Logo of jester cap with thought bubble.

Image source: The Motley Fool.

TC Pipelines L P (TCP)
Q3 2020 Earnings Call
Nov 10, 2020, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen, welcome to the TC PipeLines LP 2020 Third Quarter Results Conference Call.

I would now like to turn the meeting over to Ms. Rhonda Amundson. Please, go ahead.

Rhonda Amundson -- Investor Relations

Thank you, operator, and good morning, everyone. I would like to welcome you to TC PipeLines third quarter 2020 conference call. I'm joined today by our President, Nathan Brown; our VP and General Manager, Janine Watson; and our VP, Principal Financial Officer and Treasurer, Chuck Morris.

Please note that a slide presentation will accompany their remarks and is available on our website at tcpipelineslp.com, where it can be found in the Investors section under the heading Events and Presentations. Nathan will begin the call today with a review of TC PipeLines' 2020 third quarter results. Janine will provide a commercial update on the Partnership's assets and our growth program, following which Chuck will provide a 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.

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 and 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 2019 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, adjusted EBITDA and distributable cash flow during our presentation. EBITDA and adjusted EBITDA are approximate measures of our operating cash flow during the current earnings period and reconcile directly to net income. Distributable cash flow 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 turn the call over to Nathan.

Nathan Brown -- President and Director, TC PipeLines GP, Inc., Vice-President

Thanks, Rhonda. Good morning, everyone, and thanks for joining us today. 2020 is proving to be a very extraordinary year with persistence of the COVID-19 pandemic, together with significant impact it's having on people around the world. We truly hope that you and your families continue to stay healthy and safe during these uncertain times.

TC PipeLines business continuity plans have been in place across our companies, since early March when COVID-19 was declared a global pandemic. Our services are broadly considered essential or critical given the important role our infrastructure plays in delivering the energy people need across the United States. We have continued to deliver energy and advanced our projects in a safe and reliable manner following rigorous health, hygiene and distancing protocols. These actions ensure the energy that is vital to the daily lives of so many continues to be delivered seamlessly across our country.

I'll now turn to our third quarter financial results. As outlined in our news release and looking at Slide 4, I'm pleased to report TC PipeLines' solid quarterly results, with our portfolio of pipeline assets continuing to perform as expected. With approximately 90% of our cash flow coming from long-term take-or-pay contracts, we continue to be largely insulated from the short-term volatility associated with volume throughput, commodity prices. Customer demand for our services remained strong, despite the impact of COVID-19 on the broader North American economy. Aside from the impact of normal maintenance activities, planned regulatory adjustments and seasonal factors, flows and utilization levels have remained in line with historical norms, which further reinforces the resilience and stability of our natural gas midstream business.

We generated $65 million in net income during the third quarter of 2020, significantly more than the $56 million in the same period in 2019. EBITDA was $118 million for the third quarter, and adjusted EBITDA was $117 million, compared to $100 million and $125 million respectively, generated in 2019 over the same period.

We generated $36 million in distributable cash flow in the third quarter of 2020, compared to 2019 where DCF was conservatively higher at $78 million. The decrease was largely the result of higher maintenance and integrity capital expenditures as well as commercial IT system purchase, by certain of our subsidiary and equity method investment pipelines. The higher maintenance costs, although a drag on distributable cash flow, reflect the positive environment of higher natural gas flows, and these costs will be added to rate base and enjoy a return on and of capital for future tolls.

We paid out $47 million in distributions to our unitholders during the third quarter, the same as was paid in the same period in 2019. The Partnership also declared its third quarter distribution of $0.65 per common unit, which is consistent with our quarterly distribution since the first quarter of 2018. The stability of our low-risk business model, which is underpinned by long-term take-or-pay contracts and strong demand for our essential energy services, has provided the basis for our solid financial performance, and our ability to maintain the distribution to our unitholders, even in periods of economic stress and uncertainty. Chuck will discuss our financial results in more detail a little bit later in the call.

We also continued to advance our organic growth program. We're continuing on both our GTN XPress project and our Tuscarora expansion. Our other PNGTS organic projects are progressing well and provided for incremental capacity on our PNGTS system in the Northeast. We anticipate the changes to work practices and other restrictions put in place by government and health authorities in response to the COVID-19 pandemic could have an impact on our construction timelines, but generally believe this will not be material to our operations. Janine will discuss these and other commercial developments in more detail in a minute or two.

During the third quarter, we also completed a sizable $250 million financing at PNGTS, which was utilized to repay its revolver borrowings, and which will also provide the necessary capital for the remainder of its current expansion program. We take pride in having completed this transaction despite the uncertainty in the financial markets, and viewed as representation of the continued confidence in our credit by the investment community. Additional notable credit events during the quarter include, reaffirmation by both Standard & Poor's and Moody's of our Partnership credit rating at BBB/Stable and Baa2/Stable, respectively, together with S&P's upgrade and Northern Border's outlook to BBB+/Positive. Subsequent to the third quarter, in early October, S&P revised the Partnership's outlook to Creditwatch Positive, reflecting their opinion that TC Energy's offer to acquire all of the outstanding units will increase the level of parental support from TC Energy.

Looking at our financial position, during the quarter, our bank leverage ratio was approximately 3.8 times, and our distribution coverage was approximately 0.8 times. Our liquidity position is likewise very strong. No outstanding bank borrowings, we have full availability of our $500 million revolving credit facility. And while we're proud of our financial performance and the returns we have generated for our unitholders, we know our ongoing success depends on our ability to balance profitability with safety, and environmental and social responsibility. I want to stress that safety and reliability are critical priorities for us.

Our general partner, TC Energy, has a 65-year track record of safe and reliable operations, and we're committed to protecting the environment in all that we do. Our natural gas assets are critical to the quality of life and communities they serve, and we believe that our systems will be important contributors in achieving greenhouse gas emission targets to further improve the carbon footprint of North America, in a responsible and sustainable manner.

Lastly, we announced on October 5, 2020 that the Partnership had received a non-binding offer from TC Energy Corporation to acquire all of the outstanding publicly held common units in exchange for common shares of TC Energy. The offer was made to the Board of Directors of the general partners of TCP. Given the general partner is an indirect, wholly owned subsidiary of TC Energy, a conflicts committee composed solely of independent directors of the TCP Board was formed to consider the offer pursuant to its processes. Independent financial and legal advisors have been retained by the Conflicts Committee to assist in their fairness termination [Phonetics]. Given their work has yet to be concluded, we're precluded from the commenting any further at this point.

I will now turn the call over to Janine Watson, our VP and General Manager to provide additional color on our assets and our commercial developments, together with our market outlook.

Janine M. Watson -- Vice-President and General Manager, TC PipeLines GP, Inc., Director, LP Management and Pricing

Thanks, Nathan, and good morning, everyone. Moving on to Slide 5. As Nathan noted, cash flows from our pipeline systems have been largely insulated from volatility associated with fluctuations in market this quarter, as we are about 90% long-term firm contracted across our footprint. There were no noteworthy contract expirations or non-renewals in Q3. Further, our assets encountered no material credit issues during this period, consistent with the fact that more than 90% of our cash flows are received from creditworthy customers.

Now, turning first to GTN. The beneficial results of TC Energy's debottlenecking activities of its west gate [Phonetics] delivery point were evident, as gas flows coming down from Canada rose to an average of about 2.3 Bcf a day, this past quarter, and about a quarter of a Bcf more than flowed at that time last year. Phase 1 of our GTN XPress project got under way in Q3, with horsepower replacement and other reliability work, being undertaken at several sites across GTN's footprint. Intended to be in the service by the end of 2021, this work is being done to meet the needs of GTN's existing customers for reliable and affordable transportation of clean burning natural gas.

Turning to the Midwest. Long-term and seasonal demand remained strong for Northern Border capacity, though short-term fundamentals were challenged. Utilization rates on Northern Border trended back to more normal levels compared to those seen in Q2. Flows to Glen Ullin averaged about 2.4 Bcf per day in Q3. Operationally, Northern Border experienced two minor force majeure outages in Q3, that requires very small firm capacity restrictions for short period in July and August.

Bakken receipts on the Northern Border system are slowly returning to the levels that they were tracking prior to the crude price collapse in April. They averaged about 1.66 Bcf per day in Q3, accounting for about 70% of the gas transported on this line. Looking forward, winter transportation is still well in the money on Northern Border. And we think that strong market demand in the Midwest will keep this pipeline highly utilized and support contract renewals on this asset.

As we discussed last quarter, a request was filed on May 1, for an 11,000 Btu heat content safe harbor provision for the natural gas that Northern Border received into its many receipt points across its system. On August 6, FERC held a technical conference and heard from many stakeholders upstream and downstream of the pipeline. On November 2, FERC rejected the proposal without prejudice to future filings, encouraging Northern Border to continue to work with its shippers on a solution. We continue to monitor the operations in Northern Border system, and work with stakeholders to provide safe and reliable transportation for our shippers.

Results from Iroquois were slightly down in Q3, as its scheduled maximum recourse rates stepped down. We're not completely offset by discretionary opportunities, though there have been some incremental firm contracting on this asset. Iroquois received a lump sum payment of $48.5 million from Williams, resolving all issues in claims, associated with Constitution PipeLine's termination of the Wright Interconnect Project agreement. TCP's share of these funds was received as a return of equity at the beginning of Q3.

Quarterly results on the remainder of our transmission systems were all roughly comparable to Q3 of 2019. TCP's assets are highly contracted, critical infrastructure, as was evidenced in their steady performance this past quarter. Now finally, Phase III of PNGTS' Portland XPress project was placed commercially in service on November 1. Fully backed by long-term fixed-price contracts, this project has increased the firm capacity of the Portland system by 178,000 [Phonetics] dekatherms a day, making it the largest growth project TC PipeLines has completed thus far in its 20-year history.

Turning now to Slide 6. This chart illustrates our capex outlook for our major projects over the 2020 to 2023 period. It is largely unchanged from what we presented in May. To-date, we have experienced no significant slowdown in our permitting pre-construction or construction activities, nor any material changes to our planned capital expenditures as our operator, TC Energy, has successfully implemented business continuity plans across our footprint. However, we continue to monitor the impact that COVID-19 and as many challenges may have on our projects. It's still too early to know what unexpected impacts this pandemic may have on our capital program. The bars on the graph represent TC PipeLines' proportionate share of estimated capex based on our ownership level.

Work is under way, as I've mentioned, on time and on budget on Phase I of our GTN XPress project. This initial phase will enhance the reliability of GTN's existing transportation service, via horsepower replacement and other reliability work being performed at brownfield compression facilities, along GTN's existing footprint. This reliability and horsepower replacement work is expected to be in service by the end of 2021, and will account for more than three quarters of the total project cost. We expect that these costs will be recovered in recourse rates. The required section Section 7(c) filing is being prepared for submission to FERC for Phase II of the GTN XPress project. The second phase will provide 250,000 dekatherms per day of additional firm transportation service on the full path of the GTN system, and is anticipated to be commercially phased into service through November of 2023.

Now our Westbrook XPress project also continues to progress on time and on budget, as major FERC and state air permits are in hand, and Phase II is expected to be in service November 1, 2021.

Looking to North Baja XPress, you will recall that this is an approximately 0.5 Bcf per day proposed expansion that meant to transport gas to IEnova's Costa Azul LNG export facility. IEnova is in the process of securing the Mexican export permit needed for its project, and reports that it expects to reach an FID decision shortly. North Baja has agreed to extend IEnova's date for its FID decision to the fourth quarter of this year. The estimated project cost remains about $90 million, excluding AFUDC, and the estimated in-service date is February 2023. FERC staff issued the environmental review for this project on September 8 recommending that Commission find no significant environmental impact.

Tuscarora XPress also continues on time and on budget. FERC recently indicated that the environmental assessment for this project will be issued in February 2021. This project will increase Tuscarora's capacity by 15,000 dekatherms per day at a cost of about $13 million with a planned in-service date of November 1, 2021.

Iroquois continues to make progress on it's Section 7(c) application with FERC to construct the compression-only enhancements to its system contemplated by its proposed ExC project. FERC staff issued an environmental assessment, recommending of finding of no significant impact on September 30. As part of its FERC filing, Iroquois quantified the indirect downstream emissions expected to result from the project, as well as the emissions expected from the construction and operation of the ExC facilities. Iroquois also quantitatively addressed indirect upstream emission impact. We therefore, believe Iroquois has met or exceeded FERC requirements and continue to expect that FERC will issue a certificate by Q1 of next year.

Of course, the ExC project requires a various state permits as well. In particular, Iroquois applied for an air permit with the New York State Department of Environmental Conservation in February. Iroquois management are mindful of GHG analysis concern raised in the course of the FERC environmental assessment project by the DEC, and continue to work cooperatively with this agency on all matters related to bad air permit.

Finally, we continue to plan to self-fund the capital during this period through a combination of debt at the asset levels and contributions from TC PipeLines, the latter funded with the cash from operations, together with our revolving credit facility, if required. Though a small portion of our planned maintenance activities have been shifted to subsequent periods because of our business continuity planning, our proportionate share of normal course maintenance capex is expected to be $151 million in 2020, inclusive of the $38 million third quarter acquisition of the commercial IT system mentioned by Nathan in his comments, again all self funded.

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

William C. (Chuck) Morris -- Vice-President, Principal Financial Officer and Treasurer, TC PipeLines GP, Inc.

Thanks, Janine, and good morning, everyone. Moving on to Slide 7, I'll now review the Partnership's third quarter financial results.

Net income attributable to controlling interests in the third quarter was $65 million or $0.90 per common unit, compared to $56 million or $0.76 per common unit in the third quarter of 2019. This represents an increase of over 16% year-over-year and was primarily the result of higher revenues at PNGTS for certain of its expansion projects being placed into service, and higher equity earnings from Northern Border.

EBITDA was $118 million in Q3 of 2020 versus $100 million the year previous, again, primarily the result of the same factors that increased net income. Our adjusted EBITDA for the third quarter of 2020 was $117 million, compared to $125 million in 2019, approximately 6% lower. The decrease was largely the result of lower distributions from our equity investments in Great Lakes and Iroquois. Great Lakes did not pay the Partnership a distribution in Q3, as it used its cash generated during the quarter for the one-time purchase of the commercial IT system. The purchase was part of a joint acquisition by Great Lakes, GTN, Tuscarora and North Baja. In addition, our equity investee, Iroquois, had been making quarterly payments to its owners of surplus cash on its balance sheet from the date of our investment in Iroquois, and the Q4 2019 installment marked the final payment associated with that obligation.

The Partnership paid distributions of $47 million to common unitholders in the third quarter, the same amount that was paid in Q3 of 2019. As Nathan mentioned earlier, we declared our third quarter 2020 distribution of $0.65 per common unit. This is consistent with that declared in each quarter since Q1 of 2018.

Our distributable cash flow was $36 million in the third quarter of 2020, $42 million lower year-over-year. The primary drivers of the decrease in DCF was our lower adjusted EBITDA, together with the one-time purchase of the commercial IT system by certain of our consolidated pipelines, and higher normal course maintenance and integrity capital expenditures on GTN, resulting from higher system utilization in response to the sustained increased natural gas transportation volumes. The higher maintenance costs on our systems, although a drag on distributable cash flow, reflect the positive environment of higher natural gas flows. Additionally, the commercial IT system purchase is expected to reduce future operating costs. Both the maintenance capital and the IT system purchase costs will be added to our pipeline's respective rate bases and will attract a return on and of capital through future tolls.

Turning to Slide 8. Revenues from our consolidated pipelines of $99 million in the third quarter of 2020 were $6 million higher than in the same quarter last year. This was primarily the result of new revenues from PNGTS' growth projects that went into service on November 1 of 2019. The increase was partially offset by a scheduled rate reduction of 6.6% on GTN, effective January 1 of this year, and a 10.8% decrease on Tuscarora, effective August 1, 2019, together with lower opportunities for the sale of discretionary services by GTN during the period.

Equity earnings in the third quarter of 2020 were $8 million higher year-over-year, due to higher earnings in Northern Border, resulting from non-recurring incremental revenue related to certain pre-arranged contracts entered into by Northern Border with its affiliate ONEOK Rockies Midstream. These contracts were subsequently canceled by the FERC, effective October 15, and the capacity was remarketed and awarded under terms that approximate Northern Border's maximum recourse rates, which are lower than the pre-arranged contract rates and more consistent with historical results.

Third quarter OM&A was $2 million lower, due primarily to decreased costs and lower overhead expenses. And depreciation and amortization expenses were $10 million higher year-over-year, largely due to a negative salvage allowance recorded by PNGTS during the quarter. Financial charges and other were $3 million or 15% lower in the third quarter of 2020 versus the same period of 2019, primarily attributable to higher allowance for funds used during construction or AFUDC, which more than offset higher interest charges, resulting in the decrease. The AFUDC increased primarily due to the continued spending on our expansion projects, as well as higher maintenance capital spending.

That concludes my remarks on the third quarter financial results. I'll now turn the call back over to Nathan.

Nathan Brown -- President and Director, TC PipeLines GP, Inc., Vice-President

Thanks, Chuck. I'll now refer to Slide 9 for some key takeaways. As I mentioned at the outset, we had another good quarter this year and our assets continued to perform well, proving out the resilience and strong low-risk business model. Going forward, our cash flow will continue to be derived from our portfolio of critical natural gas pipelines underpinned by long-term take-or-pay contracts with creditworthy shippers.

Our balance sheet is strong with solid capital structure, underpinned by our high-quality infrastructure assets. Our investment-grade credit ratings, including those of our subsidiary companies, provide us the financial flexibility. And we believe our ratings reflect our solid financial condition and outlook. We continue to prudently manage our financial position and believe our actions will have resulted in a strong balance sheet. Our bank leverage ratio is currently, approximately 3.8 times, and our distribution coverage this quarter is 0.8 times. Softness in the latter is primarily a reflection of the one-time commercial system purchased in Q3, together with increased normal course maintenance capex, and we anticipate it will migrate higher in Q4. As we said in previous quarters, we expect our distribution coverage on a run rate basis to be in the 1.3 times to 1.4 times. These healthy metrics are enabling us to self-fund our organic growth on each of our GTN, Tuscarora and PNGTS projects.

Capital market conditions in 2020 have been significantly impacted by the COVID-19 pandemic, resulting in periods of heightened volatility and reduced liquidity. Despite this, our liquidity position remains strong, underpinned by stable cash flow from operations, cash on hand, and full access to our $500 million senior revolving credit facility. And we have established financing facilities at both GTN and PNGTS to provide the required funding for the remainder of their organic growth projects. As Janine outlined earlier, we'll continue to execute on our organic growth program, with our projects proceeding on time and on budget.

In summary, we continue to conservatively manage our financial position, self-fund our ongoing capital expenditures and maintain our debt at prudent levels. And we believe our business will continue to deliver consistent financial performance going forward.

I'll now turn the call back over to Rhonda.

Rhonda Amundson -- Investor Relations

Thanks, Nathan. Before I open the call up for questions, I would ask that you refrain from asking questions about the TC Energy offer to acquire all outstanding publicly held common units of the Partnership. The work of the Conflicts Committee has yet to be concluded, and as such we are precluded from commenting further at this point.

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

Questions and Answers:


Thank you. [Operator Instructions] Our next question comes from Donald Labonte [Phonetics] of Ameritrade [Phonetics]. Please go ahead.

Donald Labonte -- Ameritrade -- Analyst

I'd like to know if the dividend is going up?

Nathan Brown -- President and Director, TC PipeLines GP, Inc., Vice-President

Thanks for your question. We review our distribution on a quarterly basis with the full Board of Directors, and we make that determination as we look forward on our forecast that we developed internally. But at this point, we are -- we declared a dividend for distribution for Q3 at the same $0.65 that we've had since Q1 of 2018, and we'll announce changes as we make further analysis. Thank you.

Donald Labonte -- Ameritrade -- Analyst

Thank you.


[Operator Instructions] Ladies and gentlemen, this concludes the question-and-answer session. If there are any further questions, please contact Investor Relations at TC PipeLines, LP.

I will now turn the call back over to Rhonda Amundson.

Rhonda Amundson -- Investor Relations

Thank you, everyone, for your participation today. We appreciate your interest in TC PipeLines, and sincerely hope that you and your families are staying healthy. Bye for now.


[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Rhonda Amundson -- Investor Relations

Nathan Brown -- President and Director, TC PipeLines GP, Inc., Vice-President

Janine M. Watson -- Vice-President and General Manager, TC PipeLines GP, Inc., Director, LP Management and Pricing

William C. (Chuck) Morris -- Vice-President, Principal Financial Officer and Treasurer, TC PipeLines GP, Inc.

Donald Labonte -- Ameritrade -- Analyst

More TCP analysis

All earnings call transcripts

AlphaStreet Logo