Earnings Call Transcript - TRP Q2 2022

Gavin Wylie, Vice President, Investor Relations

Thank you for your patience. This is the conference operator. Welcome to the TC Energy Second Quarter 2022 Results Conference Call. The conference is being recorded. I would now like to hand it over to Gavin Wylie, Vice President of Investor Relations. Please proceed. Yes. Thanks very much, and good morning, everyone. I'd like to welcome you to TC Energy's 2022 Second Quarter Conference Call. On the call, we have François Poirier, President and Chief Executive Officer; Joel Hunter, Chief Financial Officer, along with other members of our senior management team. Francois and Joel will begin today with some 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 in the Investor Relations section under Events and Presentations. Following their remarks, we'll take a few questions from the investment community. In order to provide everyone with an equal opportunity to participate, we ask that you limit yourself to 2 questions. If you are a member of the media, please contact Jaimie Harding after this call. 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 the Canadian securities regulator and with the U.S. Securities Exchange Commission. Finally, during this presentation, we may refer to certain measures such as comparable earnings, comparable earnings per common share, 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. 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. With that, I'll turn the call over to Francois.

François Poirier, President and CEO

Thank you, Gavin, and good morning, everyone, and thanks for joining us today. Despite market volatility and ongoing global events, TC Energy's value proposition remains constant, and we made important progress during this quarter. We continued to deliver strong operating and financial results from our high-quality, long-life assets, and this reflects the strength of our utility-like business model, our focus on safety and operational excellence, the value of our long-term relationships and partnerships and of course, North America's increasing demand for our essential services. In addition, we're pleased to announce that Coastal GasLink LP has achieved a significant milestone with the execution of revised agreements with LNG Canada that settles all outstanding disputes, and allows us to continue the safe and timely completion of the project. Now given Coastal GasLink will be on everyone's mind, I'll start by discussing the importance of the revised agreements before moving to a few operational highlights from the quarter. And Joel will then provide more detail around our revised funding plan and why we remain confident in our ability to deliver our 5%, ‘21 to ‘26 EBITDA compound annual growth, our 3% to 5% dividend growth rate as well as achieve our debt-to-EBITDA target of 4.75. So I'll start by saying that a lot has changed over the past 10-year life of the CGL project. We've seen additional regulatory and stakeholder requirements, scope increases, impacts from COVID, inflation, weather and other extraordinary events. So what hasn't changed is our commitment to delivering a competitive LNG solution for the Western Canadian Sedimentary Basin. The basin is globally competitive with fundamentals aligning with our strategy and the long-term value of our CGL and NGTL system assets. Our revised agreements with LNG Canada establish a better framework for project advancement and one that further strengthens our long-term partnership. Our agreements mitigate project funding and execution risk, provide a revised and expedited dispute resolution process, and it will allow us to work with LNG Canada on CGL Phase 2 if and when the project is sanctioned. More specifically, we've reduced our capital recovery risk. On the project by resolving uncertainty over specific and anticipated costs that now incorporates a new estimate of $11.2 billion. This settlement will enable an increase in our project level credit facility to $8.4 billion. And together with our equity contribution, we can step down on our balance sheet subordinated loan over time. Now I want to reaffirm that we continue to see the Coastal GasLink project as economically viable, and we anticipate mechanical in-service by the end of 2023 followed by commissioning and commercial service. Finally, these agreements create a solid foundation and a clearer path forward for the potential development of Coastal GasLink Phase 2 that if and when sanctioned, could enhance TC Energy's project returns. The success of this project is not only important for TC Energy and for LNG Canada, this is a nation-building project that contributes to global climate change goals and creates tangible social and economic benefits for numerous stakeholders. CGL will be the first direct path for Canadian natural gas to reach global LNG markets, providing additional egress for some of the most competitive and responsibly produced natural gas in the world. Importantly, our resolution allows us to continue the safe and timely execution of the project, which is now approximately 70% complete. More than $1.4 billion has been awarded in contracting and employment opportunities to indigenous and local communities and up to 6,000 people will be employed at peak construction this summer. Moving forward, this project also reflects the commitment we made to partner with indigenous communities in one of Canada's largest resource projects. This is one of the ways we continue to advance reconciliation. We have agreements with all 20 of the First Nations along the project route, and have signed historic option agreements to sell a 10% equity interest to two indigenous groups representing 16 of those nations. And together with LNG Canada, the project could reduce global greenhouse gas emissions by 60 million to 90 million tonnes per year by displacing coal-fired power. Now on this slide, you can see a section of pipe being transported to the mountain top. This specialized 1.4-kilometer long cable crane can transport 16 tonnes of materials and was engineered specifically for this project. This is innovation in action. This is the first of its kind for Canada, considering the slope classification, and I'm proud of the work our team has accomplished. The execution of the CGL project clearly aligns with rising North American and global demand for affordable, reliable and low-cost energy. Now depending on which forecast you look at, global LNG demand is anticipated to grow from 50 Bcf a day to approximately 75 Bcf a day by the end of this decade, with North America playing an increasing role. This growth is largely underpinned by heightened energy security concerns and the reorientation of the energy mix in Europe, along with strong demand from growing economies in Asia. Combined European and Asian LNG demand is forecasted to increase over 40% or 20 Bcf a day by 2030. This next wave of LNG demand is creating significant opportunities that align with our strategy. TC Energy's unparalleled asset footprint will play a critical role in securing global energy supply. Our updated forecast shows North American LNG exports growing by over 90% from 13 Bcf a day to 25 Bcf a day by 2030. With a number of world-class LNG export facilities on the Gulf Coast, the U.S. is now the world's largest exporter of LNG. This represents over 1/4 of the global market and is expected to increase over the coming years. Now we are safely and reliably connecting about 25% of the volumes destined for U.S. LNG exports and are well positioned to compete for and win our fair share of this growing market. We continue to advance our portfolio of LNG projects at a steady cadence. Grand Chenier XPress went into service in January. Louisiana XPress is already delivering partial volumes and will be fully in service by the end of this year. Construction is underway on Alberta XPress with targeted in-service by the end of '22. Additionally, North Baja Xpress is slated to come online in the spring of 2023, and we expect customer FID on the East Lateral XPress to follow later this summer with an in-service date in late 2024. Combined, these projects represent 3.3 Bcf per day of new capacity and a capital investment for TC Energy of over $1 billion. Now Canada is also ideally situated to support future LNG growth. As discussed, CGL will connect one of the most prolific and low-cost sources of natural gas supply in North America. When complete, CGL Phase 1 will facilitate over 2 Bcf a day of LNG exports off the West Coast, with the potential to expand to approximately 5 Bcf a day if and when Phase 2 is sanctioned. So with 94,000 kilometers of existing natural gas pipelines throughout the continent, TC Energy's unparalleled asset footprint is core to North America's LNG success today and in the future. And we continue to see tremendous opportunities. Now I want to shout out to our operating teams across our entire platform. They did a phenomenal job operating our system in the second quarter. Utilization remains high across our diversified portfolio of high-quality life energy infrastructure assets underpinned by increasing demand for energy. Flows on our 13 U.S. natural gas pipelines averaged 25.4 Bcf a day, up over 3% compared to the second quarter of 2021. Our NGTL system had total system deliveries averaging 12.8 Bcf a day. This is up 9% compared to the same period last year, continuing to demonstrate our ability to deliver reliable market access. At Bruce Power, execution continues to be exceptional. Planned outages were completed ahead of schedule with results further augmented by the approximately $10 a megawatt hour increase in contracted power price received in April related to the ongoing major component replacement program, asset management work and other adjustments. And on our Keystone Pipeline system, we safely reached nearly 610,000 barrels a day as we placed about 30% of the 2019 open season contracts into service. Once again, this highlights the essential role our infrastructure plays in North America. Now as we look at our 2022 priorities, I'm very pleased with the overall progress. Safety is our top value, and that is a constant. It is embedded in our culture and it is my commitment that we conduct all of our business safely and reliably. Executing on our secured capital program and increasing the returns on our existing assets are also key priorities. As I mentioned just a minute ago, we're increasing long-haul volumes on Keystone, and we're also working to increase utilizations on Marketlink. In our Power and Energy Solutions business, we've now finalized contracts for a total of approximately 820 megawatts, that is 580 megawatts of wind and 240 megawatts of solar energy, respectively. This renewable energy will provide the required electricity for the U.S. portion of Keystone to become one of the first net-zero liquids pipelines in North America. It will also supply renewable energy solutions to industrial and corridor demand that we've been very successful in aggregating. We continue to evaluate the proposals received through our RFI process and expect to finalize additional contracts in 2022. Now year-to-date, we’ve placed $1.6 billion of assets into service and are working towards our goal of sanctioning $5 billion of high-quality, low-risk growth opportunities each year. As Joel will discuss in more detail, we are funding our capital programs prudently to ensure we maintain our financial strength and flexibility. And we're also progressing our ESG commitments. This year, TC Energy joined the UN Global Compact, the world's largest corporate sustainability initiative and the TNFD Forum. We'll continue to identify innovative and viable energy solutions. We are energy problem solvers. And our commitment is to do so safely and sustainably while building on our long track record of delivering superior total shareholder value. Thank you very much. I'll now hand it off to Joel for a few comments on our second quarter results.

Joel Hunter, CFO

Good morning, everyone, and thanks, Francois. As Francois mentioned, our assets continue to deliver strong results in the second quarter, while reliably and safely meeting the growing demand for energy. Comparable earnings for the second quarter were $1 billion or $1 per common share compared to $1 billion or $1.06 per common share in 2021. Comparable EBITDA and comparable funds generated from operations were $2.4 billion and $1.6 billion, respectively, compared to $2.2 billion and $1.8 billion for the same period in '21. Net income to common shares was $889 million or $0.90 per share in the second quarter of 2022 compared to net income of $975 million or $1 per share for the same period in 2021. Certain specific items are outlined on the slide and discussed further in our second quarter 2022 report to shareholders. Overall, second quarter comparable EBITDA from our operating segments is up 5% year-over-year, in part driven by a stronger U.S. dollar to $2.4 billion. Mexico Natural Gas Pipelines comparable EBITDA increased primarily due to lower interest expense associated with repayment of our peso-denominated loan with the subsequent issuance of a U.S. dollar-denominated loan, which was entered into on March 15, 2022, at Sur de Texas. Liquids Pipelines comparable EBITDA decreased due to lower contracted volumes in Marketlink partially offset by higher long-haul contracted volumes on the Keystone Pipeline System as we placed approximately 30% of the 2019 open season contracts into service effective April 1, 2022. Liquids marketing achieved higher margins in the three months ended June 30, 2022, due to improved arbitrage opportunities compared to the same period in 2021. Natural gas storage EBITDA within the Power and Storage segment increased as a result of the active management of our natural gas positions in the second quarter of 2022. By bringing sales forward from the fourth quarter into the second quarter, the gas storage team was able to capture favorable Alberta spreads and reduce future operating costs. It is worth noting, while we have locked in an overall gain for 2022, we expect the second quarter realized gains to be partially offset in the second half of 2022 as the corresponding purchases are recognized. Power and Storage results were also impacted by positive contributions from Bruce Power, primarily due to higher contract price that was partially offset by lower volumes resulting from greater planned outage days. For all of our businesses with U.S. dollar-denominated income, translational results in the Canadian dollars occurred at an average exchange rate of 1.28 in the second quarter of 2022 compared to 1.23 in 2021. And as a reminder, our U.S. dollar-denominated revenue streams are in part naturally hedged with U.S. dollar-denominated amounts below EBITDA, and the residual exposure is actively managed on a rolling basis of up to 3 years. Interest expense increased primarily due to long-term debt and junior subordinated note issuances, net maturities, a stronger U.S. dollar and higher interest rates on increased levels of short-term borrowings. It is important to note that approximately 85% of our long-term debt has a fixed rate and an average term to maturity of 20 years. Comparable interest income and other decreased primarily due to realized losses on derivatives in the second quarter used to manage our net exposure to foreign exchange rate fluctuations on U.S. dollar-denominated income. We continue to progress our industry-leading $20 billion secured capital program and have placed $1.6 billion of projects into service this year. This program is expected to deliver a weighted average unlevered after-tax IRR of approximately 7% to 9%, which remains in line with our targeted range. Further, our targeted $5 billion of projects sanctioned each year must adhere to our strategic capital allocation threshold. We will not compromise our value proposition. Projects must meet our risk requirements and return preferences, and decisions will be made with per-share accretion as a priority. Now we remain opportunity-rich. Our capital program not only focuses on growing our business but also on modernizing and advancing projects aimed at reducing emissions and offering low-carbon energy solutions. We reiterate our outlook for comparable 2021 through 2026 EBITDA growth of 5%. Importantly, our EBITDA outlook is largely underpinned by long-term take-or-pay contracts or cost of service regulation. Now this visibility at future cash flows continues to position us to grow our dividend per share by 3% to 5% per annum. Now turning to our funding program. As you heard, we are pleased to announce Coastal GasLink LP and LNG Canada have reached revised agreements that address and resolve all outstanding disputes over certain incurred and anticipated cost of the project. Capital costs have increased from the original cost estimates made in 2012 and the revised agreements incorporate a new cost estimate for the Coastal GasLink project of $11.2 billion. In recognition of the revised project agreements with LNG Canada and in accordance with a binding commitment subject to the execution of definitive agreements with our Coastal GasLink LP partners, we will make an equity contribution to Coastal GasLink LP of $1.9 billion, which will be paid in installments commencing in August of 2022 with no resulting change to our 35% ownership. This contribution will be included in recoverable project costs and will earn a return on and of capital. Any additional equity contributions will be initially funded through our amended 2021 interest-bearing subordinated loan agreement between TC Energy and Coastal GasLink LP. Outstanding amounts will be repaid by the Coastal GasLink partners, including us, following in-service and final cost determination. Now I want to reiterate Francois' remarks. We continue to see Coastal GasLink as economically viable and the agreements create a solid foundation and clear path forward for the potential development of Phase 2 that if and when sanctioned could enhance TC Energy's project returns. Importantly, the agreements reached reduce our project financing risk by supporting a $1.6 billion expansion of the existing project level credit facilities to a total of $8.4 billion. Our commitment under the subordinated loan agreement between TC Energy and Coastal GasLink LP will be stepped down from the current $3.8 billion over time as capacity under the project level credit facilities is increased and we make installment payments associated with our equity contribution. Now in terms of 2022 capital spending, we now expect to invest approximately $8.5 billion as a result of increased costs in the NGTL system and our equity contribution associated with Coastal GasLink of approximately $1.3 billion. The graphic illustrates our updated forecasted sources and uses of funds for 2022 through 2024, including these revisions. Now starting in the left column, our total requirements over the 3 years are projected to be approximately $29 billion reflecting capital expenditures, including maintenance capital of $18 billion and dividends of $11 billion. The second column highlights expected internally generated cash flow of $21 billion and proceeds from the $800 million hybrid issued in March. This leaves a residual need of approximately $7 billion depicted in the far-right column that we expect to fund through a combination of commercial paper, incremental debt, hybrids, the dividend reinvestment plan, asset sales and Keystone XL project recoveries. To continue to prudently fund our capital commitments while maintaining our leverage targets, we have reinstated issuance of common shares from treasury at a 2% discount under our dividend reinvestment plan, commencing with the dividends declared on July 27, 2022. The dividend reinvestment plan is intended to be short-term funding mechanism that we anticipate will be activated for 4 quarters based on historical participation and as we bring additional projects into service. So in summary, we will always utilize the most optimal funding tools to maintain our financial strength and flexibility while delivering per-share value. Given the strong year-to-date performance of our base business, we reiterate our 2022 comparable EBITDA outlook to be modestly higher and comparable earnings per share to be generally consistent with last year. We reaffirm our industry-leading capital program of $28 billion is expected to deliver 2021 through 2026 comparable EBITDA growth of 5%. And we have strong visibility to incremental growth that leaves us comfortable with our ability to meet our leverage target of 4.75. Lastly, we expect to grow our dividends by 3% to 5% with sustainable growth in earnings and cash flow per share and strong coverage ratios. When you combine our enduring business model, unparalleled asset footprint and organizational capabilities, we are differentiated in our potential to capitalize on the opportunity-rich environment before us. Overall, solid execution will allow us to continue to deliver superior long-term shareholder value. That's the end of my prepared remarks, I will now turn the call back over to Gavin for the Q&A.

Gavin Wylie, Vice President, Investor Relations

Yes. Thanks, Joel. So just a reminder before I turn it over to the conference coordinator for questions from the investment community, we ask that we just limit yourself to 2 questions. Thank you.

Operator, Operator

Our first question comes from Linda Ezergailis of TD Securities.

Linda Ezergailis, Analyst

I'm wondering if you could just give us some more context around the Coastal GasLink updated costs. For the prospective cost, how much have you actually locked in? And have you provided for any sort of additional contingency? Or maybe you can provide some sort of confidence level in your cost estimates?

Bevin Wirzba, Senior Executive

Yes, Linda, this is Bevin. As we've mentioned, 70% of the project has already been completed. All necessary materials are on site. We've resolved and finished 2 out of the 8 sections in terms of mechanical completion, and all our contracting strategies have been tendered and led. Therefore, we have a high level of confidence in our new estimate. This estimate of $11.2 billion includes a contingency for potential risks as we move towards completion. We are confident that we will achieve mechanical completion by the end of 2023. Currently, we have strong confidence due to having a settlement in place with our partners and customers at LNG Canada. We are well positioned to fulfill our commitments of the $11.2 billion and the mechanical completion deadline at the end of 2023.

Linda Ezergailis, Analyst

Are you currently having discussions with LNG Canada regarding Phase 2? What do you consider to be the ideal timing for the final investment decision to minimize the dismantlement and reconstruction of labor camps, particularly in the context of cost savings? Can you provide some details on that?

Bevin Wirzba, Senior Executive

Yes. So we're in active discussions with LNG Canada around Phase 2 and the feasibility, doing the appropriate front-end work to establish what the scope and scale of that project will be. The project looks very different than Phase 1. It's not a linear development. It is compression facilities. And so that changes the risk profile to our benefit. In terms of the FID timing, that is one where our customers, LNG Canada are in control of determining when they are prepared to bring a final investment decision, and we're supporting them in that evaluation right now. There's a tremendous amount of work that needs to be accomplished, but it's important to do that work today. So we have a high confidence decision in going into that FID.

Linda Ezergailis, Analyst

And just for my second question, more broadly for your capital spend plan. You've identified $18 billion in your funding plan. Is that all up to date with any sort of inflationary pressures or appropriate contingencies? Or might we see some projects potentially embedded in that going up in cost or deferred to the extent you have some discretion around that?

Joel Hunter, CFO

Linda, it's Joel here. So we are up to date with the capital spend that you referred to. You might recall back in Q1, we did revise our cost estimates for the NGTL system expansion projects. So that's where we're really seeing, obviously, most of the cost pressure within the portfolio. We're very encouraged by what we're seeing at Bruce Power. The Unit 6 MCR program is on time and on budget. We're not seeing any inflationary pressure on our capital investment in the United States now, but it's really coming from Alberta, as you well know. It's a huge market here. We've got the CGL project going on. There's Trans Mountain going forward along with, obviously, the expansion of the NGTL. So we don't expect to see any material changes to our cost estimates going forward and what you see is most reflective of our current estimates.

Operator, Operator

Our next question comes from Ben Pham of BMO.

Ben Pham, Analyst

I wanted to go back to that gray shaded category on your funding program. I'm more specifically curious around with asset sales, how do you think that ranks in that overall gray-shaded area? And is there anything logical that stands out? And is it really appealing to sell assets in this environment when you're looking to reduce debt at the same time?

Joel Hunter, CFO

So Ben, it's Joel here. When we look at our capital program and how we fund it, obviously, we're always trying to look for the optimal capital structure that really minimizes our cost of capital, maximizing shareholder value and really meets our leverage targets. Obviously, we're very judicious with our share count. We want to maximize our earnings per share and cash flow per share. So when we look to the financing, it really is an all-of-above strategy. And what you see in that gray box to the extent our balance sheet permits, we do use debt. We do maximize our utilization of hybrids at 15% of our capital structure. And then we look to internal equity, which is joint venture partnering, sale of non-core assets and then obviously, external equity through the dividend reinvestment plan and, if needed, discrete equity. So that's kind of the stack that we look at, but we do have a number of non-core assets in the portfolio that we could look to monetize. But again, what we're trying to achieve here is what maximizes our shareholder value, what is the lowest cost of capital alternative for funding our capital program.

Ben Pham, Analyst

Okay. And then when you updated this funding plan, obviously, you're putting in Coastal GasLink that impact on NGTL. Are you thinking about some of the Mexican pipeline developments as well when you think about turning on your DRIP for at least a year?

Joel Hunter, CFO

Ben, I'll start here with regard to the DRIP. As we outlined, the DRIP is really in connection with higher spending that we're seeing on NGTL along with Coastal GasLink. We just deemed to be prudent at this point in time. Obviously, core tenant for us is to preserve our financial strength and financial flexibility, have a strong balance sheet. And therefore, we determined that turning on the DRIP for 4 quarters, and what we're trying to achieve here is about $1.25 billion of common equity based on a 35% historical participation rate at the 2% discount is appropriate to fund our capital program at this point in time.

Ben Pham, Analyst

Okay. So no comment on Mexico then?

Joel Hunter, CFO

I had no comment that I have on Mexico. I will maybe turn it to Stan.

Stan Chapman, Senior Executive

Yes. Ben, this is Stan. I can tell you this much. We've made some very meaningful progress in the negotiations around the definitive agreements with CFE, both with respect to the settlement and the potential project, but we're not done just yet. As you know, we've been in Mexico for over 30 years. We are still very, very much committed to our strategic alliance that we have with the CFE. And I just ask that you give us a little bit more time to close out the negotiations.

Joel Hunter, CFO

So Ben, I would just offer one last comment here that, as I mentioned, you think about what's in that gray box in our funding plan right now that we have a number of levers at our disposal here that if we were to move ahead with a project in Mexico, as I mentioned, again. We are very judicious around our share count, and we'll try to find the lowest cost of capital that ultimately maximizes shareholder value and really meets our leverage targets. So it is a bit of an all-of-the-above strategy, not only with our current capital program, but obviously, if anything goes ahead with Mexico.

Operator, Operator

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

Robert Kwan, Analyst

Can you discuss how the current base returns for Coastal GasLink compare to the originally expected returns, which seemed low from the start? Additionally, regarding the potential Phase 2 expansion, has the cost and return structure been established in your new agreement? If there is no further liquefaction expansion, does the current agreement include a way to enhance the returns on CGL, or are you simply left with the low returns?

Bevin Wirzba, Senior Executive

So Robert, this is Bevin. So Phase 1 clearly didn't achieve its initial return objectives. But as we indicated, coming to a settlement puts the project in the best position to move forward. And primarily, our priority was to ensure the total competitiveness to support the project and support the ongoing Phase 2 development that would subsequently follow if LNGC chooses to FID. Our returns are not linked between Phase 1 and Phase 2. The terms of our settlement are confidential. But we're confident that the return profile that would exist in Phase 2, which is well advanced in our discussions with LNG Canada as well as our settlement delivers a strong project for our shareholders.

Robert Kwan, Analyst

Okay. So does Phase 2 get you back to where you originally anticipated?

Bevin Wirzba, Senior Executive

Phase 2, combined with Phase 1, places us in a highly competitive return scenario for the entire project.

Robert Kwan, Analyst

Okay. If I could wrap up on funding and specifically the DRIP. You mentioned being cautious with your share count. Can you explain the reasoning behind activating the DRIP as the most suitable funding option compared to asset monetizations? You mentioned it will remain active for a year, but if current market conditions continue, does the decision to implement the DRIP now indicate that you view the DRIP or equities as the best funding source for adding projects like Mexico to your portfolio?

Joel Hunter, CFO

Yes, Robert, it's Joel here. First of all, what we're really looking at here with the additional increases that we're experiencing on NGTL and Coastal, this is over kind of a tight period of time. We're talking really 2023 where we saw our metrics being a little bit elevated based on our internal forecast. And we saw that turning on the DRIP for 4 quarters was really important for us. What we like with DRIP is that it is really shaped nicely with the capital spend profile. When we look at DRIP relative to discrete equity, it's much cheaper than a 2% discount versus an all-in discount of, say, 7% to 8% that you would see on discrete equity. And obviously, we have the ability to turn off quarterly. As we move forward here, and we see maybe further expansion of our capital program, obviously, we'll look to, again, non-core assets that we can monetize. And again, we evaluate that against other forms of capital, so as again, to maximize shareholder value and really manage our leverage. But again, I just want to reiterate that we're looking really at 2023 and to get our leverage down to where we're comfortable with. This is a quick way of getting there on a very cost-effective basis and again, really well shaped with our capital spend profile.

Operator, Operator

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

Robert Catellier, Analyst

First of all, congratulations on finalizing the Coastal GasLink deal. I know it was a priority for both you and the industry, and it must have been challenging. Could you provide more details about any changes to the revised agreement that help reduce risk? I believe you mentioned this in your opening comments. What specific changes can you share that will help mitigate your risk moving forward?

Bevin Wirzba, Senior Executive

Thank you for the question, Rob, and I appreciate your recognition of reaching the settlement. We had a productive discussion with our customers, resulting in a favorable outcome. The main components for risk mitigation are transparency and clarity regarding how we will address issues moving forward. We have implemented accelerated dispute mechanisms to ensure proper alignment until the project is fully delivered, which provides us with strong confidence in transparency not only with ourselves but also with our equity partners and indigenous partners, giving them a clear understanding of the way forward. The mitigation strategies focus on enhanced alignment and increased transparency in how we handle challenges or changes in the project as we progress, fostering a strong partnership with our customer, LNG Canada.

François Poirier, President and CEO

I would also like to mention that, without a settlement, we would have a significant amount of capital on our balance sheet. Securing the settlement enables us to increase the credit facility and eliminates the need to hold a large amount of capital that could be required for many years to come.

Robert Catellier, Analyst

Okay. And just as you pointed out, the U.S. has become the largest LNG exporter in the first half of the year. Can you provide a little bit more color on some of the ways we're going about addressing not the projects that you've listed, but projects that might be available to the industry in the future? Is it simply just a question of leveraging your existing transmission network to continue to participate? Or is there some way that you could benefit from enhancing what you already have through M&A or other asset acquisitions?

Stan Chapman, Senior Executive

So Robert, this is Stan. I can start by telling you that our extensive asset network underpins my previous comments about our potential to generate approximately $1 billion annually from new growth products, with LNG being at the forefront. This growth is primarily driven by organic demand. Considering the current geopolitical landscape, Europe needs to source around 20 Bcf per day of natural gas to replace its historical reliance on Russian supplies. If about two-thirds of that comes from the U.S., it translates to an additional 13 Bcf from the U.S., predominantly from the Gulf Coast. Currently, we transport about 25% of LNG in the U.S., and I anticipate that we will at least maintain, if not increase, that market share moving forward. This presents us with an opportunity over the next 2 to 3 years in the range of 3 to 4 Bcf per day. I can't share specific details right now due to market sensitivities, but we are fully aware of the LNG growth opportunities and demand. We are actively engaging with various counterparties to leverage our competitive advantage, not only in the Gulf Coast in Louisiana but also in other regions like our North Baja system and potential prospects in Costa Azul.

Operator, Operator

Our next question comes from Jeremy Tonet of JPMorgan.

Jeremy Tonet, Analyst

Just want to look at Mexico a little bit more, if I could here. As it relates to the VdR delay, just wondering what line of sight do you have to the completion on the timeline that you said in early '23 there. Would you move forward with another Mexico project before you reach full completion on VdR?

François Poirier, President and CEO

Jeremy, I'll start. And of course, Stan and I have been in deep conversations about these questions for some time, so I'll ask him to supplement with what we're seeing specifically on Villa de Reyes. And as I've said publicly in the past, we've been in Mexico for 30 years. We have a very positive and constructive relationship with the CFE. From the perspective of allocating incremental capital into the country, we do feel it's critical to resolve any remaining contractual disagreements ahead or simultaneous with any incremental capital decisions. So that would be the way we would think about it. And Stan, over to you.

Stan Chapman, Senior Executive

Yes, Jeremy, this is Stan. We have already put into service or are ready to service both the north and the lateral segment for the Villa de Reyes project. Right now, we're focusing intensely on the Southern segment, and if we can resolve some issues, some of the hetos would likely be ready for service in early 2023.

Jeremy Tonet, Analyst

Got it. That's helpful. And just coming back, if there is a large Mexico pipeline project approved later this year, early next year. And if that pushes CapEx over $5 billion a year in 2023 or later, how should we think about the timing of incremental portfolio rotation or equity issuance should the CapEx rise in that fashion?

Joel Hunter, CFO

So Jeremy, it's Joel here. As I mentioned earlier, like anything that we do when we evaluate capital investment, in particular, when we're over that $5 billion threshold that you've indicated, we try to find the optimal capital so that really minimizes our cost of capital. Again, thinking about being very judicious around our share count and to maximize our earnings per share and cash flow per share. So as mentioned, it really is an all-of-above strategy. Again, to the extent that we can use that, we will, to the extent that any capital project comes with a hybrid capacity, we will use that. We will then look to internal equity with partnering, sale of assets. And if need be external equity with the DRIP and discrete equity. So again, it's an all-of-the-above strategy. We make that determination at that point in time when we're making the investment decision as to what's the best path forward here as it relates to our cost of capital.

Operator, Operator

Our next question comes from Matt Taylor of Tudor, Pickering, Holt & Co.

Matt Taylor, Analyst

A bit of a longer-dated one. In your targeted EBITDA growth of 5% through 2026, I just wanted to get a sense of how you're factoring in the rising cost of carbon. Obviously, you have plans to reduce the emission profile using whether it's renewable power on Keystone or more pump storage. What about those emissions that need to be reduced if there's not a disclosed plan in place? I guess what I'm getting at is as the government, over time, increases those costs of carbon, are you currently including some of the costs of that rising carbon as you're trying to offset it, whether it's using offsets or other projects? Or how are you triangulating to your emissions reduction targets longer term?

François Poirier, President and CEO

Thanks for the question, Matt. We are absolutely factoring in the cost of offsets or mitigations, and those are incorporated in our EBITDA growth outlook. As a matter of fact, that dynamic is going to be a driver of future growth going forward because it's embedded in our strategy, is actually reducing our emissions and helping our customers reduce their emissions, which is why we continue to be opportunity-rich. Emission reductions are going to be a catalyst for growth for the company. Look, in various jurisdictions, we have the ability to pass through those costs. And in others, we need to find a way to mitigate for our own account. All of those are factored into the growth estimate that we provided to the extent they are visible and have been passed into law.

Matt Taylor, Analyst

Excellent. And then one more, if I may. Just we've heard several times about potential opportunities in Mexico. But can you just speak more high level on Mexico? We've seen LNG projects that are picking up steam, some floating LNG, just a general sense of how you're viewing that market. You've been there a long time obviously, any comment with the backbone infrastructure there. Would this be a good time to crystallize value? Or do you see some of those opportunities in terms of some things we've heard about previously about helping the industrial power stack transition over to gas and some of those opportunities longer term?

François Poirier, President and CEO

I'll start at a very high level in terms of what I see as government policy and support for gas transmission, and then I'll ask Stan to provide some color around some of the things that we are seeing. I think the government in Mexico and the CFE is learning, and developments over the last few years indicate that they realized gas transmission is an enabler and supporter of CFE's ambitions to lower power costs and to address social and economic disparity between different regions of the country. So in short, increasing access to natural gas around the country is a very powerful socioeconomic tool for the country, and they see partnership with the private sector in gas transmission as an essential tool to operationalize policy. Over to you, Stan.

Stan Chapman, Senior Executive

Yes. Matt, this is Stan. From my perspective, again, this goes back to our asset footprint in Mexico, and we currently deliver about 15% of the gas that's transported today, along with strong demand. Strong demand in the context of Mexican imports from the U.S. is going to increase from 8 Bcf to 12 Bcf over the next years. So that tells me a couple of different things. One, there's going to be the need for greater capacity into Mexico, which could be an opportunity for us to expand our Sur de Texas pipeline at some point in time, which could be done relatively efficiently with compression. We're going to focus extensively on building out our backbone system across the central part of Mexico, particularly as power loads and industrial load growth continue to materialize. And then lastly, you brought up the opportunity around LNG, particularly on the West Coast of Mexico, perhaps tied to the transition efforts that the Mexican government is advancing. But right now, at least for the short term, our focus is on the potential project opportunity we have with the CFE in closing out those negotiations.

Operator, Operator

Our next question comes from Brian Reynolds of UBS.

Brian Reynolds, Analyst

Just curious as a follow-up on some of the capital allocation questions. If you could give a comment about how management is thinking about a potential suspension of dividend growth over the near term as one of the levers to support the balance sheet over the long term?

François Poirier, President and CEO

I will address that, Brian. That is not a possibility. We are confident in our ability to achieve EBITDA growth in the 5% range, along with earnings per share and cash flow per share growth that will support a dividend growth in the 3% to 5% range, while also reducing our leverage to 4.75 within the next five years. We can balance all these interests, maintain our capital discipline, prioritize deleveraging, and provide a stable and growing return to our shareholders. Therefore, we have no plans to slow down dividend growth given the abundance of opportunities available to us.

Brian Reynolds, Analyst

Great. And as a follow-up, you talked about asset sales as another lever earlier. Curious if you could provide some additional color into what those non-core assets probably look like. And then just given the resolution around Coastal GasLink, what is the interest of First Nations to join in on the project at this time during Phase 1? Or is it fair to assume that they'd like to see increased returns from CGL expansion before ultimately participating in their equity interest?

Joel Hunter, CFO

So Brian, it's Joel here. We're not going to specifically call out what assets we're looking at. But what we can tell you is when we look across our footprint, that there are a number of assets, maybe smaller nature, but that are non-core that we could look to monetize over time if need be. But at this point in time, we're not going to call out anything that we're looking at as far as portfolio management goes.

Bevin Wirzba, Senior Executive

And this is Bevin. On the First Nations, the terms of their option agreements are not affected by the settlement, and their participation in the project remains at 10% as per the original deal. So there are no changes for the indigenous option agreements, but the settlement does provide clarity and a path forward for them.

Operator, Operator

Our next question comes from Praneeth Satish of Wells Fargo.

Praneeth Satish, Analyst

At a high level, you're focused on asset sales and DRIP to support the current CapEx backlog, while still managing larger projects such as the Mexico pipeline and pump hydro, among others. My question isn't about funding but rather whether there is consideration to seek a higher return on future projects you approve, ideally exceeding the 7% to 9% corporate return, to align with the potential increase in your cost of incremental funding.

François Poirier, President and CEO

We have numerous opportunities available to us. A key strength of our company is our focus on capital discipline, allowing us to prioritize the most profitable projects. Although you didn't mention risk, it's a crucial factor. The relationship between risk and return is significant. Our historical approach to risk remains consistent, and we are confident in our ability to advance projects that have a low-risk profile supported by long-term contracts or regulatory frameworks, achieving an unlevered after-tax internal rate of return of 7% to 9%. If we consider additional capital beyond our $5 billion operational budget, which is manageable with free cash flow, it's essential to examine the marginal cost of capital for those investments. Our management team's role is to maximize the gap between the return we earn and that marginal cost of capital, which may involve asset sales or equity, as these carry the highest costs. We believe there should be a reasonable difference between the earned return and the cost of capital when making allocation decisions. However, focusing on risk management and maintaining a conservative risk profile while upholding our value proposition is always a priority for us.

Praneeth Satish, Analyst

And just switch, did you want to continue?

François Poirier, President and CEO

No.

Praneeth Satish, Analyst

Okay. Just switching gears. Just curious if there's an update on the potential Bison project in the Bakken. I think you launched an open season. Just curious how that's progressing. I know there's been some weather-related disruptions in the Bakken. So I'm not sure if that's impacted anything.

Stan Chapman, Senior Executive

Yes. This is Stan. And again, go back to our best-in-class footprint and this opportunity-rich environment that we have here. These supply push projects are just another opportunity for growth for us. We did have a nonbinding open season that closed in May. We were very pleased with the results of that open season. And suffice it to say that we're going to take the second half of this year to turn those negotiations into precedent agreements and look forward to sharing more with you in coming weeks and months.

Operator, Operator

Our next question comes from Matthew Weekes of iA Capital Markets.

Matthew Weekes, Analyst

I just wanted to quickly ask if you had any update on the open season that you talked about last quarter for Marketlink and looking to increase volumes there a little bit? And what the outlook might be sort of going forward here?

Bevin Wirzba, Senior Executive

Thank you, Matthew. This is Bevin. We conducted two open seasons last quarter, one for Marketlink and another for our Port Neches lateral, both of which were successful in securing contracts. Our strategy has been to reestablish both short- and long-term contract profiles as contracts on Marketlink have been expiring, while being aware of the current market volatility and short-term challenges we are facing. However, we are optimistic that the Marketlink asset will rebound from a challenging situation to a more favorable one. The Port Neches open season aligns with a project that is progressing under budget and ahead of schedule, improving deliveries to the Motiva refinery, the largest refinery in North America. Increasing delivery points for our customers has been an essential part of our strategy, and both open seasons were very successful.

Operator, Operator

Our next question is a follow-up from Rob Hope at Scotiabank.

Rob Hope, Analyst

I want to revisit the Mexican project. Considering your relatively full CapEx backlog in relation to what we see as attractive risk-adjusted returns, how do you view the possibility of bringing in a partner for this project? While this might limit some potential upside, it could simplify financing if the project is to proceed, similar to the situation at Sur de Texas.

François Poirier, President and CEO

Rob, it's Francois. Thanks for the question. It is in the context of our views on how much Mexico EBITDA we want in the consolidated portfolio, we think of 10%-ish contribution to consolidated EBITDA from Mexico as an appropriate near- to medium-term target for the company. And it's just prudent portfolio management and sharing diversification, et cetera. So certainly, to the extent we see attractive opportunities to earn a premium return, to the extent bringing in a potential partner for a portion of that helps us prosecute and make the value of the entire franchise more valuable, we'll certainly consider that. And so the short answer is potential for selling a minority interest down the road is something that we would be open to, but it's, again, more within the context of prudent portfolio management and proper diversification.

Rob Hope, Analyst

All right. I appreciate that. And then just as we take a look at 2023, any flex in the capital plan just to help state by this, we'll call it, tightness on the balance sheet. Could we see you less willing to invest money in some of the renewable projects towards the end of the year? Or could we see some deferred capital from '23 into '24, if possible?

François Poirier, President and CEO

I think there's somewhat limited opportunity for us to defer capital as you can well imagine, it sometimes takes 2 or 3 years from the time we sanction a project to receiving regulatory approvals and permits. We've made commitments to contractors. We've ordered long lead equipment. And so deferring spend can be a bit challenging. Our view is if a project is accretive to value, we can be creative around rotating capital. We can be creative around bringing in partners to be able to deliver long-term value for our shareholders. And more likely that you would see us doing that rather than deferring near-term capital projects.

Operator, Operator

Ladies and gentlemen, this concludes the question-and-answer session. If there are any further questions, please contact Investor Relations at TC Energy. I will now turn the call back over to François Poirier. Please go ahead, Mr. Poirier.

François Poirier, President and CEO

Thank you very much for your time and attention today. I want to emphasize that capital discipline, managing our risk profile, and reducing debt are essential priorities for our company. We are in a position with abundant opportunities. The energy transition will continue to be a significant driver of growth. Our strong existing asset base will consistently provide us with a healthy flow of opportunities, supported by our high-quality franchises. We are well positioned to thrive, regardless of the pace and direction of the energy transition. We will always balance growth, risk, and the strength of our balance sheet. Thank you again for your attention today.

Operator, Operator

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