CALGARY May 2, 2020 (Thomson StreetEvents) -- Edited Transcript of TC Energy Corp earnings conference call or presentation Friday, May 1, 2020 at 7:00:00pm GMT

* Donald R. Marchand

* Paul E. Miller

* Russell K. Girling

TransCanada PipeLines Limited - Executive VP, President of U.S. Natural Gas Pipelines & Diversity Officer

* Tracy A. Robinson

TC Energy Corporation - Executive VP & President of Canadian Natural Gas Pipelines

* Andrew M. Kuske

Crdit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

Good afternoon, ladies and gentlemen. Welcome to the TC Energy 2020 First Quarter Results Conference Call.

I would now like to turn the meeting over to Mr. David Moneta, Vice President, Investor Relations. Please go ahead, Mr. Moneta.

Thank you, and thanks very much, and good afternoon, everyone. I'd like to welcome you to TC Energy's 2020 First Quarter Conference Call.

Joining me today are Russ Girling, President and Chief Executive Officer; Don Marchand, Executive Vice President, Strategy and Corporate Development and Chief Financial Officer; Franois Poirier, Chief Operating Officer and President, Power and Storage and Mexico; Tracy Robinson, President, Canadian Natural Gas Pipelines; Stan Chapman, President, U.S. Natural gas pipelines; Paul Miller, President, Liquids Pipelines; Bevin Wirzba, Senior Vice President, Liquids Pipelines; and Glenn Menuz, Vice President and Controller. Russ and Don will begin today with some opening comments on our financial results and certain other company developments.

A copy of the slide presentation that will accompany their remarks is available on our website. It can be found in the Investors section under the heading Events and Presentations.

Following their prepared remarks, we will take questions from the investment community. If you are a member of the media, please contact Jaimie Harding following this call and should be happy to address your questions.

In order to provide everyone from the investment community with an equal opportunity to participate, we ask that you limit yourself to 2 questions. If you have additional questions, please reenter the queue.

Also, we ask that you focus your questions on our industry, our corporate strategy, recent developments and key elements of our financial performance.

If you have detailed questions relating to some of our smaller operations, for your detailed financial models, Hunter and I would be pleased to discuss them with you following the call.

Before Russ begins, I'd like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by TC Energy with Canadian securities regulators and with the U.S. Securities and Exchange Commission.

And finally, during this presentation, we'll refer to measures such as comparable earnings per share, comparable earnings before interest, taxes, depreciation and amortization or comparable EBITDA and comparable funds generated from operations.

These and certain other comparable measures are considered to be non-GAAP measures. As a result, they may not be comparable to similar measures presented by other entities.

They are used to provide you with additional information on TC Energy's operating performance, liquidity and its ability to generate funds to finance its operations.

With that, I'll now turn the call over to Russ.

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Russell K. Girling, TC Energy Corporation - President, CEO & Director [3]

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Thank you, David, and good afternoon, everyone, and thank you all very much for joining us today.

Clearly, we're living in an unprecedented times with COVID-19, the pandemic having a significant impact on millions of people around the world. So on behalf of TC Energy, I'd like to start by expressing my sincere thanks to the frontline health care and other essential service workers who are risking their personal safety to ensure the well-being of others. Your selfless acts during this difficult time are truly courageous.

At TC Energy, as always, we too are focused on health and safety of our employees, our contractors and the communities in which we operate. When the World's Health Organization declared COVID-19 a global pandemic in early March, our business continuity plans were put in place across the organization, allowing us to continue to effectively operate our assets and execute on our capital programs.

The services we provide are broadly considered essential are critical in Canada, the United States and Mexico, given the important role our infrastructure plays in delivering energy to people across the continent. And at the responsibility we take very seriously, like many others, thousands of our employees are now working remotely, while those that must be physically at our work sites are following rigorous health, hygiene and distancing protocols.

I want to acknowledge and thank our employees and their families for their ongoing efforts to ensure the energy that is vital to the daily lives of so many continues to be delivered seamlessly across North America, and your efforts are truly making a difference.

Turning now to our first quarter financial results and certain other recent developments across our 3 core businesses, with approximately 95% of our comparable EBITDA coming from regulated or long-term contracted assets. We are largely insulated from the volatility associated with volume throughput and the commodity prices that are being experienced by many others.

Aside from the impact of normal maintenance activities and seasonal factors to date, we have not seen any meaningful change in the utilization of our assets, which further reinforces their critical nature to North America. As a result, as highlighted in our first quarter report, our $100 billion portfolio, high-quality, long life energy infrastructure assets continue to produce strong financial results.

And we continue to capitalize or we continue to realize the growth expected from our industry-leading capital program. Today, that program that we're advancing, it's $43 billion of secured capital projects, and it now includes Keystone XL.

In addition, we continue to advance more than $10 billion of projects under development, including the refurbishment of another 5 reactors at Bruce Power as part of their long-term life extension program. Over the last 4 months, we took significant steps to fund our 2020 capital expenditure program and to maintain our strong financial position despite challenging capital market conditions.

More specifically, we enhanced our liquidity by more than $9 billion through the issuance of long-term debt in both Canada and the United States at very attractive rates, the establishment of incremental committed credit facilities and the sale of 3 Ontario natural gas-fired power plants.

When combined with our predictable and growing cash flow from operations and the sale of a 65% interest in the Coastal GasLink project, which is scheduled to close in the second quarter, we believe that we're very well positioned to continue to fund our capital program and other obligations through a prolonged period of disruption in capital markets if that was to occur.

Looking forward, we expect our solid operating and financial performance to continue with 2020 comparable earnings per share is still anticipated to be similar to the recorded -- or the record results that we produced in 2019. While we're proud of our financial performance and the significant returns we've generated for our shareholders, we know that our ongoing success depends on our ability to balance profitability with safety and environmental and social responsibility.

We have a 65-year track record of safe and reliable operations, but we recognize that we can always improve. To keep you better informed, we have published several investor-focused ESG documents over the past year. They described some of the work we're doing to ensure our business remains resilient in an ever-evolving energy landscape. All of this can be found on our website at tcenergy.com.

With that as an overview, I'll explain some of the recent developments beginning with a brief review of our first quarter financial results. Don will provide more detail of our results and liquidity in just a few minutes.

Excluding certain specific items, comparable earnings were $1.1 billion or $1.18 per common share for the 3 months ended March 31 compared to $1 billion or $1.07 per share in 2019, which was an increase of 10% on a per share basis. Comparable EBITDA of $2.5 billion was 6% higher and the amount reported for the same period last year, while comparable funds generated from operations was $2.1 billion, which was 17% higher than the comparable period.

Each of these amounts reflects the strong performance of our legacy assets as well as contributions from another $1.6 billion of new long-term contracted and rate-regulated assets placed into service in early 2020.

Next, I'll make a few comments on our 3 core businesses, starting with our natural gas pipeline business. Customer demand for our services remained strong despite the COVID-19 impacts on the broader North American economy. Evidence of this can be seen in the volumes transported across our systems with the NGTL System field receipts averaging about 12.2 Bcf a day. The Canadian Mainline Western receipts averaging 3.2 Bcf a day. Our broader U.S. pipeline network moving approximately 26 Bcf a day, and our Mexican pipelines moving approximately 1.5 Bcf a day. Each of these amounts are similar to or greater than the volumes moved over the same period last year. At the same time, we continue to advance more than $27 billion of capital projects associated with our natural gas pipeline businesses.

The program includes significant expansion of our NGTL System, capacity additions of our -- to our U.S. network, the Villa de Reyes pipeline, the Tula project and our Coastal GasLink pipeline project in British Columbia, which will play an important role in delivering Canadian natural gas to Asian markets.

While it's too early to determine whether the COVID-19 pandemic will have any long-term impacts on our capital programs, what I would say is directionally, we would expect some slowdown of our construction activities in capital expenditure in 2020 because of the global health crisis and the impact, the COVID-related safety protocols will have on our construction productivity.

Finally, in natural gas pipelines, last week, we are pleased to announce a 5-year revenue requirement settlement with our customers on the NGTL System. The settlement, which runs from January 2020 through December 2024, sets a base equity return of 10.1% on 40% deemed common equity and includes incentive mechanisms for certain operating costs where variances from projected amounts would be shared between TC Energy and our customers.

The settlement was a result of a collaborative process between us and our customers and is responsive to their needs during this challenging time while providing us with a stable return as we invest billions of dollars in pipeline infrastructure to enhance their connectivity of natural gas supply to premium markets.

Turning now to our liquids pipeline business, which generated solid results during the first quarter, despite extraordinary volatility in global crude oil markets. While the volatility did have an impact on our market link and liquids marketing bigger businesses, Keystone continued to produce solid results as it serves an important market in the U.S. Midwest and Gulf Coast and is underpinned by long-term take-or-pay contracts with strong counterparties.

Also in Liquids Pipelines, we recently announced that we would commence construction of Keystone pipeline or the Keystone XL pipeline. Keystone XL is the fourth phase of the Keystone system and continues to be a very important project for both Canada and the United States. It will create thousands of jobs, advanced energy security for both nations in an environmentally and sustainable way. The project is underpinned by a new 20-year take-or-pay contracts that are expected to generate approximately USD 1.3 billion of incremental EBITDA on an annual basis once the pipeline is placed into service.

Keystone XL will require an additional investment of approximately USD 8 billion and is expected to enter service in 2023. To advance the project, we have entered into a partnership with the government of Alberta, who will invest approximately $1.1 billion of equity into the project and fully guarantee a USD 4.2 billion project level credit facility. Once the project is completed and placed into service, we expect to acquire the Alberta government's equity investment and refinance the credit facility.

We appreciate the ongoing backing of landowners, customers, indigenous groups and numerous other partners in the U.S. and Canada, who have helped us secure project support and key regulatory approvals for this very important energy infrastructure project.

In addition, I'd like to thank the many government officials across North America for their support without which this project could not have advanced.

Moving forward, we will continue to carefully manage various legal and regulatory matters as we construct this pipeline, which will have the capacity to move about 830,000 barrels a day of responsibly produced energy from the Canadian oil sands to the continent's largest refining market in the U.S. Gulf Coast.

Turning now to Power and Storage, where Bruce Power continued to produce solid results through the first 3 months of this year. After years of preparation, in January, Bruce Power commenced work on the Unit 6 Major Component Replacement, or MCR outage, when they took it off-line here in January. We expect to invest approximately $2.4 billion in that program as well as the ongoing asset management program through 2023 when the Unit 6 refurbishment is targeted to be done.

Unfortunately, because of COVID-19 on March 25, 2020, Bruce Power declared force majeure under its contract with the independent electric system operator. This force majeure notice covers the Unit 6 MCR and certain asset management work. At the time, the force majeure was declared, the Unit 6 MCR program was ahead of schedule.

Despite the force majeure, Bruce Power has been able to continue limited work on critical path activities as well as training for the MCR contractors. In late April, remobilization of the MCR workforce began with strict COVID-19 measures in place with respect to worker safety. The measures include shift adjustments to reduce headcount, increased personal protective equipment, physical distancing and a reduction in noncritical work.

Operations and planned outages on all other units are expected to continue as normal. Finally, in power, earlier this week, we completed the sale of 3 natural gas-fired power plants in Ontario, Napanee, Halton Hills and our interest in the Portlands Energy Center. Net proceeds of approximately $2.8 billion will be used to help fund our industry-leading capital program.

So in summary, today, we are advancing $43 billion secured growth projects that are expected to enter service by 2023. We have invested approximately $12 billion into this program to date with approximately $6 billion of these projects expected to be completed by the end of 2020. Notably, they are all underpinned by cost of service regulation or long-term contracts, giving us visibility to earnings and cash flow they will generate as they enter service.

Based on the strength of our recent financial performance and our promising outlook for the future, in February, TC Energy's Board of Directors declared a first quarter 2020 dividend of $0.81 per common share, which is equivalent to $3.24 on an annual basis. This represents an 8% increase over the amount declared for the same period in 2019 and is the 20th consecutive year that our Board of Directors has raised the dividend.

Over that same time frame, we have maintained consistently strong coverage ratios with our dividend, on average, representing a payout of approximately 80% of comparable earnings and 40% of comparable funds generated from operations leaving us with significantly internally-generated cash flow to invest in our businesses.

Based on the continued strong performance of our base business, the organic growth and the organic growth we expect to realize as we advance our $43 billion secured capital program, we expect our dividend to grow at an annual average rate of 8% to 10% through 2021 and 5% to 7% thereafter.

So in summary, I'd leave you with the following key messages. Today, we are a leading North American energy infrastructure company with a strong track record of delivering long-term shareholder value. Our assets provide an essential service to the functioning of the North American society and its economy and the demand for our services remain strong.

Looking forward, we have 5 significant platforms for growth: Canadian, U.S. and Mexican Natural Gas Pipelines, Liquids Pipelines and Power and Storage. As we advance our $43 billion secured capital program, we expect to build on our long track record of growing earnings, cash flow and dividends per share.

We have also more than $10 billion of projects in the advanced stages of development and expect numerous other in corridor organic growth opportunities to emanate from our extensive critical asset footprints.

Looking forward, (technical difficulty) working in accordance with our values and responding quickly to market signals and sign posts to ensure we remain industry-leading and resilient as we continue to grow shareholder value.

I'll now turn the call over to Don, who will provide more details on our first quarter results and our financial position. Don, over to you.

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Donald R. Marchand, TC Energy Corporation - Executive VP of Strategy & Corporate Development and CFO [4]

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Thanks, Russ. Good afternoon, everyone. As outlined in our results issued earlier today, net income attributable to common shares was $1.15 billion or $1.22 per share in the first quarter of 2020 compared to $1 billion or $1.09 per share for the same period in 2019.

First quarter results included a positive $281 million income tax valuation allowance release following our reassessment of deferred tax assets that are deemed more likely than not to be realized as a result of our decision to proceed with Keystone XL. This was partially offset by an incremental after-tax loss of $77 million related to the Ontario natural gas-fired power plants held for sale. First quarter 2019 also included certain specific items outlined on the slide and discussed further in our first quarter 2020 report to shareholders.

These specific items as well as unrealized gains and losses from changes in risk management activities are excluded from comparable earnings.

Comparable earnings in the first quarter rose by $122 million to $1.1 billion or $1.18 per share compared to $987 million or $1.07 per share in 2019, representing a 10% increase on a per share basis.

Turning to our business segment results on Slide 14. In the first quarter, comparable EBITDA from our 5 operating segments was $2.5 billion, a $152 million increase compared to 2019. Canadian Natural Gas Pipelines comparable EBITDA of $597 million was $41 million higher than the same period last year, primarily on account of increased rate base earnings as well as flow through depreciation and financial charges on the NGTL System from additional facilities placed in service. This was partially offset by lower flow through income taxes on both the NGTL System and the Canadian Mainline as a result of accelerated tax depreciation measures enacted by the Canadian federal government in June 2019.

NGTL System net income increased $22 million compared to first quarter 2019 as a result of a higher average investment base and continued system expansions and reflects an ROE of 10.1% on 40% deemed equity. Net income for the Canadian Mainline decreased $5 million year-over-year, largely due to lower incentive earnings.

U.S. natural gas pipelines comparable EBITDA of USD 766 million or CAD 1.032 billion in the quarter rose by USD 36 million or CAD 60 million compared to the same period in 2019. The increase was mainly due to contributions from Columbia Gas and Columbia Gulf growth projects placed in service, partially offset by the sale of certain Columbia midstream assets in August 2019.

Mexico Natural Gas pipelines comparable EBITDA of USD 198 million or CAD 269 million was USD 88 million or CAD 123 million above first quarter 2019. The increase was primarily due to higher earnings in Sur de Texas, including USD 55 million associated with onetime fees realized as a result of the successful completion of the project compared to contract targets as well as fees received from operating the pipeline.

Liquids Pipelines comparable EBITDA declined by $118 million to $445 million in first quarter 2020, driven by lower uncontracted volumes on the Keystone pipeline system, a decreased contribution from liquids marketing activities due to lower margins and reduced earnings as a result of the partial monetization of Northern Courier in July 2019.

Power and Storage comparable EBITDA rose by $43 million year-over-year to $194 million due to higher Bruce Power results, which were augmented by an increased realized power price and higher production resulting from fewer outage days, partially offset by losses on funds invested for post-retirement benefits.

The higher contribution from Bruce Power was modestly offset by lower Canadian power results, largely due to an outage at our Mackay River cogeneration facility, which began late fourth quarter 2019 and the sale of the Coolidge generating station in May 2019. For all our businesses with U.S. dollar-denominated income, including U.S. natural gas pipelines, Mexico Natural Gas Pipelines and parts of Liquids Pipelines, EBITDA was translated into Canadian dollars using an average exchange rate of CAD 1.34 in first quarter 2020 compared similar to the rate used for the same period in 2019.

As a reminder of our approach to managing foreign exchange exposure, our U.S. dollar-denominated revenue streams are partially hedged by interest on U.S. dollar-denominated debt. We then actively managed the residual exposure on a rolling 1-year forward basis with realized gains and losses on this program reflected in comparable interest income and other.

Now turning to the other income statement items on Slide 15. Depreciation and amortization of $630 million increased $22 million versus first quarter 2019, largely due to new projects placed in service in Canadian Natural Gas Pipelines and U.S. Natural Gas Pipelines. Depreciation of Canadian Natural Gas Pipelines is recoverable in tolls on a flow-through basis.

Interest expense of $578 million for first quarter 2020 was $8 million lower year-over-year, primarily due to the net effect of higher capitalized interest related to Coastal GasLink and Keystone XL, lower interest rates on higher levels of short-term borrowings and long-term debt issuances net of maturities.

AFUDC decreased $57 million for the 3 months ended March 31, 2020, compared to the same period in 2019, largely due to Columbia Gas growth projects placed in service during 2019 and the suspension of recording AFUDC effective January 1, 2020, on Tula due to continuing construction delays.

Comparable interest income and other increased by $19 million in the first quarter versus 2019, primarily due to unrealized foreign exchange gains on peso-denominated deferred income tax liabilities, reflecting the weakening of the Mexican peso in first quarter 2020.

Income tax expense included in comparable earnings was $211 million in first quarter 2020 compared to $228 million for the same period last year. The $17 million decrease was mainly due to lower flow-through income taxes on Canadian rate-regulated pipelines, inclusive of a lower Alberta corporate income tax rate, partially offset by lower foreign tax rate differentials and increased pretax earnings.

Excluding Canadian rate-regulated pipelines, where income taxes are a flow-through item and thus quite variable, along with equity AFUDC income in U.S. and Mexico Natural Gas Pipelines, we expect our 2020 full year effective tax rate to be in the mid- to high teens after normalizing for these items.

Comparable net income attributable to noncontrolling interest of $96 million in the first quarter decreased by $5 million related to the same period last year, primarily due to lower earnings in TC PipeLines, LP. And finally, preferred share dividends were comparable to first quarter 2019.

Now turning to Slide 16. During the first quarter, we invested approximately $2.3 billion in our capital program, which reflects 100% of Coastal GasLink spending pending close of the equity sale of the KKR and AIMCo expected in the second quarter. Capital expenditures were largely funded with comparable funds generated from operations of $2.1 billion, along with cash on hand and notes payable.

As everyone is acutely aware, capital market conditions have been significantly impacted by COVID-19, resulting in periods of dramatically heightened volatility and reduced liquidity. In response to this, we secured approximately $6.6 billion of additional financial capacity in early April through long-term debt issuances in Canada and the U.S. on compelling terms, along with the establishment of USD 2 billion of incremental committed credit facilities.

Our solid financial position was bolstered earlier this week with the completion of the disposition of our 3 Ontario natural gas-fired power plants for $2.8 billion.

The sale will result in a final estimated after-tax loss of $370 million, of which $271 million was realized at March 31, 2020. The remaining amount will be recorded on close and reflected in second quarter 2020 results.

These transactions have collectively added over $9 billion in incremental liquidity over the past months, enhancing our financial flexibility and demonstrating our continued access to capital markets under stressed market conditions.

Looking forward, our financial strength will improve further upon completing the partial monetization of and establishing project level financing for Coastal GasLink. In late April, we executed a credit agreement with the syndicate of banks extending nonrecourse project level financing to fund the majority of the project's construction costs.

The credit facilities will be available to be drawn once conditions precedent have been met, including the closing of the equity purchase agreement with KKR and AIMCo, which is expected to occur in the second quarter.

As was highlighted, we have also secured government of Alberta support for Keystone XL in the form of a USD 1.1 billion equity contribution and USD 4.2 billion loan guarantee.

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