Earnings Call Transcript
TC ENERGY CORP (TRP)
Earnings Call Transcript - TRP Q1 2020
Operator, Operator
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.
David Moneta, Vice President Investor Relations
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; Francois 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, Liquid 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 she'd 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 two questions. If you have additional questions, please re-enter 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, or your detailed financial models, Hunter and I'd 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; 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.
Russ Girling, President and CEO
Thanks, David. And good afternoon, everyone. And thank you all very much for joining us today. Clearly, we're living in an unprecedented time with COVID-19, the pandemic having a significant impact on millions of people around the world. On behalf of TC Energy, I'd like to start by expressing my sincere thanks to the frontline healthcare and other essential service workers who are risking their personal safety to ensure the well-being of others. Your selfless actions during this difficult time are truly courageous. At TC Energy, as always, we too are focused on the health and safety of our employees, our contractors and the communities in which we operate. When the World 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 or critical in Canada, the United States and Mexico given the important role our infrastructure plays in delivering energy to people across the continent. And as a responsibility we take very seriously, like many others, thousands of our employees are now working remotely, while those that must be physically at our worksites 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 three core businesses; With approximately 95% of our comparable EBITDA coming from regulated or long-term contracted assets, we're 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 is $43 billion 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 five reactors of Bruce Power as part of their long-term life extension program. Over the last four months, we took significant steps to fund our 2020 capital expenditure program and 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 three 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 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 describe 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 the 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 three months ended March 31st, compared to $1 billion or $1.7 per share in 2019, which was an increase of 10% on a per share basis. Comparable EBITDA of $2.5 billion was 6% higher than 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 three 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. Program includes significant expansion of our NGTL System, capacity additions of 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, directionally we would expect some slowdown of our construction activity and capital expenditure in 2020 because of the global health crisis and the impacts the COVID-related safety protocols will have on our construction productivity. Finally in Natural Gas Pipeline last week we're pleased to announce a five-year revenue requirement settlement with our customers on the NGTL System. The settlement, which runs from January 2020 through December 2024 at the base equity return of 10.1% on 40% deemed common equity, 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 liquids marketing back of 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 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, advance 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 US$1.3 billion and incrementally EBITDA on an annual basis once the pipeline is placed into service. Keystone XL will require an additional investment of approximately US$8 billion and is expected to enter service in 2023. To advance the project, we've 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 US$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 three 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 offline 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 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 three natural gas-fired power plants in Ontario, Napanee, Halton Hills, and our interest in the Portlands Energy Centre. 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 of secured growth projects that are expected to enter service by 2023. We've 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 for long-term contracts, giving us visibility to earnings and cash flows 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 the 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 the 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 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'll 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 North American society and its economy and the demand for our services remains strong. Looking forward, we have five significant platforms for growth, Canadian, U.S. and Mexican Natural Gas Pipelines, Liquid Pipelines and Power and Storage. As we advance our $43 billion secured capital program, we expect to build on our long-term 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 footprint. Looking ahead, we will continue working in accordance with our values and responding quickly to market signals and signposts 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 detail on our first quarter results and our financial position. So Don, over to you.
Don Marchand, CFO
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 $1.9 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 from 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 $1.7 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 five 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 reflected an ROE at 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 US$766 million or CAD1.032 billion in the quarter rose by US$36 million or CAD60 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 US$198 million or CAD269 million Canadian was US$88 million or CAD123 million above first quarter 2019. The increase was primarily due to higher earnings from certain taxes including US$55 million associated with one-time 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 the first quarter due to 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 Coolidge generating stations in May 2019. For all our businesses with U.S. dollars 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 1.34 in the 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 manage the residual exposure on a rolling one year forward basis with realized gains and losses on this program reflected in comparable interest income and others. 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 in Canadian Natural Pipelines is recoverable and totals on a flow-through basis. Interest expense of $578 million for the first quarter of 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 three 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 comparable earnings was $211 million in the 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 pre-tax earnings. Excluding Canadian rate-regulated pipelines, our 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. Profitable net income attributable to non-controlling interest was $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 a capital program which reflects 100% of Coastal GasLink spending, pending close of the equity sale to 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 US$2 billion of incremental committed credit facilities. Our solid financial position is bolstered earlier this week with the completion of the disposition of our three 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 month, 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 a syndicate of banks, extending non-recourse project-level financing to fund the majority of the project’s construction costs. 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 Russ highlighted, we have also secured Government of Alberta support for Keystone XL in the form of a US$1.1 billion equity contribution and US$4.2 billion loan guarantee. Now turning to Slide 17, this graphic highlights our forecasted sources and uses of funds in 2020. Starting in the left column, long-term debt maturities of $3.7 billion, dividend and non-controlling interests distributions of approximately $3.3 billion, and 2020 capital expenditures which are now projected to be approximately $10 billion with the addition of Keystone XL, and reflecting a 100% of Coastal GasLink up to close of the equity purchase agreement, brings our total funding requirements for the year to approximately $17 billion. The second column highlights aggregate sources of approximately $17 billion, including forecast internally generated cash flow of approximately $7 billion, proceeds from sale of Ontario natural gas-fired power plants are $2.8 billion, the sale of the 65% interest in Coastal GasLink and associated project level financing which are together expected to generate approximately $2.2 billion, the Government of Alberta equity investment in Keystone XL at US$1.1 billion or CAD1.5 billion Canadian and $3.7 billion of long-term debt that was issued in April. With the completion of these finance activities, we're effectively fully funded for 2020 and along with more than $13 billion of committed credit facilities in place and well-supported commercial paper programs in both Canada and the U.S. position to assuredly navigate a prolonged period of disruption should that occur. In conjunction with the Keystone XL FID, we announced the dividend reinvestment plan will be reinstated in 2021 and 2022 to help fund our portion of the project spend profile. Further, to provide additional financial flexibility in support of our credit metrics and overall capital program, we intend to file a $1 billion equity shelf to enable an aftermarket equity issuance program, which will be utilized if and as deemed appropriate. We continue to firmly believe there is value in maintaining credit ratings that are at the top of our industry. Now turning to slide 18. In closing, I’ll offer the following comments: Our solid financial and operational results in the first quarter continue to highlight our diversified low-risk business strategy and reflect the robust performance of both our blue-chip legacy portfolio along with the contribution of equally high-quality assets from our ongoing capital program. Our overall financial position remains strong. We are well poised to fund our $43 billion secured capital program through resilience and growing internally generated cash flow and an array of attractive funding options. Our portfolio of critical energy infrastructure projects is poised to generate high-quality long-life earnings and cash flow for our shareholders, underpinned by strong fundamentals, solid counterparties, and premium service offerings, as well as germinate further attractive and executable in-corridor opportunities that are expected to support annual dividend growth of 8% to 10% in 2021 and 5% to 7% organic growth thereafter. Finally, we will continue to maintain financial strength and flexibility at all points of the economic cycle. That's the end of my prepared remarks. I'll now turn the call back over to David for the Q&A.
David Moneta, Vice President Investor Relations
Thanks, Don. Just a reminder before I turn it over to the conference coordinator for questions from the investment community. We would ask that you limit yourself to two questions in order to give everybody an opportunity. With that, I'll turn it over to the conference coordinator.
Operator, Operator
Our first question is from Robert Catelier. Please go ahead. Your line is now open.
Robert Catellier, Analyst
Thank you for your presentation and comments today. I have a couple of questions. So the first one is on the Bruce Force Majeure, I just want to confirm, it sounds like it was entirely due to COVID-19, but can you confirm that there were no issues related to supply and chain management, some difficulty getting any equipment or anything like that? And what was the response to the Force Majeure claim?
Francois Poirier, COO
Hi Robert, it's Francois. I'll take that one. So, yes, I can confirm that the Force Majeure event was related to COVID-19. And a lot of the work taking place in the reactor is under close quarters. With respect to our supply chain, we've had a very modest number of suppliers, none of them critical with some issues. And we've actually been working hard to resolve those issues with a very small number of suppliers, and we don't expect any of those issues to interrupt progress for the project.
Robert Catellier, Analyst
Okay. My second question, possibly for Russ or Don, is regarding the confirmed dividend growth outlook despite the market's significant volatility and the addition of a major growth project. I am curious about what it would take to compromise that dividend growth outlook. Specifically, do you believe the premium dividend growth rate, particularly in the range of 8% to 10% in 2021, will still hold value?
Russ Girling, President and CEO
I'll start, it's Russ. And maybe Don wants to augment. But as you know, we take a long-term view on our capital allocation policy. It's been unchanged for almost two decades here. We use 60% of our free cash flow and we reinvest it in our core businesses. And we take 40% of it and we return it to our shareholders in the form of a dividend. We've maintained that sort of payout ratio for a long period of time. And as you point out, you don't necessarily get value at all points in the cycle, but we believe over the long-term, stability and predictability is a value to people. And as we've said before, when we provided that guidance of 8% to 10% through 2021, it was underpinned by growth in earnings and cash flow per share. And it will be our plan to maintain similar payout ratios that we've had in the past going forward. And I don't see any need to change that or any reason to change that. Don?
Don Marchand, CFO
Yes. I’ll concur, Russ. Again, when we give dividend guidance, it's really with that long-term perspective in mind. And as we outlined at Investor Day, 95% of our EBITDA comes from regulated long-term contracted assets. That will increase to 98% once Keystone XL is in service. And we believe we have fairly solid visibility to, in the absence of Keystone XL, EBITDA that's largely locked in the $10 billion range at the end of this decade. So, I think it speaks to the criticality of our assets and just how important they are to the North American economy. So, we are comfortable with that guidance and with what we consider payout ratios that are eminently affordable and hopefully valuable.
Operator, Operator
Thank you. Our next question is from Robert Kwan from RBC Capital Markets. Please go ahead, your line is now open.
Robert Kwan, Analyst
Good afternoon. If I can first start with a question on the NGTL settlement. And specifically, just under the settlement agreement, can you just talk about the treatment of volume variances as well as any impact of customer bankruptcies? So first, just the treatment? Second, how the timing of any cash true-ups for and also, doesn't matter where on the system there's either volume variances or customer bankruptcies, e.g., is it core system versus something on the edges like North Montney Mainline?
Tracy Robinson, President, Canadian Natural Gas Pipelines
Robert, it’s Tracy here. So the revenue requirement agreement that we've just completed was, as Russ said earlier, an effort collaboratively across the system and really kind of an alignment of our interest. So, if you think about it, what it does is it gives our customers kind of true-ups incentives for tolls to expand prudently and to manage our tolls down, which is what they're really concerned about. And for us, it gives us the assurances of the return on equity over a period of time where we do that expansion, so it's really around making sure that we're both aligned in the growth and the health of the basin. As it comes to the more specific issues around what happens if there are bankruptcies or other, it doesn't deal with those things specifically. The tenants of the rate-regulated system remain completely intact under this agreement. So, I'll leave it there, and you can press on that a little if you need to.
Robert Kwan, Analyst
Sure. Just a quick follow-up. Does that go into a deferral account? Are you allowed to dispose of that during the agreement period, or do you have to wait for the five-year settlement to be completed before you can factor it back into new rates?
Tracy Robinson, President, Canadian Natural Gas Pipelines
No. The toll system, the toll arrangement of determining tools under this agreement is the same as it would normally be. What the incentive structure is, is that we've established with our customers what we would predict tools to be in the future. And if we can work our capital program and our expenses in a manner that falls below that projected level, then there are some benefits to us, particularly in depreciation rates. If tools come in above those baseline numbers, then the agreement can be opened, not the return on equity, but the agreement, some of the other provisions in the agreement can be revisited. There's also an incentive structure embedded in agreement, not dissimilar to what you've seen before in the NGTL agreements around costs, operating costs. And so there's no specific provisions around deferrals.
Robert Kwan, Analyst
And then if I can just finish turning to the Liquids System. Keystone and market length, are you able to give an update as to what flows and specifically, either price-sensitive or interruptible flows are on both systems today compared to where you were in the first quarter? And then is there also an update on the still analysis and the pipe that was set for evaluation?
Paul Miller, President, Liquids Pipelines
Sure, Rob. Paul here. Regarding your first question, our Keystone System excluding Hardisty was operating just below capacity. Following the spill we experienced late last year, we were planning to gradually increase throughput throughout the first quarter. So, we ran slightly under capacity, which is similar to our performance in the first quarter of 2019. On an uncontracted spot basis, we were slightly ahead compared to the first quarters of 2019 and 2020, likely about almost $0.01 more. At the southern end of our system, we noticed a decrease in flows, resulting in approximately $0.03 to $0.035 less in earnings from our market-linked revenues in the first quarter of 2020 compared to the same period in 2019. The independent failure analysis indicated that the issue stemmed from a crack caused by a weld defect in the pipe during manufacturing. We are currently developing technology to identify similar issues throughout the system, and we are conducting other maintenance and integrity work across the entire system as part of the response to the Enberg spill. Looking ahead, we anticipate that flows in the second and third quarters on the Keystone system will be in line with what we saw in the first quarter as we continue to implement various integrity programs.
Robert Kwan, Analyst
Was there, Paul, with those flat flows, is that really more a result of the work you're doing rather than what's being put through the system and demanded in the system?
Paul Miller, President, Liquids Pipelines
Yes. It's kind of a combination, Robert. I see the Keystone continues to enjoy high demand, notwithstanding some of the supply cuts we've seen, particularly in Alberta. We have a lot of features that shippers find attractive as far as our ability to get to the market quicker with a competitor toll. And we're also seeing more late volume come into the system. And with our bullet line design, we have exceptional product quality, which becomes even more important as you move on later volumes. So we continue to see good volumes through the system. But there will be, I think, extra capacity available to us with some of the supply decreases. So we're going to take advantage of perhaps some of those lower supplies and bring some of that maintenance and integrity work for it. So going to be a bit of a combination.
Operator, Operator
Thank you. Our next question is from Jeremy Tonet with JP Morgan. Please go ahead. Your line is now open.
Jeremy Tonet, Analyst
Just wanted to start off with, I think counterparty concern is a big issue in the marketplace right there. And you guys seem to be in a pretty good position. I think you talked about IG being kind of a material percentage of your counterparties there, but I was wondering if you could share a bit more color as far as percentage-wise or any other details as far as what your exposure to investment-grade versus non-investment-grade is right now. And when you're talking to your producer customers in different basins, do you sense any kind of stress there or expectations just bankruptcy in general, how that might impact you if that were to come to fruition?
Don Marchand, CFO
Jeremy, it's Don here. I'll start off and then pass it on to my colleagues for more insights in their specific areas. Our customer base is primarily investment grade, and we see the value of our service reflected in several ways. One indicator is the high capacity utilization we continue to observe. For instance, in the NGTL deal, we have supply push customers who are primarily willing to commit to a five-year agreement with us to support the system. In contrast, we have some strain with counterparties that are less investment grade, particularly on the supply push side in the WCSB and in Appalachia. However, our revenue cycles thus far have not shown any irregularities in terms of payments. Again, system utilization remains very high, and these areas are quite advantageous. Now, I'll hand it over to Stan and Tracy to provide additional insights on their respective customer bases.
Stan Chapman, President, U.S. Natural Gas Pipelines
Jeremy, this is Stan. A thoughtful question. And while we have seen several producer downgrades over the past couple of weeks. Overall, our view of how we're handling this producer exposure really hasn't changed. We're still holding about $1 billion of collateral, predominantly in the form of letters of credit. We're still seeing high load factors with more than half of our large producers flowing at load factors in excess of 90%. And tells us that producers are continuing to get proper value for the capacity that they hold on our system, specifically given the fact that the TECO pool the Columbia gas trading point trades at a premium to Tetco M2 or Dominion South point, many of our producers have attractive hedges in place for 2020. And the recent price run-up we've seen on the NYMEX curve for 2021, in particular, where prices are up almost $0.40 are not only going to allow for higher cash flow in realized prices, but also better hedged positions for 2021 and more good news. The capital markets seem to be opening up to the producers. And we're seeing some transactions being completed. And some producers are using these proceeds to buy back debt at discounted values or to purchase outstanding equity shares. And that, in turn, is driving equity valuations up pretty much across the board over the past 30 days or so. So our producer exposure, in our view, continues to be manageable. And it's good to hear some positive news on that front. With respect to our overall customer mix, at least within the U.S. gas business, you could generically think of us as having about one-third of our portfolio being covered by end users, one-third producers, and then a third marketers at least for the top 40 of our customers that generate about 70% or 75% of our revenue.
Jeremy Tonet, Analyst
Jeremy, I add a little bit from that on the WCS. Stan, are we done?
Tracy Robinson, President, Canadian Natural Gas Pipelines
Okay. I'll add a little bit on the WCSB. Much of the same about two-thirds of our customers are our revenues rather come from investment-grade customers. And nearly 90% is credit worthy. And for those others that are out there, we have collateral pursuant to the terms of both the tariff and the contracts. So without a doubt though, we're watching this very closely. And we do know that there are some of our customers out there who are struggling with some near-term issues on equity valuations and liquidity. The federal government, of course, in Canada, has announced a program that we think offers a prospect of helping with some of that in the near-term and we believe and hope that of course this is a near-term issue because it stands at the fundamentals of gas right now are largely unchanged. If you look at the price curve as you go out, this is not a bad place to be right now. So we are positive.
Paul Miller, President, Liquids Pipelines
And Jeremy, it's Paul here. Maybe I'll just give you better visibility on the liquids side on the Keystone shippers. We have a small number of large creditworthy investment-grade counterparties. The vast majority are integrated well they have engagements in place to move productions to their associated refineries. I would say that probably weighted average in that BBB+ range. So, generally, well capitalized and diversified super groups.
Operator, Operator
Thank you. Our next question is from Linda Ezergailis with TD Securities. Please go ahead. Your line is now open.
Linda Ezergailis, Analyst
I just want to get a better understanding of how we might think of the path forward for Keystone XL to the extent that you're running some scenarios potentially. I'm just wondering at what point the project's progress might be bottlenecked if the Permit 12 issue is not resolved and starts to become on the critical path. And maybe you can walk us through some understanding of where on the U.S. route, what percentage potentially crosses wetlands and waterways and what work could be done in the U.S. in advance of resolving that permit specifically?
Bevin Wirzba, Senior Vice President, Liquid Pipelines
Linda, this is Bevin. I'll address your question. Yes, the District Court and Federal District Court in Montana vacated our nationwide Permit 12 on April 15. On April 29, we filed a motion to stay that order. We are exploring various options regarding both the regulatory and legal aspects. As you're likely aware, nationwide Permit 12 is essential for many industries in the U.S. that undertake utility-related projects crossing waterways. We are working on our strategies and adapting them as needed. We have always been prepared for the need to be flexible in our construction management and planning, allowing for options throughout our construction timelines. Currently, we are making progress on the border crossing, which is ahead of schedule, moving pipes between yards, continuing camp construction, and examining different pump stations and pipe spreads in case we are completely hindered by this ruling. Regarding your question about the right-of-way limitations, we can pursue individual permits and advance construction in alternative ways or avoid certain routes. These options involve incremental adjustments to the project, which we are evaluating against alternatives. Our current plan is to proceed with the identified spreads in the U.S., and we believe we can complete a substantial amount of work in the U.S. in 2020, even if it differs from our original scope. Additionally, I want to note that we are making significant progress in Canada, and that work will not be affected by the Nationwide Permit 12.
Linda Ezergailis, Analyst
That's very helpful context. Thank you. I have a broader question. I understand it's still early, but I'm curious if the Board and management have considered how the pandemic and industry challenges might influence TC Energy to rethink its long-term strategic plan and focus. This could involve potential changes in consumer behavior or preferences, shifts in government policies or regulations in the markets you operate, and specific government support for certain sectors. Additionally, while we know the long-term effects will be significant, I'm wondering if this situation might necessitate a permanent change in your approach to strategic priorities.
Russ Girling, President and CEO
It may be too early to determine if any adjustments are needed in our long-term plan. What's clear from recent weeks is the critical nature of our operations. Every segment of our system is functioning at a high capacity and our construction programs across North America are considered essential. While discussions will likely persist about the future energy sources required, there’s no doubt that the demand for reliable and affordable energy will remain strong. Owning the existing infrastructure will provide a significant advantage in capturing this growth. At this moment, we don’t see any shifts in our strategy; rather, it serves to reinforce our focus on the growing demand for energy and our efforts to meet that demand efficiently. We're concentrating on our existing footprint, which we believe will prove effective. In the future, we expect our plans to become even more feasible. While we will need to adapt some protocols on our construction sites in the coming weeks, we have implemented the necessary measures so far and have faced no resistance regarding ongoing construction. Additionally, we're hearing from various government levels that construction-ready projects are essential for job creation as we recover from this crisis. The subsequent economic stimuli, such as new purchases of materials and equipment, will significantly benefit the economy. Currently, we don't anticipate any opposition to employing the tens of thousands of workers we plan to have on-site. Overall, the direction of our strategy appears to confirm our existing approach rather than indicate a change.
Operator, Operator
Thank you. Our next question is from Andrew Kuske with Credit Suisse. Please go ahead. Your line is now open.
Andrew Kuske, Analyst
We've obviously seen a number of severe dislocation cycles before. This one is obviously unique in a number of respects. And in those dislocation cycles, we've seen the debt raters move the goal post at various times. So you've had a situation of growing the business, deleveraging the company. But I guess the questions are, where do you really want to land it, like what metrics are you focused on? And what credit ratings are you focused on?
Don Marchand, CFO
Andrew, it's Don here. There has been no change in our perspective. We are still aiming for a long-term debt-to-EBITDA ratio in the high 4s and an FFO to debt ratio around 15%. We believe these targets are suitable given our business risk and our corporate structure, which is straightforward. This balance between equity and debt aligns with our current ratings. Recently, leading up to the Keystone XL announcement, we conducted a thorough review of our business and plans with the rating agencies. The outcomes have been communicated. Aside from any changes in expectations we've seen in the past, or retroactive decisions and market assessments, we are quite satisfied with our capital structure and coverage. We expect that the recent comments from the rating agencies indicate that our current position should place us at the high end of our industry in terms of credit ratings, which is our goal.
Andrew Kuske, Analyst
And then maybe just one follow-up, and it's in the Geeky detail of the notes of the financials, and it's really just on the derivative marks, obviously, there's a lot of volatility in Q1. And the marks that you had, they changed quite a bit. But maybe just on the interest rate derivatives, what portion of the interest rate derivatives were for existing versus planned issuance over the course of the year?
Don Marchand, CFO
Yes, the anomaly in Q1 is early this year, once we executed the Coastal GasLink joint venture agreement, we entered into interest rate hedges on the construction finance and project financing for that project, which will get rolled into the final financing and amortized over the life of those instruments. So that is the big change in this quarter. Those positions were entered into in very early 2020.
Operator, Operator
Thank you. Our next question is from Robert Hope from Scotiabank. Please go ahead. Your line is now open.
Robert Hope, Analyst
Just one question for me. Just want to get a sense of how you're thinking about allocation of capital. You look relatively fully funded for 2020, but you did add some liquidity. And just wanted to think about your willingness to add on new projects or M&A and in an environment where you significantly added to your backlog with Keystone XL, which does put some upward pressure on your metrics over the next two years?
Russ Girling, President and CEO
Robert, you’re right. We have a lot going on and a solid plan to keep growing cash flow, earnings, and dividends in the coming years. That said, we have maintained the best credit rating in the industry to ensure financial flexibility and access to markets for potential opportunities that could enhance shareholder value. We aren't actively seeking those opportunities right now, but if the right situation arises that would benefit shareholders, we would consider it. For now, we are comfortable with our plans and have plenty to focus on. Our business units highlight that all our operations are supported by strong fundamentals, and our growth projects are still needed in the market. We have confirmed with our customers that they want us to continue building, which has been a clear yes from them, supported by reliable counterparties. While construction may progress a bit slower than expected, due to rate regulations and long-term contracts, we still anticipate solid cash flow and earnings. We have a strong plan, and our current focus is on execution. However, if suitable opportunities come up, we will incorporate them into our portfolio. I expect smaller projects, usually in the $500 million to $1 billion range, to continue coming our way, and we aim to add these to our portfolio over the next few years. Concerning large-scale new greenfield projects, I don't foresee many of those currently, as we don't have many in our existing portfolio. We are looking at niche-oriented projects like the pump storage initiative in Ontario, but those are several years out. Don, do you want to add anything?
Don Marchand, CFO
Yes. I have a few additional comments. Even for any new opportunities, it typically takes a few years to complete the permitting process before significant capital is invested. Regarding our credit metrics, by moving forward with Keystone XL and the financing mix we've mentioned, which is primarily subordinated, we don't anticipate significant upward pressure on our credit metrics. Our debt-to-EBITDA ratio will temporarily rise to the low fives during what we expect to be a shortened construction period, and then it should return to the high fours once Keystone XL is finished.
Operator, Operator
Thank you. Our next question is from Jeremy Tonet with JPMorgan. Please go ahead. Your line is now open.
Jeremy Tonet, Analyst
My questions have been addressed.
Operator, Operator
We have no further questions registered at this time.
Russ Girling, President and CEO
Okay, great. Thank you, and thanks to all of you for participating today. We obviously very much appreciate your interest in TC Energy. We look forward to talking to you again soon. In the meantime, obviously, we wish you and your families good health.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.