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TC PipeLines (TCP) Q3 2018 Earnings Conference Call Transcript

By Motley Fool Transcription – Nov 9, 2018 at 5:26PM

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TCP earnings call for the period ending September 30, 2018.

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TC PipeLines (TCP)
Q3 2018 Earnings Conference Call
November 9, 2018, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen. Welcome to the TC PipeLines LP 2018 third quarter results conference call. I would now like to turn the meeting over to Miss Rhonda Amundson. Please go ahead.

Rhonda Amundson -- Head of Investor Relations

Thank you very much, Operator. Good morning, everyone. I would like to welcome you to our third quarter 2018 conference call. I'm joined today by our President Nathan Brown, our VP and General Manager Janine Watson, and our Principal Financial Officer Chuck Morris. Please note that a slide presentation will accompany their remarks and is available on our website at or it can be found in the investor section under the heading Events and Presentations.

Nathan will begin the call today with a review of TC PipeLines' third quarter highlights and results. Janine will provide an update on the partnership's assets and the market environment as well as a brief regulatory update, following which Chuck will provide a more detailed review of our financial results for the third quarter. Nathan will return and wrap up our remarks and close with some key takeaways.

Following the prepared remarks, I will ask the conference operator to coordinate your questions. We will take questions from the investment community, but if you are a member of the media, please contact Grady Semmens following this call and he will be happy to address your questions.

Before we begin, I would like to remind you that certain statements made during this conference call will be forward-looking regarding future events and our future financial performance. All forward-looking statements are based on our beliefs as well as assumptions made by any information currently available to us. These statements reflect our current views with respect to future events and are subject to various risks, uncertainties, and assumptions as discussed in detail in our 2017 10-K as well as our subsequent filings with the Securities and Exchange Commission.

If one or more of these risks or uncertainties materialize or if the underlying assumptions prove incorrect, actual results may differ materially from those described in the forward-looking statements. Please also note that we use the non-GAAP financial measures EBITDA and distributable cashflow during our presentation.

EBITDA is an approximate measure of our operating cashflow during the period and reconciles directly to net income and distributable cashflow is presented to provide a measure of cash generated during the period to evaluate our cash distribution capability. These measures are provided as a supplement to GAAP financial results and we provide a reconciliation to the most closely related GAAP measures in our SEC filings.

With that, I will now turn the call over to Nathan.

Nathan Brown -- President and Director

Thanks, Rhonda. Good morning, everyone and thanks for joining us today. As outlined this morning in our news release, I'm pleased to report that TC PipeLines had another very good quarter, with solid results and our portfolio of pipeline assets continue to perform as expected. We generated $62 million in net income during the third quarter of 2018, $8 million higher than the $54 million earned during the same period of 2017. This is primarily due to higher revenues of PNGTS and North Baja, together with increased equity earnings from Great Lakes, partially offset by lower net revenue at GTN.

Our EBITDA was similarly higher year over year at $113 million for the quarter compared to $103 million in 2017. Our distributable cashflow was $83 million for the third quarter in 2018, an increase of $18 million from the comparable period in 2017. Our cashflow was bolstered by a reduction in distributions paid to our general partner, Class B unitholders, partially offset by an increase in maintenance capital expenditures on GTN.

We paid out $47 million in distributions or $0.65 per unit to our common unit holders during the third quarter. The partnership also requires third quarter distribution of $0.65 per common unit, which consistent with our second quarter 2018 distribution. Chuck will discuss our financial results in more detail a little later on the call.

On the regulatory side of the business, we have made good progress in response to FERCs ruling back in summer. As we reported in mid-October, GTN reached an uncontested settlement with the shippers and four of our other pipelines have already complied with FERC requirements leaving only Northern Border, Great Lakes, and Tuscarora left to file their Form 501-Gs in early December.

We utilized our cash savings related to our reduced distributions to repay a portion of our indebtedness, reducing our leverage position from a covenant perspective to just over four times. Our distribution coverage was very healthy this quarter at just under two times. This puts us in a much stronger financial position and we are confident that we will not require additional equity, either discreet or via our ATM program to fund our ongoing organic growth opportunities.

Further, due to our regulatory progress, our estimate of the tax-related impact to our business from the FERC actions improved to negative $20 million to $30 million on an annualized basis starting in 2019 from our previous estimate of negative $40 million to $60 million. Given this improvement, we do not see the need for corporate restructuring and we're confident that our distribution is sustainable at the current level without the need to consider any further reductions.

With that I will turn the call over to Janine Watson, our VP and General Manager to provide an update on our partnerships asset and market outlook.

Janine Watson -- Vice President and General Manager

Thanks, Nathan and good morning, everyone. Moving to slide five, you will see that TCP continues to benefit from its diverse pipeline network, which is anchored on major regional hubs and key supply and demand markets. In the third quarter, our entire portfolio of assets continues to perform well, reflecting the fact that our pipelines are well-positioned in these key areas, are highly contracted and have seasonal opportunities to realize incremental revenue.

On the East Coast, Portland benefited from increased contracting from its continent to coast customers as its legacy contracts mature. These are long-term transportation contracts, which together with Portland Express project contracts will serve to replace expiring legacy contracts and expand the Portland system to approximately 0.3 BCF per day.

North Baja benefited from an increase in short-term transportation services sold during the quarter. This potential to deliver southbound gas into Mexico that can then be routed back into Southern California stimulated interest in this asset's available short-term capacity.

We saw continued strong demand for transportation service on our GTN pipeline, serving energy needs in California and the Pacific Northwest. However, the incremental demand revenue earned by this asset was offset by the 2018 revenue refund agreed to with the shippers as part of GTN's recent uncontested supplement.

Upstream debottlenecking on TransCanda's NGTL system continued as basic differentials between the Western Canadian sedimentary basin and Midwestern markets are very supportive of gas flows in those regions on TCP's assets. Great Lakes is benefiting from the strength of the supply push out of the WCSB, resulting in incremental short-term sales.

Great Lakes revenues were also improved compared to Q3 of 2017 due to the elimination of the revenue sharing mechanism that was a feature of this asset's tolls and tariffs prior to the 2018 settlement with the shippers. Northern Border's capacities largely sold out until the end of 2019, as it continues to enjoy the advantage of both its upstream tie to the WCSB and its proximity to Bakken-associated gas.

The remainder of our asset portfolio performed as expected, as reported continued stable results during the third quarter. Now, turning to our outlook.

TC PipeLines' assets are geographically varied, strategically located, and enjoy many synergies with TransCanada's assets, allowing TCP to potentially benefit from some unique opportunities. First, because of the highly contracted nature of pipeline assets, we expect that they will continue to perform in a consistent manner with past periods and thereby produce steady, predictable results.

Our Portland natural gas pipeline system is strategically located in a geographic area that is otherwise significantly bottlenecked, providing this asset with some relatively easy expansion opportunities to serve markets in New England and up in Atlantic Canada. Our Portland Express or PXP expansion project provides an example of the type of appropriately scaled, well-placed, and well-timed expansion projects that we are seeking out across TCP's footprint, providing a competitive path to market with a fairly minimal environmental and regulatory footprint.

Work on the PXP project is currently on time and on budget. Phase one of the project came online in November of this year, bringing an incremental 40,000 dekatherms a day of flows onto Portland. Phase two of this project, which will extend or recontract existing legacy volumes on this line, is expected to be in service in November of 2019. This phase of the PXP project is supported by compression stabilities to be built on pipelines in conference, upstream of the Portland system.

TransCanada has the regulatory approvals needed for the capacity additions in hand and construction of their facilities has commenced. The final phase of this project entails a fairly modest brownfield construction project entailing a compressor and associated facilities on Portland's joint facility at an estimated cost of about $80 million to be self-funded at the asset level.

Permitting and preconstruction work is under way on schedule for the planned November 2020 in service day. In total, these three phases will add an incremental 70,000 dekatherms of firm, long-term contracting on the Portland system.

Beyond this opportunity, the combination of ongoing permitting difficulties in the US Northeast, together with recent declines in Atlantic Canada's offshore gas production is driving additional market interest in the Portland system.

The TransCanada main line has recently launched two open seasons to bring new capacity on the system, to bring natural gas to Northeast and Atlantic Canadian markets, the results of which are still pending and are expected to be announced by month's end. Portland is working with the main line to capture the next wave of growth opportunities on this path in response to these market drivers.

At the same time, LNG-backed opportunities are arising in the west, creating potential for organic growth at North Baja. As in the news as recently as a few days ago, Sempra's LNG export project, located in Baja, California/Mexico appears to be going forward. If it proceeds, the North Baja pipeline's existing footprint could provide a competitive connection to this new export market.

Great Lakes is well positioned to move incremental WCSB production to eastern markets as well. TransCanada's Canadian and US pipeline groups are working in tandem to explore alternatives that optimize the use in Great Lakes' existing capacity to markets that provide value to its shippers, as was the case with TransCanada's main line, long-term fixed price agreements that go back to November of 2017.

In summary, we are working to identify the next wave of growth opportunities for TCP, taking advantage of the competitive strength and strategic importance of our major pipeline systems as a platform to develop low-risk, value-creating projects supported by long-term contracts.

Now, turning to slide six, let me provide a little bit more detail on our regulatory developments during the third quarter. We continue to execute our regulatory strategy in response to the FERC actions earlier this year. Our Bison pipeline submitted its FERC Form 501-G, explaining that all of Bison's long-term firm contracts are at negotiated rates and no rate change is warranted.

On October 17th, we announced that GTN had reached an uncontested settlement with its shippers, which was filed with FERC the day prior. This settlement is structured as an amendment to GTN's 2015 settlement with its shippers, addressing the FERC's recent actions in the context of that previous arrangement. Importantly, GTN and its customers have agreed upon a moratorium on further rate changes prior to January 1, 2022.

North Baja and Portland filed their form 501-Gs on October 11th. On October 12th, Iroquois filed with FERC requesting a waiver of its requirement to file a Form 501-G based upon its existing moratorium to 2020. FERC's decision on this request is still pending. Our remaining assets as scheduled to file by December 6th, 2018.

In light of our negotiated settlements on GTN and as we progress through the Form 501-G process and engaged in discussions with our shippers, management's views of the range of possible outcomes has improved. The impact in 2018 is expected to be limited to the $10 million payment to GTN's shippers this December.

The full revenue impact of the FERC's recent initiative and Form 501-G process is now estimated at a negative $20 million to $30 million a year starting in 2019. We are very pleased with our progress on these matters thus far.

I will now turn the call over to Chuck Morris, our Principal Financial Officer, to discuss our third quarter financial results in more detail.

Chuck Morris -- Principal Financial Officer and Treasurer

Thanks, Janine, and good morning, everyone. Moving on to slide seven, I'll now review the partnership's third quarter 2018 results. Net income in the third quarter was $62 million, up approximately 15% over $54 million in the third quarter of 2017. This equates to $0.79 per unit compared to $0.61 per unit in 2017.

Several factors impacted our Q3 2018 results, the net effect of which led to the increase year over year. We experienced higher contracting on PNGTS, and higher demand for short-term services on North Baja, which resulted in higher revenues. Equity earnings on Great Lakes increased year over year due to the elimination of the revenue sharing agreements and incremental short-term seasonal sales.

These increased results were partially offset by lower net revenue at GTN, resulting from a combination of its refund provision and its recent settlement and lower short-term sales. The partnership paid distributions of $47 million to common unit holders in the third quarter.

The $27 million decrease over Q3 2017 was primarily due to a $0.35 decrease per common unit in the second quarter 2018 distribution that was paid in August of 2018. As Nathan mentioned earlier, we declared our third quarter 2018 distribution of $0.65 per common unit. This represents a decrease of 35% that declared in the third quarter of 2017 but is consistent with our first and second quarter distribution following the FERC actions.

The partnership's EBITDA of $113 million in the third quarter was 10% higher than that of the same period in 2017. The distributable cashflows were $83 million in the third quarter of 2018, $18 million higher year over year. The increase was due to the same factors impacting net income, together with a reduction in distributions allocated to both our general partner and our Class B unit holders, partially offset by an increase in maintenance capital expenditures of $2 million on GTN related primarily to the timing of pipeline reliability work.

Turning to slide eight, revenues from our consolidated pipelines of $103 million were approximately 3% higher than those in the same quarter last year. The increase was a result of the incremental contracting on both PNGTS and North Baja, partially offset by the lower revenue at GTN.

Equity earnings in the third quarter of 2018 were $7 million higher than the same period in 2017, primarily due to the increased results at Great Lakes. Operating maintenance and administrative expenses, depreciation and financial charges during the third quarter were all comparable to the same quarter in 2017.

Moving on to our financial position on slide nine -- our investment grade credit ratings provide us with the financial flexibility as we continue to fund our organic growth. Our liquidity position remains strong. The partnership has $430 million of undrawn and available capacity under our senior credit facility as of November 9th, 2018. As we continue to execute our deleveraging program, we've used our cash savings related to our reduced distributions to pay a portion of our outstanding borrowings and a revolving credit facility in advance of the anticipated reductions and future cashflows resulting from the FERC actions.

As a result, our bank leverage ratio is approximately 4.1 times at September 30th, 2018. Similarly, our distributable cashflows this quarter resulted in a very healthy distribution coverage ratio of 1.8 times in the third quarter.

This concludes my remarks on the third quarter financial results. I will now turn the call back over to Nathan.

Nathan Brown -- President and Director

Thanks, Chuck. I'll now refer to slide ten. This has been a very good quarter for our partnership. We've made a lot of progress on the regulatory front and believe that we can see a clear path forward and return to focusing on other parts of our business. Our assets are performing very well and we remain confident that they are well situated to benefit from solid underlying market fundamentals and will continue to generate value for our unit holders well into the future.

We have taken a proactive approach to managing our financial position over the past few months and are happy to report that our leverage ratio is over four times and our distribution coverage ratio is solid as well.

Going forward, we are targeting to maintain our coverage ratio in the 1.5 times area and our leverage ratio in the low four times range. With this solid financial position, we have no plans to access the equity capital markets to fund our current growth program. Our focus remains on the optimization of our asset portfolio and we are looking to secure the next wave of growth opportunities on our assets. These include organic growth projects on PNGTS, such as our current Portland Express project, as well as potential opportunities on our North Baja pipeline.

All of these will be progressed in very disciplined manner, with near-term opportunities sized and sequenced so that we are in a position to be self-funding. We have a history of prudently managing our partnership and our confident that our portfolio of crucial energy infrastructure assets will continue to generate solid financial results with opportunities for organic growth in high quality, low-risk, value creating projects for our unit holders.

I'll now turn the call back to Rhonda.

Janine Watson -- Vice President and General Manager

Thanks, Nathan. I'd now like to open the call up for questions. Operator, please go ahead.

Questions and Answers:


Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please check your handset before making your selection. If you have a question, please press *1 on your telephone keypad. If at any time you wish to cancel the question, you may press the # sign. Please press *1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience.

The first question is from Jeremy Tonet from J.P. Morgan. Please go ahead.

Charlie -- J.P. Morgan -- Analyst

Hey, good morning. This is Charlie on for Jeremy. I was wondering if we could circle back to the regulatory update. It seems like a lot of operators are going with that third option, similar to what you did with Portland. I was just curious -- as we look forward to some of your remaining pipes that you still need to submit 501-Gs for in December, any thoughts there on expectations? Are you already speaking with shippers to come to a settlement prior to submitting that form similar to what you did on GTN?

Nathan Brown -- President and Director

This is Nathan. I'd say we're progressing through our regulatory strategy on a pipe by pipe basis. Each one has slightly different facts and circumstances that work in their favor. Certainly, reaching out to the customer group is something we do on a regular basis when we have something like this going on within the regulatory realm. So, communication will be ongoing in due course, but in terms of the actual approach, we're finalizing that and should be adding all that with the filings about this time next month.

Charlie -- J.P. Morgan -- Analyst

Okay. Good thanks. Then just on some of these growth opportunities you outlined, specifically with North Baja -- can you just explain a little bit more in detail what the size and scope of this opportunity would be? Sorry, the Sempra LNG project, is this ECA?

Janine Watson -- Vice President and General Manager

Costa Azul.

Charlie -- J.P. Morgan -- Analyst

Yes, right.

Janine Watson -- Vice President and General Manager

Well, it's early days on that front, but certainly there is some fairly easy brownfield compression we can do along that line to move even up to 400 or 500 a day to meet the needs of that new LNG export ability should it come to pass.

Charlie -- J.P. Morgan -- Analyst

What's the expectation on timing on that?

Janine Watson -- Vice President and General Manager

I think we're working on these issues all the time. They come to market when the market is ready to sign up and when we have contracts under way. I think we should be pushing on this one fairly quickly over the next two quarters and we hope to have more news in the new year.

Charlie -- J.P. Morgan -- Analyst

Thank you.


Our next question is from Matthew Taylor from Tudor, Pickering, Holt. Please go ahead.

Matthew Taylor -- Tudor, Pickering, Holt & Co. -- Analyst

Yeah, hey, guys. Thanks for taking my question. Still early stages on the ongoing open season. On those, do you need new capacity? Can you just remind us how much you can expand those systems if more volumes start showing up in the Eastern triangle?

Janine Watson -- Vice President and General Manager

Yes. TransCanada is open season. They have one that is still open and one that is closed but not yet announced. So, the amount of capacity needed in the triangle, I think, is unknown at this point. It seems like they've got a positive response, but we'll see when they're ready to come forward with what that looks to be.

PNGTS and Iroquois both have some ability to -- PNGTS has quite a robust ability to add more compression to move more gas if that proves to be the direction those new shippers want to take. Then Iroquois as well has some potential, but I think it's a little bit more built out at this point.

Matthew Taylor -- Tudor, Pickering, Holt & Co. -- Analyst

That's helpful. A similar sort of conversation -- if something like East Coast Canadian LNG goes ahead, probably a similar conversation on ability to expand some of the systems there. Is the opportunity such that you could capitalize on that as well?

Janine Watson -- Vice President and General Manager

Well, I think TransCanada is talking to a lot of different LNG proponents out there and we're interested in being involved should that materialize, but I think it's very early days. We'd have to see what path those shippers want to take.

Matthew Taylor -- Tudor, Pickering, Holt & Co. -- Analyst

If I switch over to Northern Border, if you look at volumes on that system, I don't think you highlighted any growth opportunities there. I'm just thinking Canadian volumes are trending downward. Is there any opportunity to use some of that Northern latent capacity that otherwise would have been filled with Canadian volume that might not be seeing the same volume flow to connected bison or maybe not even bison but to do something else with that northern piece of Northern Border?

Nathan Brown -- President and Director

That's certainly something we're looking at. The dynamic you're describing is reflective of the rise in volumes that have flown on the Northern Border. Certainly, there's a regional solution to be had there among several different things. So, within the asset of Bison, we've got some open capacity, whether it's a reverse flow of gas or some other project conversion along the way. There are certain opportunities there we're pursuing.

But again, it's fairly early days on those, but we do think the value of our assets and the value of pipe in the ground can be something we can capitalize upon. Whether that translates into another solution that involves Northern Border, that's certainly in the realm of possibility within the things we're going to pursue to try to manage the volumes we see in the Bakken and the dynamic that's happening right there around the intersection of the two pipes.

Matthew Taylor -- Tudor, Pickering, Holt & Co. -- Analyst

That's really helpful. With your messaging now more strongly about growth and no need for corporate restructuring, etc., can you give us what you're thinking on distribution, where now the FERC impact is supposed to be negative 20 to 30, trending in the right direction there. Can you give us some sense of how you're thinking of distribution? Are you in wait and see mode? Any color there would be helpful.

Nathan Brown -- President and Director

Sure. We're watching the outcomes of all the remaining FERC filings we have to do so we can get a little more precision around those. We're also evaluating these near-term growth opportunities that we have as they come to fruition and working through how our cashflow situation works through our distributions with a view on being self-funding, with a view of staying within our means and not counting on the additional capital coming from TransCanada.

From that perspective, we're working through a lot of fairly significant moving parts that are yet to be finalized. We do feel confident that another distribution decrease isn't necessarily. In terms of an ongoing growth story from here, we think we've got some good underpinning dynamics that will push us in the right direction and look forward to finalizing those, putting some more precision around them and being able to have a very clear message when the time comes.

Matthew Taylor -- Tudor, Pickering, Holt & Co. -- Analyst

Great. That's helpful. Thank you very much.


Thank you. The call has now concluded. If there are any further questions, please contact investor relations at TC PipeLines LP. I want to turn the call over to Rhonda Amundson.

Rhonda Amundson -- Head of Investor Relations

Great. Thank you, everyone, for your participation today. We certainly appreciate your interest in TC PipeLines and we look forward to speaking with you again soon. Thanks.


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

Duration: 29 minutes

Call participants:

Rhonda Amundson -- Head of Investor Relations

Nathan Brown -- President and Director

Janine Watson -- Vice President and General Manager

Chuck Morris -- Principal Financial Officer and Treasurer

Charlie -- J.P. Morgan -- Analyst

Matthew Taylor -- Tudor, Pickering, Holt & Co. -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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