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 expect to sanction additional high-quality opportunities, novel projects sanctioned will have significant capital requirements over the next few years. We will be disciplined around capital allocation, with a goal deferring certain project spending and finding capital reductions where possible without sacrificing operational safety or reliability. Reiterating Francois's 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 4.75 times 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 $5 billion to $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 $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 June 30, 2023. These two charts capture the resiliency of our value proposition. First, as Francois mentioned, TC Energy's Board of Directors has declared a first quarter 2023 dividend of $0.93 per common share, which is equivalent to $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 is 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 Francois.

Thanks, Joel. Just a few closing comments before we turn it 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 $5-plus billion asset divestiture program; and then 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 Instructions] Our first question comes from Rob Hope of Scotiabank. Please go ahead.

First question is on the asset sale process that are ongoing. As we've seen the cost increase for Coastal GasLink, have you seen kind of the -- or internally, have you changed your views of which assets could potentially be for sale, just given the higher capital requirement? And then secondly, on that, just given the market conditions, have you seen any changes in bidding activity from your counterparties?

Rob, it's Francois. I appreciate the question and I understand that there's a lot of interest on what we'll be selling and when we are in market with 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. And so we're going to refrain from commenting specifically on any process. But what I will tell you is we are confident in our ability to achieve our $5-plus 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 5 times debt-to-EBITDA. And 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 want to maintain that diversity, and we want to 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. I hope that helps.

No, that's a great answer. I appreciate that. And then just moving over to coastal. I understand that you gave us an update a couple of weeks ago, but 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?

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 cruz over 6,000 return to our right away. We’re highly confident in the contract visibility to continue to manage through some pretty challenging sections are remaining on the project. But 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 mechanical completion. We're introducing gas here shortly to Wilde Lake 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.

Our next question comes from Ben Pham of BMO. Please go ahead.

I'm wondering, you mentioned you expect your debt-to-EBITDA to move to 5 times in 12 months. I'm curious what factors or assumptions you're using to get to that? And is that a run rate expectation? And maybe just for context to what was your debt to EBITDA in 2022 adjusted for the credit rating adjustments?

Yes, thanks, Ben, for the question. Joel here. As we exited 2022, our debt-to-EBITDA based on S&P's calculation was around 5.35 times as we exited the year. As we go forward here, again, the assumptions to get to the 5 times in the next 12 months, our asset sales, obviously, that Francois mentioned that we have a high degree of confidence around to achieve that interim target of 5 times. On a run rate basis, so going forward, nothing changes with the 4.75. That is our ultimate goal here for our debt to EBITDA. That's going to create additional financial strength and flexibility for us going forward. And that is still our goal. But in the interim, want to get to the 5 times in the next 12 months and then ultimately get down to the 4.75.

And your funding slide, does it contemplate any equity beyond the DRIP? But I'm wondering to that is what scenarios could drive you potentially to extend the DRIP or even tap to external equity markets?

I'm going to take that one, then it's Francois. 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 have -- we saw a 6% growth in EBITDA in 2022. We see comparable growth in 2023. We have industry-leading low payout ratios of FGFO for our dividend. And when you have $110 billion approximately of assets, there's a lot of optionality in there for us to realize our divestiture program of $5-plus 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.

Our next question comes from Theresa Chen of Barclays. Please go ahead.

Bevan, I just wanted to follow up on the Coastal GasLink update. With the activities done at this point, what is your confidence in that $14.5 billion number? And what would it cost to go beyond 15.7, if it does go well into next year?

Theresa, we -- 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. So we made an allowance for -- 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 '24 and '25, that being restoration and kind of cleanup activities. In our range of estimates from that 14.5 to 15.7, that 15.7 includes costs that extend well into 2024. So right now, our focus is to safely deliver the project this year for our customers to be ahead of the plan, and we're confident that we can do that safely this year.

And then turning to Southeast Gateway, would you mind telling us what percentage of the offtake goes to Duska versus power gen downstream just given the delays, lack of clarity on the refinery start date as well as the below industry average utilization with the existing 6 Pemex refineries.

Yes, this is Stan. As things sit right now, no volumes are planned to go to the refinery dose focus. So virtually, all of it is going to go to power gen facilities that CFE is currently constructing.

Our next question comes from Linda Ezergailis of TD Securities. Please go ahead.

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've completed all the critical path elements before your construction windows close. And when would typically those windows reopen later this year?

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 are not accomplished would go -- would drift into the early 2024 time frame 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 time frame. 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.

And just as a follow-up as it relates to your -- 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 and 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?

Yes, great question. 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. And so we've repositioned our contracting strategy in 2023 with those contractors to be -- to better align the risks that are going forward and ensure that those contractors are able to complete successfully. So 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 really a strong indicator that we can complete by the end of this year.

Our next question comes from John Mackay of Goldman Sachs. Please go ahead.

Maybe staying 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 reduced scope here or there. Maybe you can just share some more detail on what you're thinking about there? How much could be in '23 versus what could be more of a '24-plus impact?

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 '23 into '24. We're not going to give you the specifics around that. But obviously, as we optimize portfolio, the important thing to remember is that we're not going to jeopardize the reliability or the integrity of our system nor our -- to meet the needs of our customers. But we continue to refine the portfolio, and I would just point you to our outlook for this year, which is that $11.5 billion to $12 billion of capital spend. .

Okay. Fair. Maybe a follow-up on Keystone, can you spend a second just talking about what you're kind of assuming for '23 in terms of being able to get back to prior run rates or not? And then 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? And is any of that assumed in guidance right now?

Thanks, John, it's Francois, I'll start off and then pass it on to Richard. All I want to 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. And I also want to 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. So with that, I'll pass it over to Richard.

Yes. Thanks, Francois. I just -- a couple of other things I'd mention on that respect too. I'd also pass our thanks on to a couple of agencies that have participated in the response to our incident command structure, that being the EPA and the Kansas Department of Health and Environment, they've both been very helpful and instrumental in terms of us progressing the work that we've been able to on the ground and on our cleanup and reclamation. I'd say our near-term focus right now is safely operating the system and completing the cleanup and remediation efforts on site. We've -- as Francois 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. And what that did conclude is that the failure was a result of a weld flaw and bending stress that were both -- 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. So 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 accessing a risk, and our engineers are actively evaluating across the Keystone system where a similar circumstance could potentially occur. As part of our root cause assessment, we're also working through our remedial actions and what next steps that we're going to have to take in order to confirm both to ourselves, to our regulators and our customers that we can continue to operate the pipeline safety -- safely. So in the meantime, we are operational to all delivery points, but we are operating the pipeline under some additional operation -- operating mitigation measures, which includes a pressure derate, which is also required from FINSA 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. And just to give you some perspective on that, Keystone is 94% contracted. We're required to leave 6% of our space for uncommitted or spot capacity by the regulator, and it's -- that's 6% of the volume at this time, we're not able to move. So we're working through these remedial actions. It is going to take some time for the root cause investigation to play out and for us to determine not just what caused the failure, but why those circumstances were in place at the time. And once we work through that, at that time, we'll be getting with FINSA on a path towards how we return the system back to baseline operations. And I -- at this point in time, I don't have a time frame 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, so -- 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, and we're working with our insurances on this. And it's probable that the majority of the estimated costs are going to be eligible for full recovery.

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

I can come back to CGL. And Bevin, so you talked about a lot about the winter construction activities. Are those the only -- or are those the biggest critical path items, i.e., 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? Or are there other critical path items in the summer and into the fall? And what would those be?

So Robert, where 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, hundreds of kilometers of pipeline. We're really in a series of crossings, tie-ins, hydro testing, discrete scopes of work that we've been able to, A, contract appropriately; B, put mitigation plans where we 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 are reliant on one or two scopes of work. We have to execute as we have been safely and efficiently through the entire year. So our focus is relentless on this. There's not one or two critical path items that are going to stop as we just have to remain focused on executing the plan that's in front of us today.

If I can turn and finish with asset sales here. So you've got the messaging where you are at the 5 plus. I'm just wondering, you talked about being able to get to 5 times 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 5 times, 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?

Yes, Robert, it's Joel here. Simply answer your question, yes, it does. You have to recall that when you look at our EBITDA growth, 6% year-over-year, '22 relative to '21. Going forward here, '23, we expect 5% to 7% and then 6% going forward here. So 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 $34 billion capital program. And so certainly, what we see here on a run rate, as I mentioned earlier, that we expect to hit that 5 times in the next 12 months. And then going forward to get to that 4.75. So when we look at our model, that is our run rate is to get to 4.75, but near terms get to 5 times and we're going to stay there. Again, we're not going to go higher, as we've talked about before. 4.75 is the appropriate level here. So again, when you look at our model, it's certainly we're able to achieve that with the capital rotation.

And Robert, it's Francois 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. And so really, when you're looking at many of the types of projects that we pursue, they get sanctioned and then have one or two years of regulatory approvals to go through. So really unlikely to see us sanctioning significant amounts of incremental capital in that period of time. And where we do, we will be looking to capital rotation to maintain our balance sheet metrics.

So 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?

Yes. I would say though that the 4.75, our expectation is we accelerate that beyond 2026. We showed you at Investor Day getting there by 26 without any capital rotation. But we expect to accelerate that into '24 would be our expectation right now in the next 12 months. It's to get to the 5 times. But as we look at exiting '24, possibly getting to 4.75.

Our next question comes from Praneeth Satish of Wells Fargo. Please go ahead.

On Coastal GasLink Phase II, I know the project is still under evaluation, but I'm wondering how you think about the economics for Phase 2 in the context of Phase 1 cost overruns? Can you look to earn a higher return on Phase 2 to partially offset the lower return on Phase 1, so that I guess if we look at Phase 1 and Phase 2, collectively, the blended return of both projects could be back into your targeted 7% to 9% range? Just curious for your thoughts on that.

So Praneeth, Coastal GasLink is basically Canada's LNG corridor. And we're working with our customer, LNG Canada is developing not only their first trains, but they've asked us to begin the evaluation of Phase 2. So as you say, we're very excited to be contemplating the expansion of our system that would not be a linear development. It's the addition of 6 compressor station sites, which we've demonstrated at Wilde Lake that we've just brought to mechanically complete, that we can deliver those on schedule and on time. 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 court or to returns that or more commensurate with what our expectations would be. The other project, in addition to Phase 2, that's important to note is support of the Haisla led Cedar LNG project, which would be the largest single indigenous lead investment in Canada's history. So we're working with them as a customer as well as an offtaker off of CGL. So very exciting opportunity. Getting this corridor on the ground is really -- it's very similar to our broader footprint and that we've established the right corridors to the right markets, connecting supply and demand.

And you touched on asset sales and CapEx as options to help the funding program, wondering about dividend growth and whether slowing dividend growth is a lever that you'd consider to accelerate or manage deleveraging?

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 $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% to 5% range. I'll remind everyone that, that is subject -- that, that is a Board decision. But 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.

Our next question comes from Harry Mateer of Barclays. Please go ahead.

As you're advanced in 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. So are you thinking of using the bank debt market as an interim measure to bridge until asset sales close maybe with some prepayable debt in the mix? Or are you more inclined to take advantage of the inferred rates curve right now and issue some term debt?

Yes, Harry, it's Joel here. As you've noted, we did do a term loan for $1.5 billion here in December. Going forward, we do have a normal course refinancing that we would do here. So we 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. We need a 10-year and 30-year space. So we'll look to that, potentially the front end of the curve by cash. But we'll still do with 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. So we factor that into our calculus. We'll use a combination of funding in the debt capital markets and short-term debt.

And then 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 what that might mean for your ability to tap that market?

Yes. So to your question, it's 15% of our total capital structure. That's the S&P methodology, and that's what we adhere to. So as the balance sheet grows, obviously, there is going to be additional capacity that's created, so we'll still look to that market for additional funding going forward. I'd 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 USD 800 million of hybrids last March to replace our preferred shares that we redeemed at par in May. So again, as the balance sheet grows, so does our hybrid capacity, and we'll still adhere to around that 15% threshold?

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

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?

Sure. Thanks, Robert. This is Greg Grant, President of the Canadian Gas business. But -- to start out with, I actually just want to congratulate the Blueberry River First Nation and the other three 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. So 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. So we view this as continuing to feed the growth we've already seen in NGTL over the last year of over 1 Bcf of production and will allow us in the future to continue to add disciplined capital growth. So we'll continue to work with the customers. as we review more details as they become available. But I really want to 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.

But also, Francois, I can't let you go without an asset sale question. So 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 changing the investment proposition? So what factors go into that process other than price? And also how significant evaluation do you need to justify selling an interest in the core asset?

I'm not sure if I want to say thanks for the question or not. But Robert, it's a great question. And as we said before, the things -- the factors that will influence our decisions around divestitures, first and foremost, deleveraging is our number one priority. I just want to be clear on that. The other side of the coin around leverage credit metrics, though, is the quality and stability of your cash flows. So 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. And when you have $110 billion in assets, you're looking to monetize $5-plus billion. You have an opportunity and optionality to divest off whether it's discrete assets or interest in other -- in larger assets in a way that you can preserve the high-quality composition of your portfolio. So that's how we're going to go about it. Some of the other things we mentioned are pro forma impacts to per share cash flow and earnings growth. And of course, we want to continue to progress our emission reduction -- emission intensity reduction between now and 2030.

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

Joel, just a follow up on the hybrids question. sorry if I missed it, but after the write-down of CGL, if you could just confirm how much room you still have today within the cap structure to issue additional hybrids? And then I guess 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?

Yes, Pat. So 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? So if you think about, for example, we expect to have about $6 billion of assets into commercial and service this year. So you have that coming in and then, obviously, you're going to have some asset sales. So overall, we see the capacity continuing to increase here over time. But again, the way to think of it for every $1 billion, it's around $150 million of additional capacity that you get as the balance sheet grows. So again, this will be a tool that we'll use going forward to fund ourselves. We like the product. And again, we'll look for opportunities going forward here to issue in that market.

And then, I guess, with respect to the negative outlooks on the BBB plus credit rating. I know in the past, the A rating was very much touted as a competitive advantage for the company, at least up until when the goalposts removed on you. So obviously, a lot has changed since that last downgrade, but I'm just curious how important it is to protect the BBB plus rating going forward even if the goalposts are moved on you again for whatever reason?

Yes. We can never factor how the agencies are going to move the goalposts around as you've noted, Pat, we had that happen a few years ago where the key metrics to adhere to the A minus 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 plus ratings. Again, the key point of this is our leverage -- as I've stated earlier, that we want to get to the 5 times in the next 12 months and then ultimately down to that 4.75 times. You've heard Francois mentioned that we're not going to compromise our business risk because the left-hand side of the balance sheet is here with our ratings as well. And so again, with the portfolio management, we don't see any change to our business risk profile nor our value proposition. So again, it's very important for us. And again, the capital program that we have in place -- capital rotation program that is, we view that we can get to that 5 times leverage market -- leverage target. So that's our objective right now. And again, the BBB plus rating is very, very important to us.

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.

Yes. 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.

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