Earnings Call Transcript - TRP Q4 2022

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the TC Energy Fourth Quarter 2022 Financial Results Conference Call. Please note that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be a chance to ask questions. I would now like to turn the conference over to Gavin Wylie, Vice President, Investor Relations. Please proceed.

Gavin Wylie, Vice President, Investor Relations

Thanks very much, and good morning, everyone. I'd like to welcome you to TC Energy's 2022 fourth quarter conference call. Joining me today are 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.

Francois Poirier, President and CEO

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 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 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.

Joel Hunter, CFO

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 of 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, which 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 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.

Francois Poirier, President and CEO

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, Operator

Our first question comes from Rob Hope of Scotiabank. Please go ahead.

Rob Hope, Analyst

The first question is about the ongoing asset sale process. With the cost increase for Coastal GasLink, have you altered your perspective on which assets might be up for sale due to the higher capital requirements? Additionally, considering the current market conditions, have you noticed any changes in bidding activity from your counterparties?

Francois Poirier, President and CEO

Rob, it's Francois. I appreciate the question and I understand that there's a lot of interest in what we'll be selling and when we are in market with a number of different processes and conversations. We're at a very sensitive time in those processes. I'm sure many of those counterparties are listening to this call. 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.

Rob Hope, Analyst

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?

Bevin Wirzba, Executive Vice President

Rob, this is Bevin. Thank you for your question. Our progress has been very strong. The productivity we are seeing in the field has been not only very safe, but after Christmas, the majority of our crew, over 6,000, returned to our right-of-way. We are highly confident in the contract visibility to continue to manage through some challenging sections that remain on the project. As mentioned in our update a few weeks ago, we have a solid execution plan that we believe will allow us to achieve our target for mechanical completion by the end of 2023. We will be introducing gas to the Wilde Lake compressor station shortly, which is fully mechanically complete. This is a significant milestone since it is where we will start gas introduction for the commissioning of the project.

Operator, Operator

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

Ben Pham, Analyst

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, what was your debt to EBITDA in 2022 adjusted for the credit rating adjustments?

Joel Hunter, CFO

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, again, the assumptions to get to the 5 times in the next 12 months, are 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, we want to get to the 5 times in the next 12 months and then ultimately get down to the 4.75.

Ben Pham, Analyst

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?

Francois Poirier, President and CEO

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 seen 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 approximately $110 billion 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.

Operator, Operator

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

Theresa Chen, Analyst

Bevin, 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?

Bevin Wirzba, Executive Vice President

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 major achievement for the project, clarifying what scope remains. We took the time to carefully review all execution plans and the different risks associated with the remaining scope. We have developed mitigation plans for these risks and are confident that we have addressed both cost and schedule risks in our execution plan to achieve mechanical completion this year. However, this is a linear project with some very challenging activities, so we have made allowances. If we are unable to accomplish the planned scope this year, we do expect some activities may extend into 2024 and 2025, which includes restoration and cleanup efforts. Our estimates range from 14.5 to 15.7 billion, with the high end including costs that stretch well into 2024. Currently, our focus is on safely delivering the project this year for our customers ahead of the plan, and we are confident that we can achieve this safely.

Theresa Chen, Analyst

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.

Stanley Chapman, Senior Vice President

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

Operator, Operator

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

Linda Ezergailis, Analyst

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?

Bevin Wirzba, Executive Vice President

That's a great question, Linda. Some activities are specifically for winter construction. We have plans to execute those in February and March. However, if we aren't able to complete them, they may shift to early 2024. We have created mitigation plans to monitor our progress closely over the next month. I can provide the best update on whether we will complete these tasks mechanically by the end of the year around June or July. Additionally, some of the winter tasks can still be addressed later in the year, so not everything scheduled for winter needs to be postponed to the next season.

Linda Ezergailis, Analyst

As a follow-up regarding some of the challenges faced by your contractors, could you provide an update on the contingencies and mitigations you have in place? Have you formed any new agreements with additional contractors? Have you adjusted any of your commercial arrangements to align with the new realities that some of the other contractors are facing? Can you help us understand the current status of that work stream?

Bevin Wirzba, Executive Vice President

Yes, that’s a great question. As I mentioned earlier, the productivity we achieved last year was remarkable, but it put both us and our contractors in some difficult situations. Therefore, we have adjusted our contracting strategy in 2023 to better align with the risks moving forward and to ensure that our contractors can successfully complete their work. We have restructured our contractor base. After the Christmas break, all of our workforce returned, and we are seeing an increased ability to attract higher quality talent, which is a strong indicator that we can finish our projects by the end of this year.

Operator, Operator

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

John Mackay, Analyst

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

Joel Hunter, CFO

Yes, we are actively reviewing our portfolio and seeking ways to optimize it. We have shifted some projects from this year to next year, but we won't provide specific details on that. It's important to emphasize that while we refine our portfolio, we will not compromise the reliability or integrity of our system, nor will we fail to meet our customers' needs. We are committed to continuing this refinement, and I want to highlight our outlook for this year, which is set at $11.5 billion to $12 billion in capital spending.

John Mackay, Analyst

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?

Francois Poirier, President and CEO

Thanks, John, it's Francois. I'll start off and then hand it over to Richard. I want to express my gratitude to our workers. We still have over 800 people in the field, and they have done excellent work safely. I also want to thank the community where we are working, which has been wonderful in welcoming our workers and has shown great support for our efforts. Now, I'll pass it to Richard.

Richard Prior, Senior Vice President

Thank you, Francois. I would like to highlight a few additional points. I also want to express our gratitude to the EPA and the Kansas Department of Health and Environment for their support in our incident response efforts. Their assistance has been vital in enabling us to progress with our cleanup and reclamation activities on the ground. Our immediate priority is to operate the system safely and complete the cleanup and remediation efforts at the site. As Francois mentioned, we have successfully recovered 90% of the oil and we are making substantial progress. Last week, as part of our root cause investigation, we released the findings from the metallurgical lab analysis, which indicated that the failure stemmed from a weld flaw and bending stress, both of which were necessary for the failure to occur. Importantly, it confirmed that there were no problems with the strength or material properties of the pipe and fittings, and the system was operating well within design and permit specifications at the time of the incident. The evidence suggests this is a localized issue, but we are taking a comprehensive approach to assess risks. Our engineers are currently evaluating the entire Keystone system to identify where similar circumstances might arise. In conjunction with our root cause analysis, we are also planning our remedial actions and next steps to assure ourselves, our regulators, and our customers that we can continue to operate the pipeline safely. Meanwhile, we are operational at all delivery points but have implemented additional operational mitigation measures, including a pressure derate mandated by FINSA in the corrective action order. Commercially, we can meet all of our contracted volume commitments, but we currently cannot transport uncommitted or spot volumes. To clarify, Keystone is 94% contracted, and regulators require us to reserve 6% of our capacity for uncommitted or spot volumes that we are currently unable to move. We are working through our remedial actions, which will take time as we complete our root cause investigation and identify the reasons behind the circumstances that led to the failure. Once we finalize our findings, we will engage with FINSA to establish a path towards returning the system to baseline operations. I cannot provide a specific timeline at this moment, but we will remain transparent and continue to update our website. We will keep our customers and stakeholders informed of any new developments. Regarding your question about cost estimates, we have recorded a liability of $480 million, which represents our current estimate for the total expenses necessary to repair the site and complete the environmental remediation. We have adequate insurance coverage for these types of incidents and are in discussions with our insurers regarding this matter. It is likely that most of these estimated costs will be fully recoverable.

Operator, Operator

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

Robert Kwan, Analyst

I can return to CGL. Bevin, you mentioned the winter construction activities. Are those the only key critical path items, or are they the most significant ones? By the time we reach June and July, or specifically the Q2 reporting in August, will we have a clear understanding of timing and costs? Are there other critical path items to consider for the summer and into the fall? If so, what would those be?

Francois Poirier, President and CEO

So Robert, we're at 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 appropriately contract; and put mitigation plans where we brought in additional tie-in type crews, other kinds 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.

Robert Kwan, Analyst

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 and your discussions with them?

Joel Hunter, CFO

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.

Francois Poirier, President and CEO

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.

Praneeth Satish, Analyst

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.

Bevin Wirzba, Executive Vice President

Coastal GasLink serves as Canada's LNG corridor, and we are collaborating with our customer, LNG Canada, not only to develop their first trains but also to start evaluating Phase 2. We are excited about the potential expansion of our system, which will involve the addition of six compressor station sites. We have proven at Wilde Lake that we can complete these projects on schedule. Although the project economics are confidential, we are optimistic about moving towards a final investment decision, which would bring the total investment in the LNG corridor to returns that align more closely with our expectations. Additionally, we are supporting the Haisla-led Cedar LNG project, the largest single indigenous-led investment in Canada's history, and we are working with them as both a customer and an offtaker from Coastal GasLink. This corridor is a significant opportunity, and getting it operational aligns with our overall strategy of connecting supply with demand in the right markets.

Francois Poirier, President and CEO

I believe that regarding my earlier comments about our payout ratios being among the lowest in our peer group, we are looking at our $34 billion capital program moving forward and our divestiture program, which is already in progress. We do not foresee a situation that would require us to alter our dividend policy. We plan to continue increasing the dividend in the 3% to 5% range. I want to remind everyone that this is ultimately a decision for the Board. However, from management's perspective, we do not anticipate any need to modify our long-term dividend growth range, even with the divestiture program in mind.

Operator, Operator

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

Harry Mateer, Analyst

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?

Joel Hunter, CFO

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 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. 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?

Operator, Operator

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

Robert Catellier, Analyst

Maybe I'll start with the NGTL system. I'm curious what you're hearing from shippers about the implications of the Blueberry River First Nations agreement on their development plans and any additional expansion that you might need there?

Greg Grant, President, Canadian Gas

Sure. Thanks, Robert. This is Greg Grant, President of the Canadian Gas business. To begin, I want to congratulate the Blueberry River First Nation and the other three nations on signing the implementation agreement with the province of British Columbia. Some of us were fortunate to be present for the signing in Prince George and it was truly meaningful and emotional for the communities, not just today, but for generations to come. This agreement is relatively new, so while we understand that industry players may need time to assess it, we believe the clarity and certainty it brings will support disciplined and responsible growth in the region, marking an important step towards mutually beneficial development. We have already observed significant approval increases for licenses and permits in January. Therefore, we see this as contributing to the growth we have experienced in NGTL over the past year, with over 1 Bcf of production, and it will enable us to continue disciplined capital growth in the future. We will keep collaborating with customers as we analyze more details as they come to light. I want to emphasize that we see this as a positive development, not only for our system but also for the basin and the other BC First Nation communities.

Robert Catellier, Analyst

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?

Francois Poirier, President and CEO

I'm not sure whether to thank you for the question, but it's a good one. Firstly, deleveraging is our top priority when considering divestitures. I want to emphasize that. Additionally, the quality and stability of our cash flows are crucial for us. We aim to uphold strong cash flow quality and stability in the future. We appreciate the diversity within our portfolio and the balance among our various businesses. With around $110 billion in assets, seeking to monetize over $5 billion provides us with options to divest specific assets or interests in larger assets while maintaining a high-quality portfolio composition. That’s how we plan to approach it. We also mentioned the pro forma impacts on per share cash flow and earnings growth, and we are committed to reducing emission intensity from now until 2030.

Operator, Operator

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

Patrick Kenny, Analyst

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?

Joel Hunter, CFO

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 it, 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. Yes. We can never anticipate how the agencies might change their criteria. As you've pointed out, Pat, we experienced this a few years ago when the key metrics for achieving an A minus rating were adjusted to the extent that it became unreasonable. We prioritize our ratings and have a financial plan that we believe will help us maintain our BBB plus ratings. A critical aspect of this is our leverage, as I've mentioned earlier, which we aim to bring down to 5 times in the next 12 months and ultimately to 4.75 times. Francois has mentioned that we are not willing to take on additional business risk because our ratings are tied to the left side of the balance sheet. Therefore, we don't foresee any changes to our business risk profile or our value proposition. This is crucial for us. We believe our capital rotation program will enable us to achieve the 5 times leverage target. This is our current objective, and maintaining the BBB plus rating is extremely important to us.

Operator, Operator

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.

Gavin Wylie, Vice President, Investor Relations

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.

Operator, Operator

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