TC Energy Corp

TSX:TRP

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the TC Energy 2020 First Quarter Results Conference Call. I would now like to turn the meeting over to Mr. David Moneta, Vice President, Investor Relations. Please go ahead, Mr. Moneta.

[David Moneta]

Thank you, and thanks very much, and good afternoon, everyone. I'd like to welcome you to TC Energy's 2020 First Quarter Conference Call. Joining me today are Russ Girling, President and Chief Executive Officer; Don Marchand, Executive Vice President, Strategy and Corporate Development and Chief Financial Officer; François Poirier, Chief Operating Officer and President, Power and Storage and Mexico; Tracy Robinson, President, Canadian Natural Gas Pipelines; Stan Chapman, President, U.S. Natural Gas Pipelines; Paul Miller, President, Liquids Pipelines; Bevin Wirzba, Senior Vice President, Liquids Pipelines; and Glenn Menuz, Vice President and Controller. Russ and Don will begin today with some opening comments on our financial results and certain other company developments. A copy of the slide presentation that will accompany their remarks is available on our website. It can be found in the Investors section under the heading Events and Presentations. Following their prepared remarks, we will take questions from the investment community. If you are a member of the media, please contact Jaimie Harding following this call and should be happy to address your questions. [Operator Instructions]Also, we ask that you focus your questions on our industry, our corporate strategy, recent developments and key elements of our financial performance. If you have detailed questions relating to some of our smaller operations, for your detailed financial models, Hunter and I would be pleased to discuss them with you following the call. Before Russ begins, I'd like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by TC Energy with Canadian securities regulators and with the U.S. Securities and Exchange Commission. And finally, during this presentation, we'll refer to measures such as comparable earnings, comparable earnings per share, comparable earnings before interest, taxes, depreciation and amortization or comparable EBITDA and comparable funds generated from operations. These and certain other comparable measures are considered to be non-GAAP measures. As a result, they may not be comparable to similar measures presented by other entities. They are used to provide you with additional information on TC Energy's operating performance, liquidity and its ability to generate funds to finance its operations. With that, I'll now turn the call over to Russ.

[Russell K. Girling, President, CEO & Director]

Thank you, David, and good afternoon, everyone, and thank you all very much for joining us today. Clearly, we're living in an unprecedented times with COVID-19, the pandemic having a significant impact on millions of people around the world. So on behalf of TC Energy, I'd like to start by expressing my sincere thanks to the frontline health care and other essential service workers who are risking their personal safety to ensure the well-being of others. Your selfless acts during this difficult time are truly courageous. At TC Energy, as always, we too are focused on health and safety of our employees, our contractors and the communities in which we operate. When the world's World Health Organization declared COVID-19 a global pandemic in early March, our business continuity plans were put in place across the organization, allowing us to continue to effectively operate our assets and execute on our capital programs. The services we provide are broadly considered essential are critical in Canada, the United States and Mexico, given the important role our infrastructure plays in delivering energy to people across the continent. And as the responsibility we take very seriously, like many others, thousands of our employees are now working remotely, while those that must be physically at our work sites are following rigorous health, hygiene and distancing protocols. I want to acknowledge and thank our employees and their families for their ongoing efforts to ensure the energy that is vital to the daily lives of so many continues to be delivered seamlessly across North America, and your efforts are truly making a difference. Turning now to our first quarter financial results and certain other recent developments across our 3 core businesses, with approximately 95% of our comparable EBITDA coming from regulated or long-term contracted assets. We are largely insulated from the volatility associated with volume throughput and the commodity prices that are being experienced by many others. Aside from the impact of normal maintenance activities and seasonal factors to date, we have not seen any meaningful change in the utilization of our assets, which further reinforces their critical nature to North America. As a result, as highlighted in our first quarter report, our $100 billion portfolio, high-quality, long-life energy infrastructure assets continue to produce strong financial results. And we continue to capitalize or we continue to realize the growth expected from our industry-leading capital program. Today, that program that we're advancing, it's $43 billion of secured capital projects, and it now includes Keystone XL. In addition, we continue to advance more than $10 billion of projects under development, including the refurbishment of another 5 reactors at Bruce Power as part of their long-term life extension program. Over the last 4 months, we took significant steps to fund our 2020 capital expenditure program and to maintain our strong financial position despite challenging capital market conditions. More specifically, we enhanced our liquidity by more than $9 billion through the issuance of long-term debt in both Canada and the United States at very attractive rates, the establishment of incremental committed credit facilities and the sale of 3 Ontario natural gas-fired power plants. When combined with our predictable and growing cash flow from operations and the sale of a 65% interest in the Coastal GasLink project, which is scheduled to close in the second quarter, we believe that we're very well positioned to continue to fund our capital program and other obligations through a prolonged period of disruption in capital markets if that was to occur. Looking forward, we expect our solid operating and financial performance to continue with 2020 comparable earnings per share is still anticipated to be similar to the recorded -- or the record results that we produced in 2019. While we're proud of our financial performance and the significant returns we've generated for our shareholders, we know that our ongoing success depends on our ability to balance profitability with safety and environmental and social responsibility. We have a 65-year track record of safe and reliable operations, but we recognize that we can always improve. To keep you better informed, we have published several investor-focused ESG documents over the past year. They described some of the work we're doing to ensure our business remains resilient in an ever-evolving energy landscape. All of this can be found on our website at tcenergy.com. With that as an overview, I'll explain some of the recent developments beginning with a brief review of our first quarter financial results. Don will provide more detail of our results and liquidity in just a few minutes. Excluding certain specific items, comparable earnings were $1.1 billion or $1.18 per common share for the 3 months ended March 31 compared to $1 billion or $1.07 per share in 2019, which was an increase of 10% on a per share basis. Comparable EBITDA of $2.5 billion was 6% higher and the amount reported for the same period last year, while comparable funds generated from operations was $2.1 billion, which was 17% higher than the comparable period. Each of these amounts reflects the strong performance of our legacy assets as well as contributions from another $1.6 billion of new long-term contracted and rate-regulated assets placed into service in early 2020. Next, I'll make a few comments on our 3 core businesses, starting with our natural gas pipeline business. Customer demand for our services remained strong despite the COVID-19 impacts on the broader North American economy. Evidence of this can be seen in the volumes transported across our systems with the NGTL System field receipts averaging about 12.2 Bcf a day. The Canadian Mainline Western receipts averaging 3.2 Bcf a day. Our broader U.S. pipeline network moving approximately 26 Bcf a day, and our Mexican pipelines moving approximately 1.5 Bcf a day. Each of these amounts are similar to or greater than the volumes moved over the same period last year. At the same time, we continue to advance more than $27 billion of capital projects associated with our natural gas pipeline businesses. The program includes significant expansion of our NGTL System, capacity additions of our -- to our U.S. network, the Villa de Reyes pipeline, the Tula project and our Coastal GasLink pipeline project in British Columbia, which will play an important role in delivering Canadian natural gas to Asian markets. While it's too early to determine whether the COVID-19 pandemic will have any long-term impacts on our capital programs, what I would say is directionally, we would expect some slowdown of our construction activities in capital expenditure in 2020 because of the global health crisis and the impact, the COVID-related safety protocols will have on our construction productivity. Finally, in natural gas pipelines, last week, we are pleased to announce a 5-year revenue requirement settlement with our customers on the NGTL System. The settlement, which runs from January 2020 through December 2024, sets a base equity return of 10.1% on 40% deemed common equity and includes incentive mechanisms for certain operating costs where variances from projected amounts would be shared between TC Energy and our customers. The settlement was a result of a collaborative process between us and our customers and is responsive to their needs during this challenging time while providing us with a stable return as we invest billions of dollars in pipeline infrastructure to enhance their connectivity of natural gas supply to premium markets. Turning now to our Liquid Pipelines business, which generated solid results during the first quarter, despite extraordinary volatility in global crude oil markets. While the volatility did have an impact on our market link and liquids marketing bigger businesses, Keystone continued to produce solid results as it serves an important market in the U.S. Midwest and Gulf Coast and is underpinned by long-term take-or-pay contracts with strong counterparties. Also in Liquids Pipelines, we recently announced that we would commence construction of Keystone pipeline or the Keystone XL pipeline. Keystone XL is the fourth phase of the Keystone system and continues to be a very important project for both Canada and the United States. It will create thousands of jobs, advanced energy security for both nations in an environmentally and sustainable way. The project is underpinned by a new 20-year take-or-pay contracts that are expected to generate approximately USD 1.3 billion of incremental EBITDA on an annual basis once the pipeline is placed into service. Keystone XL will require an additional investment of approximately USD 8 billion and is expected to enter service in 2023. To advance the project, we have entered into a partnership with the government of Alberta, who will invest approximately $1.1 billion of equity into the project and fully guarantee a USD 4.2 billion project-level credit facility. Once the project is completed and placed into service, we expect to acquire the Alberta government's equity investment and refinance the credit facility. We appreciate the ongoing backing of landowners, customers, indigenous groups and numerous other partners in the U.S. and Canada, who have helped us secure project support and key regulatory approvals for this very important energy infrastructure project. In addition, I'd like to thank the many government officials across North America for their support without which this project could not have advanced. Moving forward, we will continue to carefully manage various legal and regulatory matters as we construct this pipeline, which will have the capacity to move about 830,000 barrels a day of responsibly produced energy from the Canadian oil sands to the continent's largest refining market in the U.S. Gulf Coast. Turning now to Power and Storage, where Bruce Power continued to produce solid results through the first 3 months of this year. After years of preparation, in January, Bruce Power commenced work on the Unit 6 Major Component Replacement, or MCR outage, when they took it off-line here in January. We expect to invest approximately $2.4 billion in that program as well as the ongoing asset management program through 2023 when the Unit 6 refurbishment is targeted to be done. Unfortunately, because of COVID-19 on March 25, 2020, Bruce Power declared force majeure under its contract with the independent electric system operator. This force majeure notice covers the Unit 6 MCR and certain asset management work. At the time, the force majeure was declared, the Unit 6 MCR program was ahead of schedule. Despite the force majeure, Bruce Power has been able to continue limited work on critical path activities as well as training for the MCR contractors. In late April, remobilization of the MCR workforce began with strict COVID-19 measures in place with respect to worker safety. The measures include shift adjustments to reduce headcount, increased personal protective equipment, physical distancing and a reduction in noncritical work. Operations and planned outages on all other units are expected to continue as normal. Finally, in power, earlier this week, we completed the sale of 3 natural gas-fired power plants in Ontario, Napanee, Halton Hills and our interest in the Portlands Energy Center. Net proceeds of approximately $2.8 billion will be used to help fund our industry-leading capital program. So in summary, today, we are advancing $43 billion secured growth projects that are expected to enter service by 2023. We have invested approximately $12 billion into this program to date with approximately $6 billion of these projects expected to be completed by the end of 2020. Notably, they are all underpinned by cost of service regulation or long-term contracts, giving us visibility to earnings and cash flow they will generate as they enter service. Based on the strength of our recent financial performance and our promising outlook for the future, in February, TC Energy's Board of Directors declared a first quarter 2020 dividend of $0.81 per common share, which is equivalent to $3.24 on an annual basis. This represents an 8% increase over the amount declared for the same period in 2019 and is the 20th consecutive year that our Board of Directors has raised the dividend. Over that same time frame, we have maintained consistently strong coverage ratios with our dividend, on average, representing a payout of approximately 80% of comparable earnings and 40% of comparable funds generated from operations, leaving us with significantly internally generated cash flow to invest in our businesses. Based on the continued strong performance of our base business, the organic growth and the organic growth we expect to realize as we advance our $43 billion secured capital program, we expect our dividend to grow at an annual average rate of 8% to 10% through 2021 and 5% to 7% thereafter. So in summary, I'd leave you with the following key messages. Today, we are a leading North American energy infrastructure company with a strong track record of delivering long-term shareholder value. Our assets provide an essential service to the functioning of the North American society and its economy and the demand for our services remain strong. Looking forward, we have 5 significant platforms for growth: Canadian, U.S. and Mexican Natural Gas Pipelines, Liquids Pipelines and Power and Storage. As we advance our $43 billion secured capital program, we expect to build on our long track record of growing earnings, cash flow and dividends per share. We have also more than $10 billion of projects in the advanced stages of development and expect numerous other in-corridor organic growth opportunities to emanate from our extensive critical asset footprint. Looking forward [Audio Gap] working in accordance with our values and responding quickly to market signals and sign posts to ensure we remain industry-leading and resilient as we continue to grow shareholder value. I'll now turn the call over to Don, who will provide more details on our first quarter results and our financial position. Don, over to you.

[Donald R. Marchand]

Thanks, Russ. Good afternoon, everyone. As outlined in our results issued earlier today, net income attributable to common shares was $1.15 billion or $1.22 per share in the first quarter of 2020 compared to $1 billion or $1.09 per share for the same period in 2019. First quarter results included a positive $281 million income tax valuation allowance release following our reassessment of deferred tax assets that are deemed more likely than not to be realized as a result of our decision to proceed with Keystone XL. This was partially offset by an incremental after-tax loss of $77 million related to the Ontario natural gas-fired power plants held for sale. First quarter 2019 also included certain specific items outlined on the slide and discussed further in our first quarter 2020 report to shareholders. These specific items as well as unrealized gains and losses from changes in risk management activities are excluded from comparable earnings. Comparable earnings in the first quarter rose by $122 million to $1.1 billion or $1.18 per share compared to $987 million or $1.07 per share in 2019, representing a 10% increase on a per share basis. Turning to our business segment results on Slide 14. In the first quarter, comparable EBITDA from our 5 operating segments was $2.5 billion, a $152 million increase compared to 2019. Canadian Natural Gas Pipelines comparable EBITDA of $597 million was $41 million higher than the same period last year, primarily on account of increased rate base earnings as well as flow-through depreciation and financial charges on the NGTL System from additional facilities placed in service. This was partially offset by lower flow-through income taxes on both the NGTL System and the Canadian Mainline as a result of accelerated tax depreciation measures enacted by the Canadian federal government in June 2019. NGTL System net income increased $22 million compared to first quarter 2019 as a result of a higher average investment base and continued system expansions and reflects an ROE of 10.1% on 40% deemed equity. Net income for the Canadian Mainline decreased $5 million year-over-year, largely due to lower incentive earnings. U.S. Natural Gas Pipelines comparable EBITDA of USD 766 million or CAD 1.032 billion in the quarter rose by USD 36 million or CAD 60 million compared to the same period in 2019. The increase was mainly due to contributions from Columbia Gas and Columbia Gulf growth projects placed in service, partially offset by the sale of certain Columbia midstream assets in August 2019. Mexico Natural Gas Pipelines comparable EBITDA of USD 198 million or CAD 269 million was USD 88 million or CAD 123 million above first quarter 2019. The increase was primarily due to higher earnings in Sur de Texas, including USD 55 million associated with onetime fees realized as a result of the successful completion of the project compared to contract targets as well as fees received from operating the pipeline. Liquids Pipelines comparable EBITDA declined by $118 million to $445 million in first quarter 2020 driven by lower uncontracted volumes on the Keystone pipeline system, a decreased contribution from liquids marketing activities due to lower margins and reduced earnings as a result of the partial monetization of Northern Courier in July 2019. Power and Storage comparable EBITDA rose by $43 million year-over-year to $194 million due to higher Bruce Power results, which were augmented by an increased realized power price and higher production resulting from fewer outage days, partially offset by losses on funds invested for post-retirement benefits. The higher contribution from Bruce Power was modestly offset by lower Canadian power results, largely due to an outage at our MacKay River cogeneration facility, which began late fourth quarter 2019 and the sale of the Coolidge generating station in May 2019. For all our businesses with U.S. dollar-denominated income, including U.S. Natural Gas Pipelines, Mexico Natural Gas Pipelines and parts of Liquids Pipelines, EBITDA was translated into Canadian dollars using an average exchange rate of CAD 1.34 in first quarter 2020 compared similar to the rate used for the same period in 2019. As a reminder of our approach to managing foreign exchange exposure, our U.S. dollar-denominated revenue streams are partially hedged by interest on U.S. dollar-denominated debt. We then actively managed the residual exposure on a rolling 1-year forward basis with realized gains and losses on this program reflected in comparable interest income and other. Now turning to the other income statement items on Slide 15. Depreciation and amortization of $630 million increased $22 million versus first quarter 2019, largely due to new projects placed in service in Canadian Natural Gas Pipelines and U.S. Natural Gas Pipelines. Depreciation of Canadian Natural Gas Pipelines is recoverable in tolls on a flow-through basis. Interest expense of $578 million for first quarter 2020 was $8 million lower year-over-year, primarily due to the net effect of higher capitalized interest related to Coastal GasLink and Keystone XL, lower interest rates on higher levels of short-term borrowings and long-term debt issuances net of maturities. AFUDC decreased $57 million for the 3 months ended March 31, 2020, compared to the same period in 2019, largely due to Columbia Gas growth projects placed in service during 2019 and the suspension of recording AFUDC effective January 1, 2020, on Tula due to continuing construction delays. Comparable interest income and other increased by $19 million in the first quarter versus 2019, primarily due to unrealized foreign exchange gains on peso-denominated deferred income tax liabilities, reflecting the weakening of the Mexican peso in first quarter 2020. Income tax expense included in comparable earnings was $211 million in first quarter 2020 compared to $228 million for the same period last year. The $17 million decrease was mainly due to lower flow-through income taxes on Canadian rate-regulated pipelines, inclusive of a lower Alberta corporate income tax rate, partially offset by lower foreign tax rate differentials and increased pretax earnings. Excluding Canadian rate-regulated pipelines, where income taxes are a flow-through item and thus quite variable, along with equity AFUDC income in U.S. and Mexico Natural Gas Pipelines, we expect our 2020 full year effective tax rate to be in the mid- to high teens after normalizing for these items. Comparable net income attributable to noncontrolling interest of $96 million in the first quarter decreased by $5 million related to the same period last year, primarily due to lower earnings in TC PipeLines, LP. And finally, preferred share dividends were comparable to first quarter 2019. Now turning to Slide 16. During the first quarter, we invested approximately $2.3 billion in our capital program, which reflects 100% of Coastal GasLink spending pending close of the equity sale of the KKR and AIMCo expected in the second quarter. Capital expenditures were largely funded with comparable funds generated from operations of $2.1 billion, along with cash on hand and notes payable. As everyone is acutely aware, capital market conditions have been significantly impacted by COVID-19, resulting in periods of dramatically heightened volatility and reduced liquidity. In response to this, we secured approximately $6.6 billion of additional financial capacity in early April through long-term debt issuances in Canada and the U.S. on compelling terms, along with the establishment of USD 2 billion of incremental committed credit facilities. Our solid financial position was bolstered earlier this week with the completion of the disposition of our 3 Ontario natural gas-fired power plants for $2.8 billion. The sale will result in a final estimated after-tax loss of $370 million, of which $271 million was realized at March 31, 2020. The remaining amount will be recorded on close and reflected in second quarter 2020 results. These transactions have collectively added over $9 billion in incremental liquidity over the past months, enhancing our financial flexibility and demonstrating our continued access to capital markets under stressed market conditions. Looking forward, our financial strength will improve further upon completing the partial monetization of and establishing project level financing for Coastal GasLink. In late April, we executed a credit agreement with the syndicate of banks, extending nonrecourse project level financing to fund the majority of the project's construction costs. The credit facilities will be available to be drawn once conditions precedent have been met, including the closing of the equity purchase agreement with KKR and AIMCo, which is expected to occur in the second quarter. As was highlighted, we have also secured government of Alberta support for Keystone XL in the form of a USD 1.1 billion equity contribution and USD 4.2 billion loan guarantee. Now turning to Slide 17. This graphic highlights our forecasted sources and uses of funds in 2020. Starting in the left column, our long-term debt maturities of $3.7 billion, dividend and noncontrolling interest distributions of approximately $3.3 billion and 2020 capital expenditures, which are now projected to be approximately $10 billion with the addition of Keystone XL and reflecting 100% of Coastal GasLink up to close of the equity purchase agreement brings our total funding requirements for the year to approximately $17 billion. The second column highlights aggregate sources of approximately $17 billion, including forecast internally generated cash flow of approximately $7 billion; proceeds from the sale of Ontario natural gas-fired power plants of $2.8 billion; the sale of a 65% interest in Coastal GasLink and associated project-level financing, which are together expected to generate approximately $2.2 billion; the government of Alberta's equity investment in Keystone XL of USD 1.1 billion or CAD 1.5 billion; and $3.7 billion of long-term debt that was issued in April. With the completion of these finance activities, we are effectively fully funded for 2020 and along with more than $13 billion of committed credit facilities in place and well-supported commercial paper programs in both Canada and the U.S. positioned to assure we navigate a prolonged period of disruption should that occur. In conjunction with the Keystone XL FID, we announced the dividend reinvestment plan will be reinstated in 2021 and 2022 to help fund our portion of the project spend profile. Further, to provide additional financial flexibility and support of our credit metrics and overall capital program, we intend to file a $1 billion equity shelf to enable an at-the-market equity issuance program, which will be utilized if and as deemed appropriate. We continue to firmly believe there is value in maintaining credit ratings. They're at the top of our industry. Now turning to Slide 18. In closing, I offer the following comments. Our solid financial and operational results in the first quarter continue to highlight our diversified low-risk business strategy and reflect the robust performance of both our blue-chip legacy portfolio, along with the contribution of equally high-quality assets from our ongoing capital program. Our overall financial position remains strong. We are well placed to fund our $43 billion secured capital program through resilient and growing internally generated cash flow and an array of attractive funding options. Our portfolio of critical energy infrastructure projects is poised to generate high-quality long-life earnings and cash flow for our shareholders, underpinned by strong fundamentals, solid counterparties and premium service offerings as well as germinate further attractive and executable in corridor opportunities. That is expected to support annual dividend growth of 8% to 10% in 2021 and 5% to 7% organic growth thereafter. Finally, we will continue to maintain financial strength and flexibility at all points of the economic cycle. That's the end of my prepared remarks. I'll now turn the call back over to David for the Q&A.

[David Moneta]

Thanks, Don. [Operator Instructions]With that, I'll turn it over to the conference coordinator.

[Operator]

[Operator Instructions] Our first question is from Robert Catellier.

[Robert Catellier]

I have a couple of questions. So the first one is on the Bruce force majeure. I just want to confirm, it sounds like it was entirely due to COVID-19, but can you confirm that there were no issues related to supply chain management, so no difficulty getting any equipment or anything like that? And what was the response to the force majeure claim?

[François Lionel Poirier, COO & President]

Robert, it's François, I'll take that one. So yes, I can confirm that the force majeure event was related to COVID-19. A lot of the work taking place in the reactor is under close quarters. With respect to our supply chain, we've had a very modest number of suppliers, none of them critical with some issues. And we've actually been working hard to resolve those issues with that very small number of suppliers, and we don't expect any of those issues to interrupt progress for the project.

[Robert Catellier]

Okay. And my second question, maybe for Russ or Don, happy to see that you've confirmed the dividend growth outlook despite the significant volatility in the markets, not to mention the fact that you've added a major growth project. So I'm just curious as to what it might take to shake the sanctity of that dividend growth outlook? And really what I'm getting at is whether or not you think you'll get value for that premium dividend growth rate, particularly the 8% to 10% in 2021.

[Russell K. Girling, President, CEO & Director]

I'll start, it's Russ, and maybe Don wants to augment. But as you know, we take a long-term view on our capital allocation policy. It's been unchanged for almost 2 decades here. We use 60% of our free cash flow, and we reinvested in our core businesses. And we take 40% of it, and we return it to our shareholders in the form of a dividend. We've maintained that sort of a payout ratio for a long period of time. And as you point out, you don't necessarily get value at all points in the cycle, but we believe over the long term, stability and predictability is a value to people. And as we've said before, when we provided that guidance of 8% to 10% through 2021, it was underpinned by growth in earnings and cash flow per share. And it will be our plan to maintain similar payout ratios that we've had in the past going forward. And I don't see any need to change that or any reason to change that. Don?

[Donald R. Marchand]

Yes. I concur, Russ. Again, when we give dividend guidance, it's really with that long-term perspective in mind. And as we outlined at Investor Day, 95% of our EBITDA comes from regulated long-term contracted assets. That will increase to 98% once Keystone XL is in service. And we believe we have fairly solid visibility to, in the absence of Keystone XL, EBITDA that's largely locked in the $10 billion range at the end of this decade. So I think it speaks to the criticality of our assets and just how important they are to the North American economy. So we are comfortable with that guidance and with what we consider payout ratios that are eminently affordable and hopefully value.

[Operator]

Our next question is from Robert Kwan from RBC Capital Markets.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

If I can first start with a question on the NGTL settlement. Specifically, just under the settlement agreement, can you just talk about the treatment of volume variances as well as any impact of customer bankruptcies? So first, treatment. Second, how the timing of any cash true-ups occur? And also, doesn't matter where on the system, there's either volume variances or customer bankruptcies, e.g., is it core system versus something on the edges like North Montney Mainline?

[Tracy A. Robinson]

Robert, it's Tracy here. So the Revenue Requirement agreement that we've just completed was a -- as Russ said earlier, was an effort collaboratively across the system and really kind of an alignment of our interest. So if you think about it, what it does is it gives our customers kind of true-up incentives for toll for us to kind of expand prudently and to manage our tolls down, which is what they're really concerned about. And for us, it gives us the assurances of the return on equity over a period of time where we do that expansion. So it's really around making sure that we're both aligned in the growth and the health of the basin. As it comes to the more specific issues around what happens if there are bankruptcies or other, it doesn't deal with those things specifically. The tenants of the rate-regulated system remains completely intact under this agreement. So I'll leave it there, and you can press on that a little if you need to.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Sure. Just kind of one follow-up. So does that get part -- I assume it gets parked into a deferral account, are you able to dispose of that during the agreement period? Or do you have to wait for the 5-year settlement to be done before to work it back into new rates?

[Tracy A. Robinson]

No. The toll system -- the toll arrangement, as I said, determining tools under this agreement is the same as it would normally be. What the incentive structure is, is that we've established with our customers what we would predict tools to be in the future. And if we can work our capital program and our expenses in a manner that toll fall below that projected level, then there are some benefits to us, particularly in depreciation rates. If tools come in above those baseline numbers, then the agreement can be opened, not the return on equity, but the agreement, some of the other provisions in the agreement can be revisited. There's also an incentive structure embedded in agreement, not dissimilar to what you've seen before in the NGTL agreements around costs, operating costs. And so there's no specific provisions around deferrals.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Perfect. Got it. And then if I can just finish turning to the Liquids system. Keystone and market lengths, are you able to give an update as to what flows and specifically, either price-sensitive or interruptible flows are on both systems today compared to where you were in the first quarter? And then is there also an update on the spill analysis and the pipe that was set for evaluation?

[Paul E. Miller, Executive VP & President of Liquids Pipelines]

Sure, Rob. It's Paul here. On the first question, our Keystone System ex Hardisty ran just about -- just under capacity. And recall with the spill we had late last year, we were going to be ramping up throughout the first quarter. So we ran just below capacity. We -- and that compares about the same as where we were Q1 of '19 and on a uncontracted spot basis, we were slightly ahead of where we were in Q1 '19 and in Q1 '20, probably about almost $0.01 higher. On the southern end of our system, this is where we saw a reduction in flows. We probably had about, let's call it, $0.03, $0.035 lower earnings generated from our market linked in Q1 '20 versus Q1 '19. On the spill cause, what we've -- what the independent would call it failure analysis determined that the failure was a result of a crack due to a weld defect with the pipe from the manufacturer. We have developed or in the process of developing technology that will allow us to detect these types of features elsewhere in the system, and we continue to do other maintenance and integrity work across the entire system as a result of the [ Enberg ] spill. I think what that's going to be for us going forward on Keystone System is we will probably see flows in Q2, Q3, about the same as we saw in Q1 as we worked the various integrity programs on the system.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

With -- Paul, with those flat flows, that's really a function no more of the work you're doing rather than what's being put through the system and demanded [ for -- on the system ]?

[Paul E. Miller, Executive VP & President of Liquids Pipelines]

Yes. It's kind of a combination, Robert. I see the -- Keystone continues to enjoy high demand, notwithstanding some of the supply cuts we've seen, particularly in Alberta. We have a lot of features that shippers find attractive as far as our ability to get to the market quicker with a competitor toll. And we're also seeing more late volume come into the system. And with our bullet line design, we have exceptional product quality, which becomes even more important as you move on later volumes. So we continue to see good volumes through the system. But there will be, I think, extra capacity available to us with some of the supply decreases. So we're going to take advantage of perhaps some of those lower supplies and bring some of that maintenance and integrity work for it. So it's going to be a bit of a combination.

[Operator]

Our next question is from Jeremy Tonet with JPMorgan.

[Jeremy Bryan Tonet, Senior Analyst]

Just wanted to start off with, I think counterparty concern is a big issue in the market place right there. And you guys seem to be in a pretty good position. I think you talk about IG being kind of a material percentage of your counterparties there, but I was wondering if you could share a bit more color as far as percentage-wise or any other details as far as what your exposure to investment-grade versus non-investment-grade is right now. And when you're talking to your producer customers in different basins, do you sense any kind of stress there or expectations just bankruptcy in general, how that might impact you if that were to come to fruition?

[Donald R. Marchand]

Jeremy, it's Don here. I'll start off, and I'll turn it over to my colleagues to give a little more color in their specific business areas. We're -- yes, our customer base is heavily investment-grade. And I think the value of the service is indicated in a couple of ways. One is just a high-capacity utilization we continue to see here. And things like the NGTL deal, where we have supply push customers for the most part, willing to sign a 5-year deal with us to underpin the system there. Where we have, I guess, more strain counterparties or lesser investment-grade counterparties to be concentrated more on the supply push side in the WCSB and in Appalachia. But to date, our revenue cycles aren't showing anything anomalistic in terms of payments. And again, our system utilization remains very high, and these are very advantaged basins. So maybe I'll turn it over to Stan and Tracy to add a little more color on their respective customer bases.

[Stanley Graham Chapman]

Jeremy, this is Stan. A thoughtful question. And while we have seen several producer downgrades over the past couple of weeks. Overall, our view of how we're handling this producer exposure really hasn't changed. We're still holding about $1 billion of collateral, predominantly in the form of letters of credit. We're still seeing high load factors with more than half of our large producers flowing at load factors in excess of 90%. It tells us that producers are continuing to get proper value for the capacity that they hold on our system, specifically given the fact that the TECO pool, the Columbia Gas trading point trades at a premium to TETCO M2 or Dominion South Point. Many of our producers have attractive hedges in place for 2020. And the recent price run-up we've seen on the NYMEX curve for '21, in particular, where prices are up almost $0.40 are not only going to allow for higher cash flow in realized prices, but also better hedged positions for 2021. More good news. Capital markets seem to be opening up to the producers, and we're seeing some transactions being completed. And some producers are using these proceeds to buy back debt at discounted values or to repurchase outstanding equity shares. And that, in turn, is driving equity valuations up pretty much across the board over the past 30 days or so. So our producer exposure, in our view, continues to be manageable. And it's good to hear some positive news on that front. With respect to our overall customer mix, at least within the U.S. gas business, you could generically think of us as having about 1/3 of our portfolio being covered by end users, 1/3 producers and then 1/3 marketers at least for the top 40 of our customers that generate about 70% or 75% of our revenues.

[Tracy A. Robinson]

Jeremy, I'll add a little bit from that on the WCSB. Stan, are you done?

[Stanley Graham Chapman]

Yes. I'm done, Tracy.

[Tracy A. Robinson]

Okay. I'll add a little bit on the WCSB. Much of the same about -- 2/3 of our customers are -- our revenues rather come from investment-grade customers. And nearly 90% is creditworthy. And for those others that are out there, we have collateral pursuant to the terms of both the tariff and the contracts. So without a doubt though, we're watching this very closely, and we do know that there are -- some of our customers out there who we are struggling with some near-term issues on equity valuations and liquidity. The federal government, of course, in Canada, has announced a program that we think offers a prospect of helping with some of that in the near term. And we believe and hope that, of course, this is a near-term issue because it stands at the fundamentals of gas right now are largely unchanged. If you look at the price curve as you go out, this is not a bad place to be right now. So we are positive.

[Paul E. Miller, Executive VP & President of Liquids Pipelines]

And Jeremy, it's Paul here. Maybe I'll just give you a better visibility on the liquids side on the Keystone shippers. We have a small number of large creditworthy investment-grade counterparties. The vast majority are integrated, where they have arrangements in place to move productions to their associated refineries. There -- I would say that probably weighted average in that BBB+ range. So generally, well capitalized and diversified super group.

[Operator]

Our next question is from Linda Ezergailis with TD Securities.

[Linda Ezergailis, Research Analyst]

I just want to get a better understanding of how we might think of the path forward for Keystone XL to the extent that you're running some scenarios potentially. I'm just wondering at what point the project's progress might be bottlenecked if the Permit 12 issue is not resolved and starts to become on the critical path. And maybe you can walk us through some understanding of where on the U.S. route, what percentage potentially crosses wetlands and waterways and what work could be done in the U.S. in advance of resolving that permit specifically?

[Bevin Mark Wirzba, Senior Vice President of Liquids Pipelines]

Linda, this is Bevin. I'll take that question. So yes, as you say, the District Court and Federal District Court in Montana vacated our nationwide Permit 12 on April 15. On the 29th, we filed a motion to stay that order. And we have a number of options that we're working with respect to hearing both the regulatory and legal aspects of that. As you are likely well aware, that nationwide Permit 12 is utilized by many industries across the United States for any such utility-related type project that crosses a waterway. So we are working those options and feel like we have our strategy formed there, and it will be -- it will evolve to the circumstances. With respect to the scope, we had always anticipated and the need to be agile in our construction management and our planning, and to have the availability of optionality of scope through the balance of the construction windows. And so as we're continuing even today to progress the border crossing, which is ahead of schedule, we are moving pipe around pipe yards, continuing camp construction and looking at the various pumps, stations and pipe spreads that we could achieve in the event that we're completely blocked by this current ruling or current situation. To your question on how much of the right-of-way is it would prohibit us to advance. There are -- there is an ability to pursue individual permits. There are -- there is the ability to advance construction in different ways and avoid certain routes. Those all come with incremental adjustments to the project that we're considering and weighing against the alternatives. But we do believe that our current plans today, obviously, our preferred path is to march forward with the spreads that we have identified for the U.S. But we do maintain that we will be able to complete a significant amount of work in the United States in 2020, even if it isn't the same scope under which we began the year. Just also want to comment, Linda, that we have had the ability to progress well in Canada, and those -- the activity in Canada will not be subject to those -- that nationwide Permit 12.

[Linda Ezergailis, Research Analyst]

That's very helpful context. And maybe just a bigger picture question. And I realize it's early days, but I'm wondering if the Board and management have put some thought to how this pandemic and some of the industry challenges might prompt TC Energy to reassess their approach to a long-term strategic plan and focus whether it'd be potential changes in consumer behavior or preferences, government policy or regulations potentially shifting in markets that you operate, including certain government support for certain parts of the industry. And I guess within that, I guess it's unknowable in terms of the effects -- the long-term effects, we know they'll be significant, but I'm just wondering if it might warrant a bit of a permanent shift in how you approach your strategic priorities?

[Russell K. Girling, President, CEO & Director]

Linda, I guess it is early to -- it's Russ. Pretty early to determine whether or not there's any shift required in our long-term plan. I think what's evident over the last few weeks has been the critical nature of what we do. I think as all of our business unit leads here pointed out, every part of our system is operating at a high load factor. As well, every part of our construction program across North America has been deemed essential service. So while the debate will continue in terms of the form of energy that will be required going forward, there's no question that the demand for reliable, affordable energy will continue for some time to come. And owning existing infrastructure and footprint will be a huge advantage in capturing that growth. So I don't think that -- at the current time, we're not seeing any shift in our strategy, but maybe more just a reconfirmation of what we've been focused on is demand for energy will continue to grow, and we're looking at the most efficient way of achieving that and where we've leaned in around our existing footprint in corridor seems to be a doable thing. And I suspect, as things move forward, it will become even more doable. Obviously, so some of our protocols will have to be adjusted on our construction sites in the coming weeks and months. We've introduced the protocols that have been required to date. I expect to see more of those but we're seeing no pushback at all in terms of continuing construction. And I guess maybe the last point I would make is we're hearing from governments, both local, state provincial and federal that construction-ready projects are going to be critical to putting people back to work as we emerge from this crisis. And then the knock-on effects that come with new economic stimulus, people buying -- us buying new parts and pieces, tires, trucks, all of those things are going to be huge boost to the economy and at least what we're seeing today, no pushback in terms of the tens of thousands of people that we're going to have on the ground working. So I'd say directionally, all things point to reaffirmation of our strategy as opposed to a change in direction.

[Operator]

Our next question is from Andrew Kuske with Crédit Suisse.

[Andrew M. Kuske]

We've obviously seen a number of severe dislocation cycles before. This one is obviously unique in a number of respects. And in those dislocation cycles, we've seen the debt raters move the goal post at various times. So you've had a situation of growing the business, deleveraging the company. But I guess the questions are, where do you really want to land it, like what metrics are you focused on? And what credit ratings are you focused on?

[Donald R. Marchand]

Andrew, it's Don here. There's really been no change to our thinking here. We continue to target long-term debt-to-EBITDA in the high 4s and FFO to debt in the 15% area. We think that's appropriate for a business risk for the corporate structure, the simple corporate structure that we have and the right balance between equity and debt. We believe that triangulates into the current ratings that we have. And we have recently, leading up to the Keystone XL announcement, engaged the rating agencies in a fairly extensive review of our business and our plans to execute that project. And you saw what came out of that. So aside from moving goalposts, which we have seen before or retroactive decision-making or macro calls, we're fairly comfortable with our capital structure with our coverages, and we look to the rating agencies' recent pronouncements that this -- what we have in front of them should keep us at the very top end of our industry, which is where we want to be in terms of the credit rating.

[Andrew M. Kuske]

Okay. And then maybe just one follow up, and it's in the geeky detail of the notes of the financials, and it's really just on the derivative marks. Obviously, there's a lot of volatility in Q1. And the marks that you had, they changed quite a bit. But maybe just on the interest rate derivatives, what portion of the interest rate derivatives were for existing versus planned issuance over the course of the year?

[Donald R. Marchand]

Yes. The anomaly in Q1 is early this year, once we executed the Coastal GasLink joint venture agreement we entered into interest rate hedges on the construction finance and project financing for that project, which will get rolled into the final financing and amortized over the life of those instruments. So that is the big change in this quarter. That -- those positions were entered into in very early 2020.

[Operator]

Our next question is from Robert Hope from Scotiabank.

[Robert Hope, Analyst]

Just one question for me. Just want to get a sense of how you're thinking about allocation of capital. You look relatively fully funded for 2020, but you did add some liquidity. And just wanted to think about your willingness to add on new projects or M&A in an environment where you significantly added to your backlog with Keystone XL, which does put some upward pressure on your metrics over the next 2 years.

[Russell K. Girling, President, CEO & Director]

No. Rob, I think you've pointed out correctly. I mean we've got a lot on our slate and a pretty good visible plan to continue to growing cash flow, earnings and dividends over the coming years. That said, I mean we'll always -- the reason that we've maintained, I would say, the best credit ratings in the industry and ensure that we have some financial flexibility and continued access to marketers to be able to act if good opportunities that add shareholder value arise. We're not actually on a hunt for any of those things right now. But obviously, for the right circumstance that would add shareholder value, we would act. But currently, we're pretty comfortable with our plans. We've got lots to do. And I think it's been pointed out again by all of our business unit leads and Don. All of our business is underpinned by strong fundamentals first, our growth projects that they're still needed in the market. We obviously, retested that here in the short run with all of our customers. Do you still want us to continue to build? And the answer has been unequivocally, yes, backed by strong creditworthy counterparties. Construction progress will be potentially a little bit slower than we anticipated. But that -- because they're rate-regulated or underpinned by long-term contracts, a pretty good visibility of cash flow and earnings. So we've got a great plan in front of us. Our focus right now is on execution. But if the right things come along, we will add them to portfolio. I certainly expect that we will see continued smaller projects that those $500 million to $1 billion additions to our footprint will continue to come to us, and those haven't stopped coming. And so I would -- you could expect us to be able to continue to try to add those to the portfolio here over the coming years. In terms of large scale, new greenfields large-scale builds. I don't really see that on the horizon. We don't have many of those in our portfolio today. So the kinds of things we're searching for more niche-oriented things like the pump storage project in Ontario, those kinds of things would be on the larger scale, but they're out there quite a few years from today. I don't know, Don, if you want to add anything to that?

[Donald R. Marchand]

Yes. I'll just -- a couple of other comments here. Even if you do and anything that's greenfield in nature brownfield, it's generally, by the time you get through a permitting process, a couple of years out before you're spending any significant capital on that opportunity. And from a credit metric perspective, by embarking on Keystone XL, with the mix of financing that we've indicated here, which is pretty much all subordinated, it's turning on the DRIP and a hybrid issue. We don't see huge upward pressure on our credit metrics. Our debt-to-EBITDA temporarily goes into, we call it, the low 5s through what we hope is a compressed construction period then returns back into the high 4s once Keystone XL was completed.

[Operator]

Our next question is from Jeremy Tonet with JPMorgan.

[Jeremy Bryan Tonet, Senior Analyst]

My questions have been addressed.

[Operator]

Our next question is from Asit Sen with Bank of America.

[Asit Kumar Sen, Research Analyst]

If I could go to Keystone XL and Montana and on Permit 12. I was wondering if you could provide your thoughts on the next watch items for investors. And any sense of potential delay in some of the options that you're exploring?

[Bevin Mark Wirzba, Senior Vice President of Liquids Pipelines]

Sure. This is Bevin speaking, Asit. The long-term potential delay with any of these kind of very omnibus-type filings or motions to vacate a permit that broad could have up to a year delay on the ultimate project, much like many of the circumstances that we've faced historically. However, we've been mitigating those types of impacts by way of pursuing other forms of the scope in parallel, which was what we had anticipated prior to taking FID is that we have been following the regulatory standards and the rule of law, and we feel that we'll ultimately clear the issues that are present in front of us right now and be able to continue pursuing activities. I don't believe it's appropriate for me to comment to speculate on what may be the next -- what another turn of events could be. Right now, we feel we have our plans in place to either construct the scope that we had shared with the market or we have an alternative plan that is well underway to satisfy moving the project forward.

[Asit Kumar Sen, Research Analyst]

Appreciate it. And Russ, Don, if I could ask you a big picture question. Could you speak to the M&A environment currently? How do you compare this cycle to previous ones, any broad thoughts?

[Russell K. Girling, President, CEO & Director]

I guess maybe is it -- as I think about sort of M&A cycle, our -- we tend to be countercyclical in our M&A activity. And so what we look for is opportunities to buy high-quality assets at reasonable prices. Our experience has been historically that those potentially come available in these times of tightened liquidity and where it's a lower cost form of accessing liquidity to sell assets than maybe some of the other options that the companies might have. So I think that's where opportunity might lie for us again. But in the current time, we're not seeing that. But as you think about the times we've acted and transacted in the past, it's been at those times where we've been able to use our strong competitive financial position when others didn't have that same capacity to act and buy really good assets at reasonable prices. So it has some of the -- the current environment has some of the attributes of what we've seen before the financial crisis and the like that we've seen in the past. But to date, we haven't seen anything come available.

[Operator]

Our next question is from Patrick Kenny with National Bank Financial.

[Patrick Kenny, Managing Director]

Just wanted to go back to the discussion surrounding force majeure due to COVID, but thinking more specifically about your contracts on the base Keystone. As you mentioned, Paul, we haven't seen any real volume reduction yet. But of course, depending on how deep producers cut CapEx and shut-in production over the coming months. I know it's hypothetical at this point, but I'm just wondering if you can confirm what exposure you might have within your take-or-pay agreements, assuming a shipper does try to declare force majeure on Keystone.

[Paul E. Miller, Executive VP & President of Liquids Pipelines]

No. Patrick, under our take-or-pay contracts, there is no provision for force majeure, be it for supply or production upsets or otherwise. And I think where we sit today with Keystone, when you consider the markets we serve, when you consider our -- the advantages we bring to marketplace as far as the product quality, the direct path, the visibility into delivery times, I feel confident that we will continue to run at high volume. Then you consider the take-or-pay nature of our contracts and being 94% contracted on Keystone, I don't foresee any significant reduction in the throughput, notwithstanding what we're seeing on the supply side and notwithstanding what we're seeing with some of the challenges with some differentials.

[Patrick Kenny, Managing Director]

Okay. Great. And then on the liquidity front and looking at the upcoming sale of Coastal GasLink, you get the project financing in place, but just curious what conditions and consents to close the deal might be at risk in this environment? Are there any construction milestones outstanding by the end of the quarter? Or any clarification required by the buyers with respect to the deal between Ottawa and the Wet'suwet'en? Just wondering if there's -- could be any speed bumps to delay closing at this point?

[Donald R. Marchand]

It's Don. I'll start out by saying that the project financing, the construction facility has closed in escrow. So we believe we're on track to completing the equity purchase agreement in late May, and the conditions precedent in the path to closure. There's really nothing particularly unusual in there other than normal conditions precedent and the passage of notification periods.

[Tracy A. Robinson]

Patrick, it might be interesting that just to note as well that the agreement you referenced between the federal government, the government of British Columbia and the Wet'suwet'en is not related in any way to this project. It speaks to -- we're told the broader issues around rights and title.

[Operator]

Our next question is from Shneur Gershuni from UBS.

[Shneur Z. Gershuni]

Most of my questions have been asked and answered at the stage -- at this late stage. Maybe I just wanted to revisit the dividend question, which was asked at the very beginning. I do appreciate the color and commentary you gave with respect to the targets over the longer-term period. But I was kind of wondering if there was a more vigorous debate at the Board level this time around? Just given the impact of COVID-19, the fact that it could last longer than people are forecasting and contrasting that with the fact that you're now turning the DRIP back on, we're talking about an ATM and so forth. And so did it make sense to maybe lower the targets a little bit in the near term and sort of rereview it? Or was that really not part of the discussion at all?

[Russell K. Girling, President, CEO & Director]

No. It wasn't part of the discussion. What are -- the discussion around dividend really hinges on the visibility and sustainability of cash flow and earnings growth going forward. And as we sat down with our Board here over the last couple of days, we looked at the cash flow of the base business, any potential impacts on that going forward, impacts on our ability to get capital in the ground and get the projects that we've got in progress, cash flow. And at the current time, we don't see any disruption in either of those. And therefore, I mean, no impact on their view as to what our dividend should be on a go-forward basis. When you think about something like Keystone XL, the issuance of some equity is a way to finance a long-term project that will bring long-term cash flow to our shareholders. So it's very -- it's an accretive project. In terms of the risk capital going in between now and the end of the year, for example, that's primarily covered by an equity injection from the Alberta government. Once we get post the end of the year, 2/3 of the capital comes from the credit facility that's provided from the government of Alberta. And as Don pointed out, those are all mezzanine-level facilities. It shouldn't impact our creditworthiness in any way. So as we think about financing long-term projects, we have never looked to impairing our dividend growth rate. We never got it too far ahead of ourselves. We've never been, I think, too anemic. We found a place that, as I said, is about 40% of our cash flow going back to our shareholders and then using the 60% to grow the company. And what we found is investing that 60% has driven a growth rate of 7-ish, 8% over the last number of years, and we've been able to augment that by doing projects that have a return that's greater than about 8%. And when you look at the accretiveness of Keystone XL, I think as we sort of look at the overall value to our shareholders, it makes sense for us to finance in the way that we have suggested and not impairing our dividend growth rates. Don, I don't know if you want to add to that. But as I said, I think that playing with your dividend payout ratios on a short-term basis to try to get the best possible value out of the market at a given instance in time is fraught with risk. We believe that long-term consistency and discipline around the capital allocation program over the long-term yield the best results for our shareholders. And I think we've proven that out over the last 20 years. As folks have come at us with different questions at different times in the cycle of whether we would accelerate or decelerate our capital allocation program and our dividend payout ratios, and we've stuck to the discipline that we have. And we believe that has produced good long-term shareholder value and stability.

[Shneur Z. Gershuni]

So that definitely makes a ton of sense there. Maybe just to follow-up a little bit. When I sort of think about North American midstream company [indiscernible] and also CapEx reductions, and I think you kind of bucked that trend a little bit. Is it more a factor that your business tends to be more regulated in nature, contracted in nature, and there's really not that kind of an adjustment process that you have to be and that's kind of a differentiating factor for TC Energy? Or how should we think about that as to how you've been different than the others?

[Russell K. Girling, President, CEO & Director]

Well, again, I would -- I can't speak to other programs, but our focus has been on assets that are underpinned by long-term fundamentals. And you think of something like a Bruce Power or Keystone XL, Coastal GasLink. Long-term fundamentals were -- and we believe that, that infrastructure will be used and useful and utilized for many decades to come. And maybe a differentiating factors, we don't bet on that. And we have that reconfirmed with long-term contracts or rate-regulated contracts where a regulator approves those assets for the long term. And when you look across our assets in our $43 billion capital program, we haven't taken commodity risk, and we haven't taken what I would call back end contract risk. And I think those are 2 things that people are probably struggling with right now. If capital projects are subjected to commodity risks and you have the kind of volatility we've seen, you have to adjust your programs accordingly. But if you think of what we're doing for the most part, on the pipeline side is we're building access, more market access for customers. The single greatest impediment to netback prices has been not being able to build the infrastructure required to get to market and very wide differentials. And so as we went back to our shippers, the best example I would have is the 5-year agreement that we just put in place with our shippers. That gives us the stability to continue to attract capital to build the egress that they need for the long term. And again, so reaffirm those. We understand that some of those shippers are facing near-term liquidity issues that are fairly acute. But at the same time, recognize that their long-term interests are best served by us continuing to build the infrastructure to support the industry over the long term. We believe that Western Canada, for example, is one of the lowest cost basins in North America, one of the lowest cost basins in the world. And they'll continue to compete for market share going forward, but what they need market access to be able to do that. So I think we're -- we may be unique, but that's certainly the discipline that we've had in looking at every project that we take on as it has to have those characteristics. And I think by sticking to that discipline has served us very well.

[Operator]

Our next question is from Matthew Taylor with Tudor, Pickering, Holt & Co.

[Matthew Taylor, Director of Midstream Research]

On 2020 earnings guidance, I know we're only 1 quarter in, but pretty fast start out of the gate, 10% higher year-over-year. I'm just curious what parts of your business are most impacted COVID-19 related or other weakness in the next couple of quarters that you felt likely in the February earnings guidance is consistent with 2019 unchanged?

[Donald R. Marchand]

Yes. It's Don here. Some pluses and minuses that largely net out at the end of the day. We've been expecting the onetime-ish benefit from the Sur de Texas fees. So that's in there. But when you look at things like visibility to liquids marketing, market link, got some tax pluses and minuses, et cetera, we generally come back to where we started the year with earnings largely consistent with 2019. So it's a bunch of pluses and minuses. There's nothing, I would say, particularly COVID-related that's pervasive in that outlook right now. We -- it's kind of steady as it goes with some limited visibility in just some pockets of the business right now.

[Matthew Taylor, Director of Midstream Research]

That's great. And maybe one more housekeeping question, if I can. On the 2020 CapEx guidance of $10 billion, does that include the expected slowdown? I know you guys said it's uncertain at this point in time, but spending on projects like Bruce Power and Coastal GasLink. And then does it include the full assumption of utilizing the government's equity investment in 2020?

[Donald R. Marchand]

Yes. It's Don again here. So we were at $8 billion in February in the annual report. It's $10 billion now. Essentially, the entire delta is the inclusion of Keystone XL and the vast majority of that will be funded by the government of Alberta's equity contributions. So both the uses and sources are up and largely net out there. In terms of COVID-related slowdowns, I wouldn't say we've incorporated much in there because it's early days, and we were not entirely sure how material this might be. So that's something we'll look at in the coming weeks and months here as we assess the restart conditions on our projects, anything that may change there. It's not necessarily supply-demand related. It is really how fast can we safely build things within governmental and health authority regulations.

[Operator]

[Operator Instructions] Our next question is from Michael Lapides with Goldman Sachs.

[Michael Jay Lapides, Vice President]

Very thorough conference call. Mine's been asked and answered. Much appreciated though.

[Operator]

We have no further questions registered at this time.

[Russell K. Girling, President, CEO & Director]

Okay. Great. Thank you, and thanks to all of you for participating today. We obviously very much appreciate your interest in TC Energy and we look forward to talking to you again soon. In the meantime, obviously, we wish you and your families, good health.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.