TC Energy Corporation (TRP) Q2 2024 Earnings Report, Transcript and Summary

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

Thanks very much, and good morning. I'd like to welcome you to TC Energy's 2024 second quarter conference call. Joining me are Francois Poirier, President and Chief Executive Officer; Sean O’Donnell, Executive Vice President and Chief Financial Officer, along with other members of our senior leadership team. Francois and Sean will begin today with some comments on our financial results and operational highlights. A copy of the slide presentation that will accompany their remarks is available on our website under the Investors section. Following their remarks, we'll take questions from the investment community. We ask that you limit yourself to two questions, and if you're a member of the media, please contact our media team. Before Francois begins, I'd like to remind you that today's remarks may include forward-looking statements that are subject to important risks and uncertainties. For more information, please see the reports filed by TC Energy with the Canadian Securities Regulators and with the US Securities Exchange Commission. Finally, during the presentation, we'll refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC Energy's operating performance, liquidity, and its ability to generate funds to finance its operations. A reconciliation of various GAAP and non-GAAP measures is contained in the appendix of the presentation. With that, I'll turn the call over to Francois.

Thanks, Gavin, and good morning, everyone. Before I dive into our results, I just want to acknowledge the natural disasters that have impacted individuals and communities across our footprint. From a hurricane Beryl in Texas to the current devastation being caused by the Alberta and B.C. wildfires, our thoughts remain with those affected. During these events, our teams face the monumental task of keeping our operations running smoothly, and their dedication to maintaining safe and reliable operations is nothing short of extraordinary. It's this dedication across our company that drove another strong quarter while making exceptional progress on our strategic priorities for 2024. Our continued focus on safety and operational excellence allowed us to set multiple records while growing comparable EBITDA by 9% as compared to the second quarter of 2023. We also advanced multiple strategic initiatives aimed at maximizing the long-term value of our assets, including a successful shareholder vote on South Bow and reaching unanimous support from customers for a five-year settlement agreement on our NGTL system. Our secured capital program continues to track both cost and schedule with our major projects, Southeast Gateway and our Bruce Power Unit 3 MCR. We've already placed $1.2 billion of projects into service and remain on track to place approximately $7 billion of assets into service in 2024, including Coastal GasLink. And as we look to 2025, this represents an important inflection point for TC Energy with plans to place an additional $9 billion of assets into service at an average build multiple of just over seven times. In combination with our announced asset divestitures that now total $2.6 billion, strong year-to-date EBITDA performance, and capital expenditures that are trending to the low end of our $8 billion to $8.5 billion outlook, we are well on track to reach our 2024 year-end debt-to-EBITDA target of 4.75x. We're proud to announce that we've entered into Canada's largest ever Indigenous Equity Ownership agreement that will enable ownership of the NGTL and Foothill Systems. This historic agreement is made possible by an equity loan guarantee provided by the Alberta Indigenous Opportunities Corporation in support of a newly formed Indigenous-owned investment partnership. The transaction creates a pathway for equity participation ownership that delivers long-term, low-risk, and stable revenue for local Indigenous communities, creating a lasting and meaningful legacy. We thank all rights holders and stakeholders involved in making this agreement possible. It is an example of what's achievable when Indigenous communities, governments, and industry come together. Never have I seen such strong prospects for North American natural gas demand growth. We are seeing natural gas demand reach record highs, and this is expected to grow by nearly 40 Bcf per day by 2035. The outlook for our business has never been stronger. Our assets are strategically positioned to meet growth and demand underpinned by five key pillars that give us visibility to attractive in-corridor opportunities through the end of the decade. Based on capacity projects under various stages of development, we have line of sight to five plus Bcf per day of next wave LNG growth that will feed exports from Canada, the U.S., and Mexico, and we are the only company to have major assets in all three markets. In the U.S., we are delivering approximately 30% of LNG feed gas. In Mexico, we expect to see the first LNG cargo this month from Altamira's liquefaction facility, and in Canada, CGL remains ready to deliver gas when called for. Second, we're seeing continued demand and reliability requirements from our utility customers. We have one of the largest natural gas storage systems in North America and that further bolsters energy reliability across the continent. Third, power generation demand is expected to increase significantly, driven by wide scale electrification, coal fired retirements, as well as emerging power needs from AI and data centers. As an example, we see around 300 data centers at various stages of development, 60% of which have proposed locations within 15 miles of our systems, namely Columbia. Additionally, within 15 miles of our Columbia and A&R systems, we estimate approximately 9 gigawatts of coal fired generation is set to retire by 2031. From a capacity project standpoint, these drivers represent approximately an additional 5 Bcf per day of high quality opportunity. Fourth, our assets strategically connect the lowest cost supply to the highest value markets. These basins continue to see significant growth potential, and our customers continue to look for additional connectivity. And finally, we have approximately $7.5 billion in our secured capital table for recoverable maintenance and our modernization projects that support the safe and reliable delivery of record volumes. Our role is to execute the opportunities that maximize risk adjusted returns while adhering to our net capital expenditure limit of $6 billion to $7 billion per year to create incremental value for our shareholders. In Mexico, we achieved critical milestones in the construction of Southeast Gateway and remain on track for commercial and service by mid-2025 at our expected cost of US $4.5 billion. Progress on the offshore pipe installation has reached over 98% completion. The deep water offshore section is now installed and there is approximately 3 kilometers of shallow water installation remaining. We anticipate the shallow water installation to be complete in the third quarter. Onshore, we have completed construction at all three landfall sites. And construction of the onshore facilities and final pipe, as well as the tie-in activities, continue to progress on schedule. To further illustrate the continued demand for natural gas, again we saw continued high utilization of our systems. You can see on this slide that our NGTL system in Canada, our US natural gas pipelines, and our Mexico pipelines all set new all-time records for receipt or delivery volumes with several daily records achieved in July. We reached unanimous support from customers for a five-year negotiated revenue requirement settlement on NGTL that extends from 2025 to 2029. This continues our 20-plus year track record of collaboratively working with our customers to address evolving needs while maximizing the value of our assets. The settlement is expected to result in approximately $150 million to $200 million per year of incremental EBITDA through increased depreciation rates and incentive mechanisms. The settlement supports competitive tolls for our customers and it incentivizes emissions reductions. The settlement also enables an investment framework to allocate approximately $3.3 billion toward a new multiyear growth program that will serve continued growth from the Western Canadian basin. The projects comprising the growth plan have targeted in-service dates between 2027 and 2030, aligning with our net annual capital expenditure limit. In our power segment, Bruce Power continues to reliably provide emission less, low cost electricity in Ontario. We achieved 78% availability in the second quarter, taking into account planned outages on four of our units, units eight through five. The availability outlook for 2024 remains in the low 90% range now that all planned maintenance is complete for 2024. Unit 3 MCR continues to progress on plan for both cost and schedule, and the Unit 4 MCR is expected to begin in early 2025. In the liquids business, Keystone continued its strong operational performance, achieving 94% reliability in the second quarter. At our annual and special meeting in June, we received strong support from our shareholders to spin off the liquids pipelines business, with voted common shares at 97% in favor of the spin. We continue to believe that spinning off South Bow will allow both companies to execute their focused strategies while maximizing the value of their respective assets. And now I'll turn the call over to Sean. Sean O’Donnell : Thanks, Francois. Good morning, everyone. I am pleased to report that TC's comparable EBITDA grew by 9% this quarter. I'll touch on the growth highlights with the chart on the left. Canada Gas saw increases primarily from system expansions on NGTL and Foothills. US Gas placed a number of new pipeline and modernization projects into service, and they signed new contracts on A&R and Great Lakes. In Mexico, the main drivers were a new lateral section of Villa de Reyes going into service last September, and higher equity earnings at Sur de Texas, primarily from the strengthening dollar over the peso. Power and energy solutions saw higher contributions from US marketing and Canadian power, which combined offset reduced contributions from Bruce Power, which had units in planned outages last quarter, as Francois mentioned. Our liquid segment was lower in the second quarter from the anticipated impacts of additional WCSB egress coming online and lower contributions from liquid marketing activities, some of which we expect to reverse later in the year. Moving to the chart on the right, our comparable earnings of $978 million were slightly lower than the second quarter of 2023. There are some variances here worth spending a moment on. AFUDC was higher due to the increased capital spending on Southeast Gateway. The FX delta was driven by a peso that strengthened by 5% in the second quarter of ‘23, which was an FX derivative gain for us, but then pivoted sharply to weaken by 10% last quarter, creating an FX derivative loss. As a reminder, we do hedge our FX, which flows through this line item. For an overall net income perspective, we're generally insulated from fluctuations of the US peso and dollar movement. Income taxes decreased by $59 million in the quarter, in large part due to the peso FX delta I just mentioned. Lastly, this quarter's deduction for non-controlling interests increased primarily due to the sale of the 40% interest in Columbia that closed in the fourth quarter last year. To conclude our earnings update, our 2024 earnings outlook is consistent with the outlook in our 2023 annual report in that our earnings per common share are expected to be lower this year than in 2023, driven largely by the NCI adjustments from our ongoing asset divestiture program. Turning to page 15 and continuing with our 2024 outlook. Due to our continued strong performance year-to-date and positive outlook for the remainder of the year, we are reaffirming our 2024 comparable EBITDA target of $11.2 billion to $11.5 billion. This year's growth is driven by the full year impact of our 2023 project completions and cash flow from our $7 billion worth of projects going into service this year. A quick reminder is that we continue to include liquids in our aggregate guidance until the spinoff closes. And the trend is similar for liquids. Following a very strong first quarter, our liquids performance continues to track its 2024 outlook. On the right side of the page, I wanted to echo Francois' comment that we're making meaningful progress on our deleveraging plan and are on track to achieve our 4.75x leverage target by the end of this year. Each component of our deleveraging strategy is contributing to our success. Our corporate development team has signed up $2.6 billion of asset sales at very attractive multiples, and we're only in July. That pace makes us feel comfortable about our $3 billion program target by yearend. Our natural gas and power teams are collectively bringing $7 billion of new capacity and associated EBITDA online this year. And our third lever is CapEx savings that Francois mentioned. Our project delivery organization is tracking towards the low end of our $8 billion to $8.5 billion net CapEx target for the year. Every dollar of CapEx savings contributes to immediate deleveraging and can also be viewed as a dollar-for-dollar offset to our asset sale target. So, our project delivery team deserves a special shoutout this quarter for delivering on our EBITDA and trending very well on our net CapEx target for the year. And finally, it bears repeating that we remain committed to staying within our $6 billion to $7 billion annual net CapEx budget in 2025 and beyond with a bias towards the lower end of that range. On page 16, we provide a quick update of our expected timeline to close the spin transaction. Practically speaking, the most efficient closing date from an IT and financial reporting perspective would be the first day of the new fiscal quarter, which would be October 1st. That is our early target as we begin to work through our closing dry run processes over the next two months. So we are refining our target closing window to say early fourth quarter. The only external milestone remaining to close the transaction is raising South Bow's $7.9 billion capital structure. We have been supporting Bevin and Van's finance team at South Bow who are preparing for the financing this quarter. I'd offer a few quick comments on market tone on ahead of South Bow's inaugural issuance. The fixed income markets remain robust, particularly for investment-grade companies with a mix of long-term commercial contract portfolios and low risk growth like South Bow. For context, TC completed the largest ever Canadian bond deal at $7 billion for Coastal Gaslink recently. To give you a sense for the market depth in Canada, this deal was nearly twice the size of the next largest deal in history, and we were three times oversubscribed and tightened our credit spreads considerably from launch to close. CGL had terrific execution on largely a Canadian offering whereas South Bow will have the benefit of being able to raise capital in both the U.S. and Canada. That dual market access should provide strong liquidity and pricing leverage to the transaction. I'll conclude this slide with two key model data points. TC will repay debt with the proceeds from the South Bow offering, and shareholders who continue to hold their pro forma at TC and South Bow shares are expected to be kept hold on a dividend per share basis going forward. On page 17, we reflect on over two decades of continuous EBITDA and dividend growth that TC has delivered. We're cognizant of how important these metrics are to the long-standing shareholder value proposition we're committed to delivering. With that, I'm happy to report that TC's board of directors declared a third quarter dividend of $0.96 per common share. On an annualized basis, that implies a dividend yield of approximately 6.6% as of Monday's close. I wanted to conclude my section this morning with page 18 and let our investors know that we just released our 2024 report on sustainability. It's a fantastic report that provides a comprehensive overview of our sustainability performance and progress, including highlights such as how TC has reduced absolute methane emissions by 15% while supporting customer growth and increasing our own cash flow, how we're investing billions into the communities where we operate, and how TC is building a diverse leadership team today and training tomorrow's future talent. You can read more about these three vital efforts and many more in the report on our website. With that, I will pass the call back to Francois.

Thanks, Sean. Once again, our team's dedication to maintaining safe and reliable operations to meet growing energy demand allowed us to deliver another strong quarter. The steady progress we're making against our 2024 priorities, combined with an exceptional outlook for our business, has made me very excited about our future. Our focus for the remainder of the year remains clear and has not changed or wavered in the last 18 months. First, we'll continue to maximize the value of our assets through safety and operational excellence. Second, project execution has been exceptional with critical milestones reached on Southeast Gateway, and we've remained focused on delivering on time and on budget. Third, with the strong year-to-date results and with the majority of our $3 billion asset divestiture plan now announced, we've made significant progress towards achieving our 2024 deleveraging target. Thank you for your attention and now I'll turn the call back over to the operator for questions.

[Operator Instructions] Our first question is from Praneeth Satish with Wells Fargo.

Thanks. Good morning, all. So a lot of positive developments here recently. You've done about $2.6 billion of asset sales, NGTL settlement, which adds $175 million of EBITDA, hundreds of millions of CapEx savings versus the budget, and on track to get Southeast Gateway into service early. So I guess the question is, when you put all of that together, where do you see leverage shaking out in 2025 versus the 4.75x target? Because it would seem to us that you're pretty close.

Hey, Praneeth, this is Francois. Thanks for that excellent summary of our prepared remarks. Look, with the $2.6 billion of asset sales announced and expected to close here in the third quarter in aggregate and the strong EBITDA performance and trending to the lower end of the CapEx guidance range at $8 billion, we're largely done with being below 4.75x for 2024. Of course, we're all aware of the fact that we only have the partial year benefit in 2025 of the assets going into service and that in 2026, frankly, we are largely done as well. So the question is, how do you deal with that interim 2025? As I said before, there are three levers for us to lean on to address the credit metrics in 2025. The first is continue to improve and exceed plan on our EBITDA performance. That comes from safe and excellent operations. The second is to outperform our plan on the capital spend, which we are optimistic there will be opportunities for us to do that. And then thirdly, our additional divestitures. We do still have some transactions in market. Now that we have the luxury of essentially being complete for the 2024 program, to the extent we see attractive valuations, we may consider announcing additional transactions in the second half of 2024, but again, I'll underscore that it will have to be compelling valuations. I think all three of those levers are available to us, and we're very confident in our ability between all three of those levers to address that interim or partial year in 2025.

Got it. That's helpful. And then maybe on your asset sale comments here. So you've established a framework now for selling a minority stake in NGTL to indigenous communities. The first question is, does this suggest a template for similar transactions in the future? And then if the answer is yes, does this transaction basically set a floor multiple of 12x for future asset sale valuations? So in other words, if you've got this ability to sell additional interest in NGTL at roughly a 12x valuation, does that become the hurdle rate for future asset sale valuations?

So I guess I would say the answer is yes, but it would be asset dependent, right. I mean, valuations of different asset classes with different risks profiles will vary. Clearly, NGTL being full cost of service regulation has the lowest volatility of cash flows, and so we'll garner a very attractive valuation as we saw with the transaction, we announced a couple of days ago. The backdrop is very positive for M&A right now. We've got good fund flows back into core infrastructure funds. We've got monitoring policy easing in Canada already and soon to be easing is our expectation in the US. And there is, again, strong demand for natural gas infrastructure from private buyers, given all of the encouraging dynamics around natural gas demand growth. So all three of those things point to a continued and very robust market. And again, adjusting for which asset we might be looking to monetize next; I think we can continue to see fairly robust multiples.

The next question is from Theresa Chen from Barclays.

Good morning. Can you walk us through the EBITDA uplift for the NGTL settlement in more detail? And strategically, what does it mean for you to have the indigenous communities as part owners of this asset for growth going forward?

Good morning, Theresa. This is Stan. I can take the first part with respect to the NGTL settlement. Maybe I'll just back up and give you a more holistic view in that. We're really excited about the collaborative effort with our customers. For the first time in recent memory, we had unanimous support for the settlement. And that's a really special thing for us. And the settlement will make sure that the customers maintain competitive tolls and the new market access that they need. And for us, it's going to mean improved cash flow and a stronger balance sheet. So I simply think of the settlement as having two parts. With respect to the tolls, a five-year term that will extend through December 2029 for maintaining the 10.1% return on equity on a 40% equity thickness. And this increase of EBITDA that we've talked about of around $200 million really comes in two parts. About $150 million of that will be generated predominantly through the accelerated return of capital via higher depreciation rates. And another $50 million or so will be generated through incentive mechanisms as those incentive mechanisms are earned on a year-to-year basis. You can also think of the $150 million of increased appreciation as largely being included in our plan. With the $50 million in incentives or so representing additional upside. Again, as those incentives are realized going forward. And the second part of the settlement deals with the multiyear buildout. The buildout's designed to meet the growing system demand. And when completed will increase capacity by about a Bcf a day. So consistent with our $6 billion CapEx plan for 2025 forward and consistent with what we've included in prior Investor Day materials, and we're going to allocate about $3.27 billion of capital that primarily will be spent across 2026 through 2030, so you can think of that as roughly about a $0.5 billion a year. And that capital will fund a series of projects, each of which are formidable, constructible, in corridor projects that will be subject to a final investment decision when they get to a Class 3 estimate.

And Theresa, in terms of what it means to have indigenous partners, first of all, this is a business transaction that's separate and apart from the rights that indigenous communities as rights holders have to participate in our regulatory processes. Having said that, as our partners, we're going to be sharing with them much earlier than would otherwise be the case, our development plans and our projects, and we'll be able to receive their input into exactly how we design and execute our projects. That is nothing but a good thing in terms of building support for the projects as we advance them through the regulatory phase, and just builds a much stronger alignment between us and a key rights holder in our regulatory process.

Thank you. Turning to the Mexico side of things, so from here, what are the key gating factors in your view of hurdles related to execution on Southeast Gateway and getting that asset online and on time and on budget? And then on the heels of the Mexico presidential election with the U.S. presidential election around the corner, how do you see the political landscape evolving and what potential readthrough do you see to your assets in business in Mexico as time goes on?

Yes, Theresa, I can talk to you first about the project, and then I'll turn it over to Francois to talk about the political climate. But again, just to reinforce, no change to the project's cost estimate, $4.5 billion, or to our summer 2025 and service date. We are glad that we've gotten all of the deep water pipeline done, and we have about three kilometers of nearshore work to get done, which we think will be completed by sometime in the third quarter. So progress on that work is progressing nicely. At the same time, we're working to complete the onshore work related to our pipe and compressor stations, and we have the expectation of that being mechanically complete sometime around yearend. CFE is continuing to make really good progress with the construction of their power plants, which are ready to go in service sometime around Q4 of this year, and then another one early in 2025. And I was down in Mexico just a few weeks ago, and they again reinforced the need of gas from SGP to fuel these plants going forward. Our team is really laser focused on getting the project placed in service on time and on budget as safely and efficiently as possible. And right now we're in a really, really good position to do that. We have had initial discussions around what would need to be true for early in service to take hold, but haven't landed anything definitive just yet. So give us a little more time to finish out some of the offshore work and those discussions we'll get back to you thereafter.

And Theresa, for the political landscape, President elect Sheinbaum being elected was not a surprise to us. We see a continuation of supportive policy for natural gas transmission. Again, we were the first ever partnership formed with the CFE, with the private sector party. The President-elect has made very supportive statements publicly with respect to natural gas transmission being important to achieving their socioeconomic goals and has also made very supportive comments with respect to the project. We have continued to see excellent support from the staff at the CFE to advance all of the development aspects of the project throughout construction. And with respect to the pending election in the United States, we will see how those unfold. Our perspective is that adding egress for U.S. natural gas from the Gulf Coast into Mexico as a market to compete with LNG exports is a little bit agnostic to which party forms government after the election. That's one of the benefits of adhering to our natural gas strategy and principles. And so we view the outcome of the election in the U.S. not having any kind of significant impact on our prospects for our business in Mexico.

The next question is from Ben Pham with BMO.

Hi. Thanks. Good morning. With [inaudible] now behind you, I wish this was a month. What is your next focus on with respect to rate filings? And is there anything across your network where you can also collect depreciation rates and bring forward cash flows? Sean O’Donnell : Well, as part of the NGTL settlement, we're doing exactly that by increasing depreciation to the tune of around $150 million. And amongst other things, that's going to allow us the ability to potentially redeploy that in other jurisdictions where we can get higher returns for that capital investment.

Any other rate cases? We have about 70% of our revenues in the U.S. come from Columbia and the A&R pipeline systems. On Columbia's last settlement, we have an obligation to file for new rates to be effective no earlier than April of 2025 and no later than April of 2026. So our team is working through that right now. And on the A&R rate case, you can think of that as likely to rate to take effect at the end of this year or early in 2026. Those are the next two biggest opportunities in terms of filings. I will note that particularly in the U.S., we have a long-standing history of settling rate cases. And we are really close to, if not at the doorstep of settling the ongoing rate cases that we've had on the GTN system and both the northern border system. So more good news to come there.

Okay. And then let me just go back to the question on the depreciation. Is that going to be more limited to the Canadian side, then? To flat from depreciation you are looking, yes.

For the most part, yes, the mainline system has a settlement that's in effect for another 2.5 years, and that system is already highly depreciated, so there's probably not a lot more to get out of it, but with respect to the US, we'll look to other optimization paradigms with respect to our rate case filings.

Okay. Got it. And maybe the second one on the data opportunity you mentioned, and mileage, and location. Are you able to identify the CapEx opportunity for that? I mean, 15 miles of steel, and is that more of a $0.5 billion opportunity per each data center?

Obviously, each project is unique, but when you think just an average rule of thumb, somewhere maybe $5 million to $10 million a mile may be something that you could use, so we're talking, well below $0.5 billion and a couple hundred million, but again, all things equal, it depends upon the specifics of the projects.

The next question is from Robert Kwan with RBC Capital Markets.

Great. Good morning. I just wanted to confirm some things, Sean, you mentioned just around the NGTL settlement. So is the $150 million of increased depreciation something that was already incorporated in the guidance you gave at the November 2023 Investor Day, just in terms of future EBITDA, and then on the incentives, I just wanted to make sure that that $50 million, is that additive to the incentive framework that was already in place? Sean O’Donnell : So yes, to the first part of your question, the $150 million in increased depreciation was largely baked into our existing plan. And then you could think of the incremental upside as being recovered through the incentive mechanisms. Now, there's no cap on the incentive dollars, the mechanism is very similar to what it was last time in that there's two different tiers that will go through. Tier 1 has a 50-50 sharing, Tier 2 and 80-20 sharing. But when we look at things, we think that there's a reasonable expectation that we should be able to generate around $50 million or so of these incentive earnings going forward. And that would be incremental to plan.

Yes. So is that, sorry, but is that incremental to what you have already been earning on the system? Sean O’Donnell : Correct.

Okay. Just the final one here, strategically, Francois, you've talked a lot about your payout ratio strategy and then overall, I think trying to get that down over time to screen favorably against regulated utilities, so this is really more the earnings payout ratio. Can you just talk a little bit more about, how you're feeling about that? And how you expect to kind of achieve that, and possibly over what timeframe?

Yes, thanks, Robert, that's an ambition we have, I would say, to start focusing on in the second half of the decade. Right now, we're laser focused on one very important task, and that's to put $16 billion of assets into service between 2024 and 2025. As I talked about with respect to one of the prior questions, we may have an opportunity or we may decide to accelerate some additional divestitures here in the second half of 2024 to make further progress against our 2025 leverage metrics. So what I would say is I would rather get that work done and see where we fall out on what our go forward run rate leverage is and payout ratios post all of these transactions and these assets be put into service before we start giving you a little bit of visibility around what we might be looking to do with incremental free cash flow and the impact on payout ratios going forward, but as you said, the trend over the long run is for us to be looking to reduce our payout ratios both from a distributable cash flow per share as well as earnings per share going forward.

The next question is from Jeremy Tonet with JPMorgan.

Hey, good morning. This is Vrathan Reddy on for Jeremy. On the data center opportunities specifically, could you elaborate, I guess, on how you see opportunities in Canada specifically and maybe how that compares to what you're seeing in the U.S.?

Sure, I could do that for you. Big picture wise, there's somewhere around 8,000 data centers that are operating in the world today. About a third of them are located in the U.S., and a majority of those are located in Virginia. As we sit here today, there's around 300 or so data centers that are currently under construction or contemplated in the U.S. And when you look at where they're being built, more than 60% of them are being built within 50 miles of our pipes, which really uniquely situates us to compete for and win this load. If you think of an average data center as consuming about 150 megawatts of power, which is about enough power to fuel 77,000 homes, by the way, these 300 new data centers are going to need somewhere around 45 to 50 gigawatts of power to operate. And then if you apply just an average heat rate to that, that's how we get this notion of around six to eight Bcf a day of capacity that's going to be needed to serve them. So, in our discussions with various entities, what we're learning is that while power costs represent a relatively small portion of the overall cost to operate a data center, the access to reliable power could be a roadblock towards the timely buildout. Given that, we're seeing a shift in siting preferences from regions where big telecom infrastructure is in place to regions where energy and supply infrastructure is in place. And as an alternative to siting these data centers behind LDCs, we're now seeing a much greater potential for data center operators to seek laterals off of our main line and to use that gas supply to fuel onsite power generation that they would build and or own themselves. So, in the U.S., we tend to build projects at around a six to eight times build multiple, and I would expect that to continue going forward with respect to data center opportunities. The other part of your question is actually very good, actually, in that our best-in-class footprint doesn't limit the opportunity set just to the U.S. Now, in Canada, there's around 300 data centers that are in operation today. We could see that load increasing by one to two gigawatts before the end of the decade. In Mexico, there's about 150 data centers in operation today. Most notably, in the state of Queretaro, it's ranked 13th in terms of data center demand usage currently, and two of our pipelines, Villa de Reyes and the Amazon Charlie pipeline serve the state of Queretaro, so there's opportunities for expansion there. So, while entities like Google and Amazon and Microsoft are both talking about expansion plans across all three of these geographies, I think the last thing I would leave you with is, while data centers are a unique opportunity and we're going to pursue them, our portfolio effect is much more than that, in that we have growth opportunities with respect to the next wave of LNG, with respect to LDC reliability, with respect to growing power generation and electrification, as well as supply access in addition to the data center opportunity.

Got it. Thank you for that. For the second one, I just want to ask, I guess, on how you guys are progressing towards those productivity and cost-effectiveness initiatives you guys laid out within the last year.

Yes, I think you're talking about what we called our focus project, which is around fundamentally changing the way we do our work on safety, productivity, and capital. What we mentioned to you previously was we set a target of $750 million of synergy savings by 2025. At this point in time, we are well on our way to meeting that goal, having generated somewhere around $410 million of synergies as of last month, and look to get the balance taken down in the next year, and potentially maybe come in a little ahead of our schedule there.

The next question is from Keith Stanley with Wolfe Research.

Hi. Good morning. I'm curious, once you're getting towards completion of Southeast Gateway, how you think about growth in Mexico within your $6 billion to $7 billion per year CapEx budget. Are there material new opportunities you could pursue in the country, or is it more likely smaller scale opportunities?

Thanks for the question, Keith, it's Francois. First and foremost, we're very bullish on the role that Mexico is going to play in North American gas markets, both in terms of growing demand in country, but also the potential for LNG exports from Mexico. So that will drive additional investment opportunities for us to consider. And I always believe that it's important for you to be the incumbent that builds the backbone of the infrastructure. That's what we're doing right now with completion of Villa de Reyes as well as Southeast Gateway. And from that comes very attractive, low-build multiple, low-risk ancillary lateral opportunities that tend to come your way as the incumbent. We are starting to see a number of those opportunities present themselves. But as we said, we are also focused on managing our aggregate exposure from Mexico as a percentage of the whole. And pro forma for the spin and Southeast Gateway going into service, we will be at approximately 15% of consolidated EBITDA. And prior to contemplating any additional investment in the near term, we would need to see some progress in either bringing in a joint venture partner or growing ahead of plan are other franchises such that the percentage is lowered. But again, the backdrop, the macro backdrop around demand growth will present us with more investment opportunities in the future, albeit a bit smaller.

Got it. That makes sense. I'm curious if there's anything notable to update on the Coastal Gas Link litigation. I think there were a couple settlements that came through. Is that all going according to your expectations and any meaningful cash inflows or outflows you're expecting as part of that?

Yes, this is Stan with respect to CGL. We continue to work on the post-construction reclamation activities, which we should have completed by the end of this year. We did have one settlement with respect to cost recoveries. We're going to continue to pursue the other and really no change in our guidance that at the end of the day, we expect to be in a net recovery position.

The next question is from Robert Catellier with CIBC Capital Markets.

Hi. Good morning, everyone, and congratulations on the progress towards your deleveraging goals. That's a follow-up question there. Yes, just wanted to follow up on how the US $400 million verdict in the Columbia acquisition case impacts your deleveraging plan, and then I'll have a follow-up question.

So we, I think, have publicly disclosed our intention to appeal the court's decision. We expect that the adjudication of the appeal process will run well into 2025, and we will react accordingly, and again, our plans were able to accommodate any judgment or cash outlay that is required at the end of that process and continue to meet all of our objectives around deleveraging. We are also optimistic based on the merits of the case that we will get a different outcome based on appeal.

Right. So how is the $400 million treated though currently until there is a final verdict, does it increase your burden or is it treated as a contingency that does not add to the leverage?

We do not have an accrual for that, Rob, in our plan, just based on confidence and legal review, Rob, but we will know in the first quarter.

Got it. And then on a more positive note here, just given the substantial progress you have made with SGP, I think I heard Stan mention the potential for being mechanically complete late in ‘24 or possibly having an early at service date, how does that change your approach to deleveraging and do you have any insight as to how the rating agencies would view early mechanical completion in terms of how they treat the partial year of 2025?

So I will start, Robert, and then I will pass it over to Sean to comment on rating agencies. As we said before, we feel like we have got our goals achieved around achieving an upper limit of 4.75x debt-to-EBITDA for 2024. So now we are looking to deal with the partial year of 2025. We have got three levers to pull to deal with that partial year. First is executing on our capital projects under budget. The second is having EBITDA performance that is ahead of plan, and one of the potential ways to do that is to bring assets into service early. Our plan right now has Southeast Gateway coming into service approximately in mid-year. As Stan mentioned, to the extent we're contemplating what's the art of the possible for bringing that asset into service early, it's very early days in our conversations with the CFE. Our job first and foremost is to excel on the execution so that we have the option of having that conversation with our customer, and so we're making good progress on that. And then, Sean, as to the rating agencies and how they would view that. Sean O’Donnell : We have given the rating agencies the conservative contractual update, the project is moving on schedule, EBITDA is in mid-year, and you will have seen all three agencies reaffirm TC, right, and family-wide, and that was a major update and focal point, as you can imagine, for each of them, so. And a rule of thumb, we've done this before, but round numbers, Canadian, $800 million worth of EBITDA on SGP, if you analyze that, that's an extra 400, that's our 2025 gap, is that half year, so there's a lot, as Francois said, a lot of focus on seeing what the art of the possible is, commercially, to help a customer and help ourselves along the way next year.

Okay, excellent. Just one last question for me. Just on the storage, one of your competitors reported today and has indicated they're seeing both term and higher rates on their storage renewals. I wonder if you can give us a look for how you see the commercial development of your storage assets, understanding, yes, you might have more of that in rate base.

So we are one of the largest storage owner operators in North America and see tremendous value in storage across our systems. And in the aggregate, across all of TC Energy, we operate around 650 Bcf, which is about 532 Bc, that being here in the US. We're in our eighth consecutive year of having our storage capacity 100% contracted for work. So really strong demand continues and our storage is heavily weighted in the market area. And over 80% of our storage is subscribed by our LDC customers who really rely on it as a source of reliability to make sure that they're meeting their peak day needs. So we don't see that changing going forward. Any storage that we seek to develop will be along those lines of rate regulated, integrated into our systems to provide additional reliability to our LDC customers.

The next question is from John Mackay with Goldman Sachs.

Hey, thanks for the time. I wanted to maybe just go back to the NGPL piece and the commentary around kind of adding 1 Bcf a day of capacity through the back of the decade. I guess is there room I guess first question, is that incremental to kind of existing expected growth in the system and then two kind of is that locked in or is there upside there just how to think about that kind of piece from a capacity standpoint?

Well, that 1 Bcf represents the expected incremental growth that's to come over the next five to seven years or so. Again, the project is made up of a series of smaller bite size expansion projects and should we see or should the customers see changes in market needs over the next several years the capability to tweak those projects accordingly?

Okay, maybe staying up there but pivoting to Cedar extension. You guys have talked about you know working on CGL to kind of improve those returns and that to you understand this is a pretty small dollar amount versus the kind of $1.2 billion of overall project capital. But can you talk about how this might end up looking like from a return standpoint on that pipe and maybe just next steps to getting to central phase two expansion of the main line?

Yes, with respect to Cedar, we were very pleased to see the Heisler and Pembara announced their FID last month and we have indeed started construction on the project. Think of it as having a P50 capital cost of about $1.2 billion which will increase capacity by the 400,000 a day when it's in service in 2028. With respect to the project's returns on an after-tax on a lever basis, you can think of it as having basically a modest upside to our regulated Canadian businesses with further upside potential if we deliver the project at a lower capital cost. On Phase 2 of CGL, really no new updates. We've continued to progress work related to the project scope, the timeline, engineering assessments, and to assess this expansion, including discussions about how we could further de-risk the project execution should it ultimately reach FID.

The next question is from Zack Van Everen with TPH.

Perfect. Thanks, guys, for taking my question. Just going back to the U.S. power demand side of things, understanding that even laterals with the FERC environment can take a few years to plan, develop, and build. Do you guys have existing space on your system today that can kind of act as operating leverage as power demand grows in the near term?

So it really depends where the opportunity arises, but most of the power gen growth that we're seeing is along the Columbia and A&R systems. For the most parts, there are isolated capacity pockets that we could use to incorporate into a project, but in many instances, it's going to require looping and or compression to capture these loads.

Makes sense. And then maybe one on the CGL with LNG Canada Phase 2, can you remind us of what that project consists of? Mainly just additional compressor stations?

Yes, the project essentially is that. It's a conditioning compressor station that's going to provide the additional capacity going forward. I think it's one station, three different units, if I'm not mistaken, five different units.

The next question is from Patrick Kenny with National Bank Financial.

Yes, good morning. Just back to the rise in natural gas demand here across North America. I think, Francois, you mentioned 40 Bcf a day, incremental by 2035. Yet it already appears that we're seeing relatively full storage capacity in several markets, which is good for spreads, of course, but perhaps you can just comment on the need for adding additional storage capacity on both sides of the border over the coming years to help enable this higher demand profile.

I think what we're seeing right now, particularly in the US, is the need for additional storage, particularly in the Gulf Coast, to handle balancing opportunities associated with LNG. And again, that tends to be not physically integrated into our systems, and it tends to have a degree of merchant risk or shorter-term contracting that comes with it. And for us, we're going to get back to ensuring anything we do around the storage assets are going to be integrated so we can provide better services to our LDC customers in particular. Same thing with respect to Canada in the awareness situation right now where we have a low pricing environment. Our storage capacity is roughly 80% full, which is above the five year average for this time. And to the extent that there are opportunities to use storage to help balance arbitrage either with respect to weather or price, we'll have to take advantage of those. But I don't really see us doing a whole lot of new storage development going forward. Anything we do likely will be in the U. S. and, again, integrated back into our customer mix.

Okay. Thanks for that, Stan. And then just maybe on the power demand side, I know it's still early days, but if you see but wondering if you had just an update on how the impact assessment process is going or any other developments related to the potential timing of the project.

Thanks for the question. It's Annesley here. So Bruce Power continues really to be primarily focused on continued operational excellence and the life extension of the existing fleet. As you've highlighted, the impact assessment process has started for potential new build at the site [inaudible]. It is still very early days for that project. And so while we are happy to see there's extremely strong support for new nuclear in the province and we are happy to participate in that process, it will be years before we will end up at the completion of even just the impact assessment stage.

Ladies and gentlemen, this concludes the question and answer session. If there are any further question, please contact Investor Relation @tcenergy. I will now hand the call back over to Gavin Wiley. Please go ahead, Mr. Wylie.

Well, thanks very much. And first wanted to thank everybody for joining us this morning. If we didn't get to your question, the investor relations team is always here to help. Please just reach out and we'd be happy to get back to you. We always appreciate your interest in TC Energy and we look forward to our next update with Q3. Hope everybody has a good summer to finish off.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.