Earnings Call Transcript
TC ENERGY CORP (TRP)
Earnings Call Transcript - TRP Q2 2023
Operator, Operator
Thank you for standing by. This is the conference operator. Welcome to the TC Energy Second Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. And the conference is being recorded. After the presentation there will be an opportunity to ask questions.
Gavin Wylie, Vice President, Investor Relations
Yes, thanks very much and good morning everyone. I'd like to welcome you to TC Energy's 2023 second quarter conference call. Joining me are Francois Poirier, President and Chief Executive Officer; Joel Hunter, Executive Vice President and Chief Financial Officer along with other members of our executive leadership team. Francois will begin with comments around the announcements we’ve made this week, Bevin will provide additional details around the spin-off of our liquids pipelines business and Joel with our financial and operational results. A copy of the slide presentation that will accompany the remarks and additional presentation materials on the announced spin-off are available on our website under the Investors section. Following the remarks, we'll take questions from the investment community. I'd like to 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 Exchange Commission. Finally, during the presentation, we'll refer to certain non-GAAP measures that may not be comparable to similar measures presented by other entities. These measures are used to provide additional information on TC Energy's operating performance, liquidity and its ability to generate funds to finance its operations. A reconciliation of various GAAP and non-GAAP measures is contained in the appendix of the presentation. With that, I'll now turn it over to Francois.
Francois Poirier, President and CEO
Thanks, Gavin, and good morning everyone. Well, it's been a busy week, but an extremely transformative one that sets out our company's path for the next decade. TC Energy's long-term strategy is focused on unlocking disciplined growth, having financial strength, and operating safely and efficiently. The announcements we've made this week are all aligned to that vision. As we've said all along, energy fundamentals drive our strategy and our decisions. What we're seeing is that all forms of energy will be required to meet demand. We are very fortunate to have incumbency across a wide range of energy infrastructure platforms. We're an incumbent in transporting natural gas from the Western Canadian basin. We're an incumbent transporting natural gas from the Appalachian basin. We’re an incumbent with the shortest transit time for crude oil to Gulf Coast Refineries. We're building incumbency in importing natural gas into Mexico. And of course, we have incumbency in nuclear generation in Ontario. That incumbency brings growth opportunities and superior returns and we need to protect it by continually investing capital and pursuing that growth. Simply put, the number of attractive opportunities we are seeing is accelerating. In fact, it's exceeded our financial and human capacity to pursue them as a single company. With our renewed commitment to an annual limit on net capital spend to $6 billion to $7 billion per year, this left us with a simple conclusion. Separating into two businesses with separate minds and management, each with a strong balance sheet and their own currency will allow us to pursue more growth for the benefit of our shareholders than we could today. So why now? Global events have reminded us of the need to balance reliability, affordability and sustainability and that all forms of energy will be required. Long-term fundamentals have shifted and that has created significant opportunities for our liquids business, opportunities that we've had to turn down and that value should be captured. This spin-off allows Bevin and his team the opportunity to fully leverage the growth opportunities that we are seeing and do so in a tax-efficient manner. The second value proposition comes from greater efficiencies we can capture and that are catalyzed by separation. As a premier North American energy company, TC Energy will leverage the complementary synergies across our natural gas, power, and energy solutions businesses. Now earlier this week, we announced a first step with the sale of a 40% interest in our Columbia pipelines to GIP. This sets up the new TC Energy for success. Both businesses have enormous growth opportunities and the beauty of that is that we see ourselves migrating to a more regulated business model. Our operational results continue to demonstrate that decarbonization and increasing reliance on renewables requires greater firming and natural gas will play a key role for decades to come. We see this in Europe, which has been a driver behind the growth in LNG exports. Our power and energy solutions business is expected to derive more than 75% of its 2030 comparable EBITDA from nuclear and firming resources likely to be underpinned by rate regulation. We're also advancing the development of CCS projects in Canada and the U.S. with projects like the Alberta carbon grid and project Tundra in North Dakota. Beyond this, we see extended capabilities to leverage the complementary nature of our gas assets in areas like hydrogen. Critical to the adoption of any new technology will be expertise and relationships with regulators, stakeholders and customers. This is a deep skill set and a competitive advantage for us. TC Energy will continue to optimize our capital allocation processes to leverage the mutual benefits across our businesses. Our value proposition and low-risk preferences are unchanged and we are increasingly utility-weighted in our business. At the close of the spin-off transaction, we expect that 96% of our adjusted EBITDA will be either rate regulated or from long-term contracts. Post-transaction, our 2022 comparable EBITDA is expected to grow at a 7% compound annual growth rate through 2026. With the transaction with GIP, and then with the spin-off, we believe that only an incremental $3 billion of additional divestitures over the course of the next 18-months will be required for us to get below 4.75 times debt to EBITDA by the end of 2024. Separately, our liquids business has an unrivaled commercial construct with the longest tenured contracts among its peer group, the lowest cost path to market with the fastest transit times. It delivers the highest quality crude for our customers to the refining market. This is what drives the opportunity to create more value as separate entities. Now let's come back to our 2023 priorities that we stated at the onset of the year. These announcements this week are in direct service of those commitments and we've made significant progress. First, we are safely delivering on our major projects such as Coastal GasLink and Southeast Gateway on the planned cost and schedule. Second, we’ve significantly accelerated our deleveraging goal with the announced sale of a 40% equity interest in the Columbia pipeline systems for total cash proceeds of $5.2 billion, which will go directly to reducing our debt to the tune of 0.4 times debt to EBITDA. Third, we continue to safely and reliably operate our assets and provide essential services across North America. We also realized that the spin-off of our liquids businesses creates an opportunity to simplify our gas organization. That’s the second value proposition of the spin and allows us to operate our systems in an integrated natural gas network across North America. We've promoted Stan Chapman to Executive Vice President and Chief Operating Officer of our natural gas pipelines to integrate our geographically dispersed natural gas businesses into a single unified structure. This is something we have been working on for many months with our consultants and we have a credible and detailed plan that we are already implementing. As our spin-off transaction proceeds, we will remain focused on safety, operational excellence and business continuity for all of our valued customers and stakeholders. We are firmly moving towards our desired future state. We'll have two separate entities with strong management to pursue incremental growth and both companies will be free to pursue their own distinct opportunity sets. One will be an increasingly utility-weighted growth vehicle comprising natural gas, nuclear, hydro storage, and new technologies. It will have a stable balance sheet with above-average per share growth that supports a stable dividend growth rate of 3% to 5% at attractive and conservative payout ratios. The other, our liquids pipeline company led by Bevin, will be a highly contracted business with stable and robust cash flows supported by long-term customers. To me, this is how we create incremental value for our shareholders. Now with that, I'll turn it over to Bevin to speak a bit more about the liquids pipeline company.
Bevin Wirzba, Executive Vice President, Liquids Pipelines
Yes. Thanks, Francois, and good morning, everyone. This is a monumental moment for the entire TC Energy organization and the new liquids pipeline company. The liquids division for our liquids business has always been to be the premier liquids backbone for North America, sustainably fueling quality of life. Yesterday's announcement to spin off the liquids business will allow us to continue to deliver on that vision. As a standalone entity, we will have greater flexibility to use our significant free cash flow to add shareholder value. In its new form, the liquids pipeline company will continue to offer one of North America's most competitive liquids platforms, connecting some of the largest and most resilient supply-demand and export markets. Our focus to deliver on our value proposition is on safety and operational excellence as we continue to deliver on the premium value proposition that has served our business well historically. Across three pipeline systems, we operate 4,900 kilometers of pipe or over 3,000 miles of crude oil infrastructure. Since its inception, the Keystone system has delivered over 3.9 billion barrels and we transport 16% of crude oil exports out of the Western Canadian Sedimentary Basin. By delivering stable, responsible WCSB supply to the most resilient refining markets in PADDs 2 and 3, we see a long runway of opportunities supported by long-term energy market fundamentals. We also remain highly committed to ESG, including safety and reducing our emissions by decarbonizing our power consumption. We have stable, robust cash flows supported by 96% investment-grade counterparties. Our comparable EBITDA is approximately 88% contracted with a weighted average contract length of approximately eight years. We also have the shortest transit times and maintain industry-leading product quality for our customers. And recall that over 90% of the product we transport from the oil sands is committed to net zero by 2050. With minimal volumetric and commodity price risk, we have an unrivaled low-risk business model that differentiates us from our peers. Initially, our team's focus will be on accelerating deleveraging to drive additional value for our shareholders while identifying low-risk, in-quarter growth projects that enhance and extend the system's reach. We will focus on optimizing latent capacity. A good example of this is our successful open season on MarketLink, which we just closed in July. Based on that success, we're going to run another one here shortly. We are also looking for strategic, accretive in-quarter or growth opportunities that we can flexibly access in this new structure without the need to compete with internal businesses for capital dollars. Our 2022 comparable EBITDA of $1.4 billion is expected to grow at a 2% to 3% compounded annual growth rate through 2026. And don't forget as a business, we have very minimal sustaining capital requirements. That means we have significant free cash flow to pursue these opportunities and support an attractive dividend for shareholders. With our strong commercial underpinning and initial capital structure, the liquids pipeline company is expected to be investment grade. Following the spin-off, we'll establish approximately $8 billion of senior debt and junior subordinated notes. You can think about the split as being approximately $6 billion of long-term debt and approximately $2 billion of junior subordinated notes, which received 50% equity credit. Proceeds will be used to repay TC Energy debt. This works out to be five times debt to EBITDA, and we plan to prioritize deleveraging to the tune of a quarter to half turn within three years. Our annual dividend growth is expected to be commensurate with our comparable EBITDA growth outlook at 2% to 3%, while adhering to conservative dividend payout ratios. With the significant cash flow this business generates, we will continuously evaluate deleveraging against the benefits of share buybacks in terms of what will serve our shareholders. I'm honored to have been endorsed by the TC Energy Board of Directors to lead the new Liquids Pipeline Company as the intended President and CEO. You're familiar with my partner and our intended Chief Operating Officer, Richard Prior, from our previous analyst calls. The liquids business already has a strong operational team in place. We have the capabilities, infrastructure, and resources to successfully stand as an independent company and the spin-off will enable us to maximize the full value and potential of our talented team and our high-quality assets. I'm very excited that a Board Chair has been selected and we will be announcing our broader management team and Board of Directors in the coming months. I want to highlight some of our operational successes that the liquids business has had in the second quarter of 2023. Comparable EBITDA of $363 million was up 6% versus the same time last year. The strong demand for U.S. Gulf Coast capacity resulted in an increase in market-related throughput by over 150,000 barrels per day. Through the first half of the year, the Keystone System's operational reliability was approximately 95%. I'll wrap things up by saying this is already a differentiated business. We have significant free cash flow and a long runway of future opportunities. As this distinct entity with the ability to focus on operational excellence and disciplined growth, I believe we can further unlock shareholder value. Now, I'll turn it over to Joel.
Joel Hunter, Executive Vice President and CFO
Thanks, Bevin. During the second quarter, we continued to deliver strong performance with comparable EBITDA up 4% year-over-year and 10% on a six-month basis. Our base business remains robust as Bevin mentioned; the Liquids Pipeline business performed exceptionally well during the quarter, resulting in 6% comparable EBITDA growth year-over-year. We also saw the highest market-linked throughput since early 2020. In Power and Energy Solutions, we continue to see solid performance. Bruce Power achieved 94% availability and our cogeneration fleet achieved 93% availability. We are pleased to see the Ontario Government announced that the Minister of Energy will begin the final evaluation of the Ontario pump storage project. We look forward to receiving the final decision later this year. In our Canadian Natural Gas Pipelines business, our NGTL system continued to see strong receipts. The system achieved its high-single day record of 14.6 Bcf on April 21st. Also on April 21st, U.S. Natural Gas achieved record LNG feed gas deliveries of 3.8 Bcf, which represents over 30% of current U.S. LNG exports. We're making steady progress on our projects in Mexico. The lateral section of our Villa de Reyes pipeline has achieved mechanical completion and is expected to be commercially in service in the third quarter of 2023. In alignment with our 2023 priorities, we continue to safely execute major projects like Coastal GasLink and Southeast Gateway. We've made tremendous progress on Coastal GasLink this year. The project is now approximately 91% complete and nearly 98% of all pipe has been welded. We continue to expect mechanical completion by year-end and our $14.5 billion estimate remains unchanged. Southeast Gateway is also progressing according to planned milestones. We have begun onshore installation and facilities construction in Veracruz and Tabasco. We expect to start offshore pipe installation by year-end. Following the partial sale of Columbia Gas and Columbia Gulf, we continue to expect 2023 comparable EBITDA to be 5% to 7% higher than 2022. Comparable earnings per common share is now expected to be generally consistent with 2022, primarily due to higher expected net income attributable to non-controlling interest, partially offset by a lower interest expense. So far this year, we have placed approximately $2.1 billion of capacity capital projects into service, progressing towards the $6 million of projects we expect to place into service this year. This includes North Baja Xpress, which entered service in June $1.5 million in Canadian Natural Gas projects. Now, turning to our funding program. A key priority continues to be capital discipline. Limiting our annual net capital spending to $6 billion to $7 billion beyond 2024 allows us to grow our business at a commensurate rate with our annual dividend growth outlook while also providing optionality to further reduce leverage or buy back shares. I'll note that there has been minimal credit spread impact following credit rating outlook changes back in February and more recently following this week's credit actions where we saw less than a 5 basis point impact. We have demonstrated competitive access to the capital markets this year in both Canada and the U.S., as evidenced by $4 billion that was issued back in March. Now while a lot has been announced this week, I want to provide clarity on our engagement with the credit rating agencies. We engaged all four to present our plan in totality, which included the Columbia asset monetization and liquid spin-off. We remain confident in our plan that we can achieve our deleveraging goals and remain committed to our 4.75 times target. To wrap up this slide, as we previously committed, subsequent to the dividends declared on April 27th, 2023, that are being paid on July 31st, 2023, our discounted DRIP has been discontinued. Now, I'm going to take some time here to walk you through how we will achieve our 4.75 times debt to EBITDA target and stay there. $5.2 billion of cash proceeds from the 40% monetization of Columbia Gas and Columbia Gulf are expected to result in an approximate 0.45 times reduction in our debt to EBITDA metric. Over the next 18 months, we will continue to evaluate capital rotation currently in the range of $3 billion. Given our expected timeline for the liquid spin-off in 2024, we anticipate eight to 10 months of liquids comparable EBITDA contribution. As Bevin said, the liquids company will issue approximately $8 billion of long-term debt and junior subordinated notes. The proceeds of which will be used to repay debt in TC Energy. Our deleveraging is further supported by assets that will be placed into service between now and 2026 further bolstering our comparable EBITDA. For example, our Southeast Gateway project, which has a targeted in-service date of mid-2025, is expected to contribute approximately $800 million in incremental comparable EBITDA. We believe we have a credible plan and a clear path to achieve our deleveraging goals. TC Energy's Board of Directors has declared a third-quarter common dividend of $0.93 per common share, equivalent to $3.72 per share on an annualized basis. I'm excited as we look to the future and I'm confident that we'll continue to deliver a sustainable dividend growth rate of 3% to 5%. This will remain core to the enduring value proposition of TC Energy and Liquids Company to further build upon 23 consecutive years of common share dividend increases. Thank you for your time and I'll pass the call back to Francois.
Francois Poirier, President and CEO
Thanks, Joel. The series of announcements that you saw this week are a complementary effort. Taken together, spinning off our liquids business, integrating our natural gas businesses under single leadership and creating a strategic partnership with GIP all directly serve our 2023 priorities and our long-term strategy to create value and prosecute growth. With that, I'll turn it over to the operator for questions.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Our first question comes from Rob Hope of Scotiabank. Please go ahead.
Rob Hope, Analyst
Good morning, everyone. Just wanted to get a sense of how you're thinking about operational capacity, as well as demand power within the organization. What you announced yesterday realigning the Natural Gas business units, as well as spinning off the liquids business units are quite a large endeavor. How do you ensure that or how do you think about the ability for the organization to engage in all of these different items? And why not push off the spin-off a couple of quarters just to better allow you to focus on the construction?
Francois Poirier, President and CEO
Thanks for the question, Rob. It's Francois; I'll start, and then I'll pass it over to Stan for some commentary on our execution. First of all, literally hundreds of people have been working on this for six-plus months. We have a separation management office that has been stood up. We've been working with Bain on this for nearly a year. I’ll point to our performance in terms of operating our assets right now. The availability of our overall system is actually up; our performance around project execution has been strong. We've brought in our projects; we brought in $5.5 billion of projects last year, $2.1 billion into service so far this year, and we are on track to bring in $6 billion for the full year. Coastal GasLink is on plan. We are performing very well. I'm very confident in our team's ability to absorb and manage all these work streams because we have been doing so in a very planned manner and organizationally. Stan, over to you.
Stanley Chapman, Executive Vice President and COO
Very good question, Rob, and it's something that is on the forefront of our mind. I would just say that we were very careful to make sure that we're setting up a dedicated team to help us capture and process these synergies and keeping that separate from the rest of the workforce that's accomplishing our day-to-day tasks. So there's a bit of a separation of duties between the two, so there's not a lot of overlap.
Rob Hope, Analyst
Appreciate that. And then just a follow-up on Coastal GasLink. We're well into the construction season. When you take a look at the downside scenarios, I would imagine you have a pretty good understanding of productivity, and whether it's been okay. What are the kind of variables or scenarios where you can miss the end of your mechanical completion and the existing cost estimate?
Bevin Wirzba, Executive Vice President, Liquids Pipelines
Thank you, Rob. This is Bevin. I want to begin by highlighting our exceptional safety record during the first seven months of this year. Focusing on safety has played a crucial role in achieving impressive productivity throughout the first half of the year and during the summer construction season. We have tackled our share of complex and risky project elements, and I am proud of the team's performance in delivering on all those challenges. Alongside executing our plan, we have also developed contingency plans to address potential risks moving forward. While the remaining tasks do present execution risks, we are managing these challenges on a week-by-week basis, making it a daily effort. Regarding your question about our plans for completing the project, we aim to finish successfully. There are certain single-point risks and several critical paths vying for attention, but none of these significantly affect our ability to meet our cost or schedule targets. Therefore, we are confident in our plans and believe we are well-equipped to deliver the projects successfully and conclude strongly by year-end. I hope this answers your question.
Rob Hope, Analyst
That’s helpful. Thank you.
Patrick Kenny, Analyst
Thank you. Good morning. Just on the business mix pro forma the spin-off looking into 2026 with Southeast Gateway online. Mexico contributions will be well through your previous 10% max threshold. So I know you're looking at rotating another $3 billion of capital, but if you could just comment on how you're thinking about managing your 10% comfort level there for Mexico with the spin-off? Thanks.
Francois Poirier, President and CEO
Hi Patrick, it's Francois. We're really pleased with the execution of Southeast Gateway thus far. At the outset when we announced the sanctioning of the project, we had 70% of the project costs fixed. The risk in terms of cost of schedule has been front-end loaded, and it's been around acquiring land and getting the permits. We have met all of our marks in that regard over the last year, which is why we’re now under construction at the compressor stations on land. We will have the requisite pipe delivered in time for a late-year start to the offshore pipeline construction. What's important for us to deliver value to our shareholders is to meet cost and schedule on that project, and we believe that we will derive maximum value for that investment after we achieve in service. In terms of managing our exposure in Mexico, we remain committed to ensuring that it remains an appropriate portion of our business mix. There are other tools to manage our capital exposure in Mexico to help us stay below that 10%, other than what the accounting says the portion of EBITDA on a consolidated basis is, and I'll ask Joel to maybe talk about that a little bit.
Joel Hunter, Executive Vice President and CFO
Sure. Thanks, Francois. Some of the tools that we're using right now, Pat, include in-country financing. For example, we issued $1.6 billion last year and did another $2.3 billion here in January. Think of that as a total of $4 billion of in-country financing, which basically takes care of most of the funding for the Southeast Gateway project. We also have other tools such as political risk insurance. We've actually put some in place in Mexico as well. When we look at this in totality, along with our partnership with the CFE at 15% along with these tools, including project financing and PRI, we have a way here to really manage exposure to what we've targeted before, which is around that 10% area of total exposure once Southeast Gateway is in service in 2025.
Patrick Kenny, Analyst
Okay, thanks for that color. And then maybe just on the $8 billion of debt to be issued at the New Liquids company. How should we be thinking about tenure on the new debt to be issued relative to the weighted average contract life of eight years? Is there anything you might be contemplating or looking to implement from a credit quality or backstopping perspective just to help solidify a strong investment-grade credit rating for the liquids company?
Joel Hunter, Executive Vice President and CFO
So, Pat, one of the things we did that’s fundamental to our decision around the spin-off of the liquids business was engaging with the rating advisory services with the credit rating agencies. To ensure that with the spin-off, this entity would have investment-grade ratings. It's indicative at this point in time. We did present the finance plan to them that contemplated, as we talked about here, approximately $8 billion of total funding, as Bevin outlined, which includes $6 billion of long-term debt and $2 billion of subordinated debt that would achieve 50% equity credit. That was presented, and we do have indicative ratings that would be investment grade. We won't have final ratings until we actually have an entity that is up and running once we have approval from our shareholders here, kind of, mid-next year. When we look at tenure, it will be across the curve. The strong business risk profile of liquids will allow us to issue debt from right at the front end of the curve, say three years, right out to 60 years, when you think of the form of subordinate capital when they have a 69 call 10 type structure. We'll be able to issue right across the curve based on the business risk profile being strong and having indicative ratings that are investment grade.
Patrick Kenny, Analyst
And Bevin, if I could ask you to comment on the competitive position of Keystone and our ability to renew contracts and such.
Bevin Wirzba, Executive Vice President, Liquids Pipelines
Yes, certainly. As Joel mentioned, we have a rough average remaining contract life of just over eight years. The terms of these contracts are quite varied in relation to our systems, which are insulated from volume or commodity price risk. Considering our system's competitiveness in serving the supply base and reaching the Gulf Coast and Midwest in terms of pricing and delivery time, we are confident that barrels will continue to flow through our system. Looking ahead at the re-contracting landscape in seven or eight years, we believe we can stay highly competitive against the demand markets served by both TMX and the mainline, as we will still be able to deliver to the strongest market in a quicker, more competitive manner and under more advantageous terms.
Patrick Kenny, Analyst
And Bevin, I know you're in the middle of another open season for Marketlink, but just curious if there's an opportunity to integrate more of a blend and extend service offering all the way down from Alberta through the Gulf Coast just to mitigate some of that longer-term re-contracting risk?
Bevin Wirzba, Executive Vice President, Liquids Pipelines
Yes, right now we're focused on we have latent capacity on our MarketLink system and we're very happy with the demand that we've seen for 2024; we see incremental demand due to the strategic reserves needing to be refilled. That is going to be a nice tailwind for us. When you look at the blend and extend, our long-haul barrels are sold out right now. That is a very competitive offering and the premier delivery vehicle for those barrels. As we move closer to re-contracting, that is five to seven years away. There is an opportunity to blend and extend and we think we can do so very competitively.
Patrick Kenny, Analyst
Thanks, guys. I’ll leave it there.
Operator, Operator
Our next question comes from Jeremy Tonet of JPMorgan. Please go ahead.
Jeremy Tonet, Analyst
Hi, good morning.
Francois Poirier, President and CEO
Good morning.
Jeremy Tonet, Analyst
Just wanted to start with a high-level question if I could here. Just with regards to the portfolio of growth CapEx at TC Energy, just wondering if you could talk a bit or for the company as a whole rather how the mix between natural gas CapEx versus energy transition opportunities? How you see that mix shifting today versus over time at this point. I want to get a current check-in, I guess, what type of opportunities you're seeing in over what timeframe that could shift?
Francois Poirier, President and CEO
Jeremy, it's Francois. I'll take that one. Right now, our capital is almost fully committed for the next three or four years. Our $34 billion program right now, the weighting of that is about 80:20 between natural gas and power and energy solutions. The power and energy solutions portion is predominantly made up of the major component replacement program at Bruce Power. As we look to sanction capital projects beyond then and remain within our $6 billion per year of net capital, I think you're going to see a gradual migration of that weighting towards more nuclear and more pumped hydro, but also balance quite well with more attractive opportunities to extend our natural gas to connect more LNG facilities for export. We will be bringing our MCR Unit 6 back into service later this year on or ahead of schedule and on budget is our expectation. We're about half a year into the MCR on Unit 3, and we will be sanctioning the MCR on Unit 4 by roughly January or February of next year. You're going to see more capital being allocated to Bruce as per our refurbishment schedule over the course of the next decade. As we mentioned at our sustainability forum, we have some price increases built into the schedule in our contract with the ISO, so you're going to see the EBIT contribution coming from that business growing significantly over the balance of the decade. The ISO has been directed by the Ministry of Ontario to make its final determination on our OPS project. That is a zero-emitting pumped hydro project. It may be the largest emissions reduction project in the federal government's portfolio, given that we are citing that project on federal land. But this is going to be very gradual. The 80:20 mix might move to 70:30 over the back half of the 2020s. If and only if new technologies become affordable and reliable, will we be allocating meaningful capital to new technologies. When we do that, we will use project financing and make sure that we limit our exposure only to our equity investment in those types of projects.
Jeremy Tonet, Analyst
Got it. That's very helpful. Thank you. And then just want to pivot towards the design initiative as put in the release today and as you discussed, wondering if you could provide a bit more detail on what's being realized in that $750 million, specifically the $150 million that's online, what's happening there? I think there's a potential for $250 million upside down the road. Just wondering what that could look like; any specifics that you can provide there would be very helpful. Thanks.
Francois Poirier, President and CEO
I'll just start, Jeremy, and tell you that we've been working on this for almost a year. We have a separation management office in place, and we have a Chief Transformation Officer who has been working on a bottom-up basis with our teams across every function and every business to do this in a very planful manner. We’re very well organized and already in the early phases of execution, and I'll pass it over to Stan for some detail.
Stanley Chapman, Executive Vice President and COO
Hey, good morning, Jeremy. We've been working with Bain over the past nine months or so to effectively rethink the way that we work. One conclusion we came to is that our processes and our structure are really preventing us from reaching our full potential. This isn't that atypical with companies like ours that have been aggregated by various acquisitions over time and different work processes had to be integrated. That was really the driver behind doing what we did in combining our three gas businesses and our technical center. That's something we've never done before under a single unified structure. Doing so is going to allow us to leverage best practices across our footprint and really create value by focusing on one way of doing things, advancing our commitment to safety, asset management, operational excellence, making us more agile, and really leveraging innovation, which is a great opportunity for us. In recognition of the unique regulatory and commercial constructs under our new structure, we're still going to have a business unit president for each of our jurisdictions in Canada, U.S. and Mexico, and they're going to lead our commercial, regulatory, and operations teams. What's new that we're doing here is we're going to create two new shared services or cross-border groups. One group is going to focus on safety and integrity, and you could think about them as optimizing our $2 billion annual maintenance capital spend. The other group is going to focus primarily on executing our projects on time, on budget. Examples of how we're going to do this include things like relooking at our insourcing and outsourcing that quite honestly we’re spending too much money on external services, and we're not leveraging the $10 billion spend across the supply chain footprint that we have as efficiently as we can. After doing this analysis, we've identified about $750 million in annual run rate opportunities across our gas businesses and corporate support functions that will be realized by the end of 2025, with about $150 million of that realized in 2023. Simply, if you wanted to unpack the $150 million a little bit, think of it as $70 million of reductions in our IS spend, $30 million of reductions just by aggregating the technical center into a common group and eliminating redundancies and inefficiencies. All that together is going to more than offset any dissynergies from the spin. Think of these opportunities primarily in the form of capital reductions and other efficiencies, which are going to flow back to our customers, but they're going to enhance our competitiveness at the end of the day, and they are included in our $6 billion to $7 billion capital expenditure outlook. On top of that, we just started the second initiative, and we believe that there's an additional $250 million in opportunities that, in part, will get flowed back to our customers, but also in part are going to flow back to our bottom line. Those are the proof points that we're going to be working on finalizing over the balance of the year.
Jeremy Tonet, Analyst
That’s very helpful. Thank you for that.
Operator, Operator
Our next question comes from Andrew Kuske of Credit Suisse. Please go ahead.
Andrew Kuske, Analyst
Thanks. Good morning. There are many past expenditures to consider, but let's focus on one example. When Canada spun off its oil sands business, it was perceived as having limited growth potential. With your current spending, you've clearly differentiated the capital market, incorporating an ESG aspect, and you will have two distinct currencies moving forward. I realize that these are complex issues. How do you envision expanding the liquids business with a separate currency, considering the high grading of returns that Francois has mentioned over the last few quarters?
Bevin Wirzba, Executive Vice President, Liquids Pipelines
Andrew, this is Bevin. I'll start. Let's start with the value proposition of what the liquid SpinCo will be right out of the gate. First, it will have a very compelling dividend. That dividend will be fully covered by contracted EBITDA. So 88% of our EBITDA is contracted in the liquid SpinCo. You'll have what we believe is a very strong income yield coming out of the gate with this entity. The free cash flow out of the assets is extremely strong. Not only does it cover the dividend, but it also supports some modest capital growth, capital light, because we have the pre-investment in the Gulf Coast system in Grand Rapids, developments like what we put in place with the Port Neches Link that serves the Port Arthur refinery in Motiva, which is the largest North American refinery. We've seen significant movements of volumes through that link. Those types of opportunities can be developed at 6 to 8 times EBITDA; the Port Neches Link was at a 7 time build. Those are very strong and compelling returns, so that is again under our free cash flow. The value proposition includes accelerating our deleveraging. The balance of the cash flow that can be generated allows us to choose to slowly pay down the debt that will be in place at the time of spin. The capacity in our plan is that we can reduce that by up to half a turn of leverage in three years. But we will balance that with share buybacks or other ways to return value back to shareholders. With respect to the separate currency, absolutely, we haven't had a separate currency to look at inorganic opportunities. But we don't need those to deliver our value proposition. We want to put some points on the board first to demonstrate to shareholders that what we're providing as a new equity is a very compelling investment. But we have seen and we have seen a number of opportunities over the last number of years that we didn't participate in, because we didn't have a currency to pursue. Capital allocation is going to be extremely disciplined because we cannot forego our risk and our value proposition to shareholders, and so we're going to generate a low-risk, high-quality return asset for shareholders.
Francois Poirier, President and CEO
And Andrew, on the second part of your question around high grading returns, yes, absolutely. One of the benefits of being opportunity rich, but limiting your cash flow to $6 billion a year is that you get to choose the projects that deliver the highest weighted average returns. We saw returns for the projects we sanctioned in ‘22; the returns were higher than in ’21, and the returns in ’21 were higher than the returns in ‘20. We continue to see a positive trend in our ability to earn premium returns. That really goes back to my opening remarks; the value of having franchises is that you're able to earn premium returns in the businesses you operate.
Andrew Kuske, Analyst
I appreciate that. If I could sneak in one more and just rely on the duration of the liquid spend. If you think about the oil sands, you're going to be like-for-like with the other competitors from an oil sands basin, but we think of the duration of the volumetric flows versus what you'd see out of a U.S. basin. Just your thoughts on that and how that translates into multiples?
Francois Poirier, President and CEO
Yes, definitely. I believe we will stand out significantly. We are the only system that does not rely on supply push, similar to how the Permian Basin connects to the Gulf Coast, where both supply and demand interplay. Our customers are engaged in both aspects, and when considering the long-term nature of our asset, we’re not dealing with declines upstream. The refining markets we serve are focused on extending their operations and are in search of crude slates that will be viable for decades. Furthermore, we can now deliver to export markets via five different points along the Gulf Coast, and we have developed the capability to transport those barrels to tidewater. In comparison to other systems, we have received regulatory approval for re-contracting from both FERC and CER. These approvals allow for market-based rates without any volumetric or commodity price risks, which is quite unique among peer liquid systems. While there will be other flow options available, and we appreciate that our customers can connect to the TMX system nearing completion through the mainline, we believe we remain the most direct and competitive route to the highest demand markets.
Andrew Kuske, Analyst
Okay, appreciate it. Thank you.
Operator, Operator
Our next question comes from Robert Kwan of RBC Capital Markets. Please go ahead.
Robert Kwan, Analyst
Hey, good morning. You previously outlined that the liquids pipelines segment generates a lot of cash flow given relatively low maintenance CapEx. So I'm just wondering, can you talk about the mechanics that allow the reiteration of the ability to internally fund at max $7 billion CapEx post-spin? Effectively the two entities can pursue more CapEx than you previously articulated. And then for RemainCo, is there still a firm commitment to the internal funding model given the already secured capital is mostly RemainCo projects?
Francois Poirier, President and CEO
Hey, Robert, I'll start with the second one first because it's simpler. Yes, the commitment remains. Frankly, we had an eye on the knowledge that we may be pursuing a spin when in April we made the commitment to limit our capital spend to $6 billion per year, and we tested our ability to continue to maintain that commitment for what I would call RemainCo after the spin has taken effect. The commitment had that eventual or potential announcement in mind. Look, the liquids business generates a tremendous amount of free cash flow. It will bring to its capital structure going forward its pro-rata share of debt and it will bring forward its pro-rata share of the dividend, with a payout ratio that is higher than what the payout ratio will be for the RemainCo portion. So in the materials that we gave you in the investor presentation and we walk through the free cash flow generation of RemainCo after dividends payable, you see that we can support a $6 billion to $7 billion capital program on the RemainCo side of it because there's an $8 billion reduction in debt, as well as roughly a $0.55 reduction in dividend that is borne by the liquids entity.
Robert Kwan, Analyst
Got it. And then I might just finish the question on the operating and funding model. One of the benefits you highlighted as part of the Columbia transaction was the ability to flexibly operate the assets but reduce the capital intensity with GIP funding its 40% share of the future capital there. So recognizing you already have some partners for potential future capital, do you see this type of structure as more of a template to pursue growth? If so, do you envision this occurring more as a joint venture going into a specific project or selling down an existing asset with future growth as you did with Columbia?
Francois Poirier, President and CEO
I think it would depend on the circumstance, Robert. We're very experienced and comfortable with joint ventures. We have partners on Iroquois and PNGTS and now with GIP. Given, as I talked at the opening, the importance of continuing to invest capital to protect the competitiveness of our franchises and that need and that opportunity set being in excess of our $6 billion per year. Joint ventures are a great way for us to defend the franchise value and still live within our means. You could expect to see us do more of those going forward. Obviously, we felt it was important for us to honor our 2023 commitment to significant deleveraging of $5 billion-plus. We achieved that with a single transaction with GIP. We don't expect us to be pursuing such a sizable dollar amount or percentage in an individual transaction for the balance of our $3 billion portfolio. With respect to other potential joint ventures, I think in new energies that's also a really good fit for that. It's more around finding partners that have the ability to mitigate the risks that come with a new investment in a new area. For example, if we're building a hydrogen hub, it would be only natural to partner with the purchaser of the commodity at the end because they deal with the commodity price risk and volumetric risk. Those types of joint ventures would be less financially driven and more focused on getting people together who can manage and mitigate risk on the new types of energy technologies.
Robert Kwan, Analyst
Got it. Thank you, Francois.
Operator, Operator
Our next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead.
Robert Catellier, Analyst
Hey, good morning everyone. I just wanted to have a follow-up on the cost-saving initiative. I'm glad to see you have that ambitious goal. I wonder if you could delineate that savings between capital items or items that will improve your EBITDA, and as you mentioned earlier, Stan, some of that’s going to be shared with shippers. So I wonder how much of that target is going to be retained and help the EBITDA outlook for TC Energy?
Stanley Chapman, Executive Vice President and COO
Yes, Rob, within the $750 million, think about somewhere between one-third to half of that as capital efficiencies. Think of a majority of the balance as items that are ultimately going to flow back to our customers, given the regulatory paradigms in our respective jurisdictions. With respect to the second part, the additional $250 million, we still have a little bit more work to do there. That is where I think we'll realize opportunities to be incremental to our plan. In addition to certain dollars how to get it flowed back to customers or capital efficiencies. But that work is yet to be done. We still have to prove out some of the concepts and then once we do that, we'll be able to give you a better line of sight on exactly what you’re looking for by the end of the year.
Robert Catellier, Analyst
Okay, that's great. And then last question on post the spin-off. Obviously, there's some currency impacts related to how much currencies at SpinCo; U.S. dollar exposure at SpinCo versus TC Energy. I'm wondering if that changes how you look at the hedging currency or risk mitigation.
Joel Hunter, Executive Vice President and CFO
Yes, Rob, it's Joel here. It doesn't change anything as it relates to how we hedge our currency. The way we do it now is we do it on a rolling three-year basis with a primary focus over the next 12 months because we're structurally long U.S. dollars, given that we are a $3 functional currency. When you think about liquids today, roughly two-thirds of its EBITDA comes from the U.S., but one-third comes from Canada. What it means for us going forward, it doesn't really change the program; it might shrink it a bit with that currency going away, but it doesn't change how we hedge the currency going forward.
Robert Catellier, Analyst
Okay, thanks everyone.
Operator, Operator
Our next question comes from Brian Reynolds of UBS. Please go ahead.
Brian Reynolds, Analyst
Hi, good morning everyone. Maybe just to follow up on the NewCo and the leverage profile just given that the company's earnings mix will be primarily U.S. focused, just kind of curious if you can talk about the decision for five times leverage versus some of the U.S. midstream peers of less than four times and then for even some three times? Thanks.
Bevin Wirzba, Executive Vice President, Liquids Pipelines
Yes, I can start on that one, Brian. This is Bevin. We went through the RES/RAS process, and what I referred to earlier is that we have a very differentiated contract profile compared to our U.S. peers. Fundamentally, you'll see in the deck we posted that 96% of our counterparties are investment grade, our contracted portfolio on EBITDA is significantly higher, and the nature of those contracts is extremely different from those of U.S. peers. When we went through the ratings process, the investment-grade analysis indicated that five times was well-matched with our underlying contract profile. As I mentioned earlier, the intent is to accelerate deleveraging for our shareholders as part of the spin. One of the key elements of the value we are providing to shareholders is that by having a separate entity, we can help speed up that deleveraging in the SpinCo. Starting at five times but reducing it by a quarter to half a turn over three years will provide great value back to shareholders. This was the essence of starting at that point because our liquids business can support it.
Joel Hunter, Executive Vice President and CFO
Brian, it's Joel here, just to further elaborate on Bevin's comments. Fundamental to our decision around everything we talked about here, our actions, we think about the partial monetization of Columbia, the liquid spin, and $3 billion of capital rotation is that we have investment-grade ratings at both entities. In the case of SpinCo, we presented our plan that contemplated, as Bevin mentioned, approximately $8 billion of debt, and we would have strong ratings as a result of that. So again, fundamental to the decision here that we'd have strong ratings coming out of the gate for both entities.
Brian Reynolds, Analyst
Great, that's very helpful. As a follow-up, in your prepared remarks, you discussed in detail the importance of maximizing long-term shareholder value for TC Energy. You have a complementary asset base on a combined basis. I'm curious, regarding the dividend level, how is that taken into account for SpinCo in terms of maximizing value versus possibly reassessing the dividend level to aggressively pursue some of the significant low-carbon growth opportunities? Thank you.
Francois Poirier, President and CEO
I want to make sure, Brian, we understand the question. Are you asking on the SpinCo side or the RemainCo side or both?
Brian Reynolds, Analyst
Just keeping the dividend effectively flat on a total basis.
Francois Poirier, President and CEO
We think it was important to ensure that from a value standpoint, one plus one equals more than two. We believe one plus one equals three or more here from a value creation standpoint. That starts with ensuring that our shareholders in aggregate holding two securities at the outset are kept whole with respect to the dividend trajectory with two separate securities as opposed to a single one. What you see on the RemainCo side is a higher growth rate on a pro forma basis for the spin than you do in the consolidated entity. We're going to conservatively keep our dividend growth in RemainCo at that 3% to 5% for some time. We want to ensure that we can provide proof points in terms of living within our means while staying at 6% or below in terms of capital spend on an annual basis. What you see from the materials is that even with limiting our capital spend of $6 billion a year, we are growing our AFFO and our EBITDA at a CAGR that is at or above the upper end of that 3% to 5%. We aim to maintain stable and very conservative payout ratios; we’ll be at about 50% of cash flow per share, and we want to stay there. We feel that with the allocation of the dividend that we've come up with for both companies, we've struck the right balance.
Brian Reynolds, Analyst
Great. Really appreciate that color. Thanks and enjoy the rest of your morning.
Francois Poirier, President and CEO
Thank you.
Operator, Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Gavin Wylie, Vice President, Investor Relations
Thank you, and thanks everybody for participating this morning. Just a reminder, we have put a fairly detailed presentation regarding the announced spin posted to the Investor Relations section of our website. As you work through that material or for any additional questions that we didn't get to today, please contact the Investor Relations team. We thank you for your interest in TC Energy, and we look forward to our next update.