TC PipeLines, LP (NYSE:TCP) Q1 2019 Earnings Conference Call May 8, 2019 11:00 AM ET
Rhonda Amundson - Investor Relations
Nathan Brown - President
Janine Watson - Vice President & General Manager
Chuck Morris - Principal Financial Officer
Conference Call Participants
TJ Schultz - RBC Capital Markets
Matthew Taylor - Tudor Pickering Holt
Alex Kania - Wolfe research
Michael Lapides - Goldman Sachs
Good morning, ladies and gentlemen. Welcome to the TC PipeLines, LP 2019 First Quarter Results Conference Call.
I would now like to turn the meeting over to Ms. Rhonda Amundson. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the TC PipeLines first quarter 2019 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 tcpipelineslp.com, where it can be found in the Investor Section under the heading Events and Presentations.
Nathan will begin our call today with the review of TC PipeLines 2019 first quarter results. Janine will provide an update on the Partnership's assets and the market environment, following which Chuck will provide a review of our financial results for the first quarter. Nathan will return and wrap up our remarks with a brief discussion of our growth strategies 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 2018 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 cash flow during our presentation. EBITDA is an approximate measure of our operating cash flow during the period and reconciles directly to net income and 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'll now turn the call over to Nathan.
Thanks, Rhonda. Good morning, everyone, and thanks for joining us today. As outlined this morning in our news release, I'm looking at slide 4. Pleased to report that TC PipeLines had a very good quarter with solid results and our portfolio of pipeline assets continued to perform as expected.
We generated $93 million in net income during the first quarter of 2019, only 3% lower from the $96 million we earned in the same period of 2018, despite the impact of 2018 FERC actions and a decreased revenue from our Bison pipeline. This is primarily due to the strong results of GTN from increased contracting, together with additional revenue from PNGTS where Phase 1 of its Portland XPress project came on stream late last year.
Our equity earnings from Northern Border were also higher this quarter compared to Q1 of 2018. Although, our earnings from Great Lakes and Iroquois were not quite as strong as last year at this time.
Our EBITDA is similarly lower year-over-year, at $142 million for the quarter compared to $150 million in 2018. Our distributable cash flow was $116 million for the first quarter of 2018, a 4% increase over the comparable period in 2018.
Northern Border's strong results drove a higher distribution which offset the lower distributions for other equity investees and our interest expense, which was quite lower this quarter as a result our continued overall debt reduction. We paid out $47 million in distributions to our unitholders during the quarter together with $13 million to our Class B units, down significantly from a total of $91 million paid in Q1 2018.
The partnership also declared its first quarter distribution of $0.65 per common unit, which is consistent with our fourth quarter 2018 distribution and for each of the other three quarters in 2018. Chuck, will discuss our financial results in more detail a little later in the call.
We continue to progress in number of organic growth projects and excite to report on the status. As I mentioned earlier, Phase 1 of Portland XPress Project was placed in service in November of last year as contributing to our bottom line results. Phase 2 will be in service later this year and final Phase 3 is scheduled for late 2020.
Westbrook XPress is moving forward as well as with Phase 1 expected to be in service in November of this year and Phase 2 in late 2021. Demand of third phase of this project had an additional 18,000 dekatherms per day to PNGTS capacity such that it will -- the total PNGTS capacity will grow to almost 400,000 a day or great expansions 210,000 a day.
Our third expansion project North Baja XPress currently being advanced in response to market demand for natural gas transportation in region and we look forward to share in more details in the future as this project develops. Janine will discuss this commercial developments in more detail later in June.
During the first quarter, our regulatory projects continued with uncontested rate settlements for both the Iroquois and Tuscarora and received accrual for both in early May. These settlements are at final step in the completion of our regulatory strategy resulting from the FERC actions 2018.
Our financial position cash savings from our reduced distributions, we continue to repay our outstanding debt balance such that we have no drawings under our senior credit facility. And our bank leverage ratio is now approximately three times. Our distribution coverage also been very strong at approximately 2.5 times for the quarter ended March 31, 2019.
These results are a testament to the resiliency of our asset portfolio and continued success of our commercial strategies, which combine to create ongoing value to our shareholders. I will now turn the call over to Janine Watson, our VP and General Manager to provide additional color on our assets and these commercials developments together with our market outlook.
Thanks, Nathan, and good morning everyone. Moving on to slide 5, I will now review the partnership's first quarter 2019 results and drill a bit further into the continued solid operating performance of our assets. Long-term contracts continue to be the cornerstone of TCPs solid commercial fundamental underpinning 87% of our 2018 distributable cash flow.
In the West, demand is strong for transportation service on our GTN pipeline, serving energy needs in California and the Pacific Northwest. GTN benefited from incremental parking loan and interruptible sales revenue in Q1 and is effectively sold out of firm capacity in and after 2020. In the northeast, PNGTS Phase 1 of Portland XPress project into service on November 1 of last year. And we therefore benefited from a full quarter of additional revenue in Q1.
Looking at our equity investment and as has been the case for the past few years, Northern border continues to experience strong demand for its capacity operating at very high levels of throughput. Its firm capacity was once again sold out in Q1 and our commercial team successfully generated incremental revenue by offering its maintenance and seasonally available capacity on short-term basis.
Bakken receipts have climbed as high as 1.3 bcf to 1.4 bcf per day and now account for more than half of the daily receipts on this line. The remainder of our pipelines operated as expected generating solid results during the quarter. We remain committed to our Bison pipeline and continue to explore both line reversal and liquid repurposing development opportunities for this asset. There is commercial interest in both options and we continue to advance them both, although we have no concrete update for you at the time.
Turning to our regulatory update, as Nathan mentioned, we filed a settlements for Iroquois and Tuscarora in February and March of this year and received FERC approvals for both.
Also in early April, Northern Border filed with FERC to amend its 2017 settlement agreement and incorporate the 2% rate reduction in February of this year into that amended agreement for the life of the settlement through to July 1 of 2024.
The 2% reduction was part of the limited Section 4 filing made by Northern Border in late 2018. With these actions behind us, we believe that our responses to the FERC actions initiated last year are complete.
Now, for your convenience, we have updated our chart of the impact of the 2018 FERC actions on each of our pipeline assets and placed it on our website on the right hand side of our homepage.
Turning to slide 6, as Nathan touched on earlier; we are excited to provide an update on our Portland expansion project. Our Portland Xpress project is proceeding on time and on budget with Phase 1 in service last November and Phases 2 and 3 plan to be in service November 1 of this year and 2020, respectively. This project is approximately $80 million in total capital cost and will add about 70,000 dekatherms per day of capacity to Portland.
At the same time, we're also advancing our Westbrook XPress project at Portland. This is an approximately $100 million multi-phase expansion project designed to help serve market in Northern New England and Atlantic, Canada that have until recently been served by offshore gas production from Sable Island and Deep Panuke.
Phase 1 of this project will be supported by pressure agreements with our upstream affiliated pipeline allowing Portland to bring an initial 43,000 dekatherms a day into service in November of this year without the need for any construction.
Phase 2 requires the addition of a compressor and associated facilities at an existing station on the Portland system and is also reliant on planned construction activities north of the border on the TQM system. This phase will bring a further 60,000 dekatherms of firm capacity to this pipeline system.
These new facilities are intended to be in service by November of 2021. We also just signed agreement with a group of shippers to add a Phase 3 expansion for an additional 18,000 dekatherms per day of capacity to be in service by November of 2022.
This final phase will be enabled by capacity enhancements north of the border on the Canadian mainline and does not required significant capital spending on the Portland system.
The cost of these projects will be financed at PNGTS through its credit facility. Once this project is full in service and together with the Portland Xpress, PNGTS' capacity will have increased by approximately 70% from 210,000 dekatherms to almost 400,000 dekatherms per day.
Looking forward, because of a highly contracted nature of our pipeline assets together with their generally strong market position, we expect that they will continue to perform in a predictable manner and thereby produce steady result.
We continue to assess other opportunities which may arise to take further advantage of TCP's existing pipeline network. North Baja's situation is one such opportunity. We noted in our earnings release today that we are developing the North Baja XPress project and an estimated $90 million project to transport additional volumes of natural gas along North Baja’s mainline system. The project was initiated in response to market demand to provide firm transportation service up to approximately 495,000 dekatherms per day between Ehrenberg, Arizona and Ogilby, California.
A successful open season was concluded in April of 2019 with a potential in-service date in 2023. The project is subject to various commercial and regulatory conditions as we move forward.
I will now turn the call over to Chuck Morris, our Principal Financial Officer to discuss our first quarter financial results in more detail.
Thanks, Janine, and good morning, everyone. Moving on to slide 7, I'll now review the Partnership's first quarter 2019 results.
Net income in the first quarter was $93 million, down approximately 3% from $96 million in the first quarter of 2018. This equates to $1.28 per unit compared to a $1.32 per unit in 2018. Several factors impacted our Q1 2019 results, the net effect of which led to the decrease year-over-year.
First, revenue from Bison was markedly lower as a result of the election of two of its customers in Q4 of 2018 to pay out their transportation agreements. This decrease was offset however, by higher demand at GTN, leading to higher revenues on that system together with the additional revenue from Phase 1 of PNGTS’s Portland XPress project that went into service in November of 2018.
Equity earnings were lower by $5 million in Q1 of 2019 compared to 2018. As 2019 winter months were not as cold as in 2018 leading to lower earnings at both Iroquois’ and Great Lakes. Northern Border, however, was able to sell additional short-term firm services during the quarter and generate higher earnings which partially offset the low results from our other two equity investments.
The Partnership paid distributions of $47 million to common unitholders in the first quarter and $13 million to our Class B unitholder, the latter of which related to the cash flow from 30% of GTN for the year ended December 31, 2018.
The $29 million decrease in common unit distributions that was paid in Q1 of 2018 was primarily due to the decrease in quarterly distributions of $0.35 per common unit paid beginning in May of 2018 as a result of our response to the 2018 FERC actions.
During Q1 of 2019, the 30% portion of GTN associated with the Class B units generated $12 million none of which was allocated to the Class B units as the annual threshold of $20 million had not been exceeded.
As Nathan mentioned earlier, we declared our first quarter 2019 distribution of $0.65 per common unit. This is consistent with that declared in the fourth quarter of 2018 and for each proceeding quarter in 2018.
The partnerships EBITDA was $142 million in the first quarter, 5% lower than that of the same period in 2018. And just distributable cash flows were $116 million in the first quarter 2019, $4 million higher year-over-year. The increase was due to the same factors impacting net income together with a decrease in interest expense due to the repayment of $170 million term-loan in the fourth quarter of 2018 and the continued repayment of our senior credit facility in the first quarter of 2019.
Turning to slide 8. Revenues from our consolidated pipelines of $113 million were slightly lower than those in the same quarter last year for the same reasons as impacted our earnings. Equity earnings in the first quarter of 2019 were $5 million lower than in the same quarter of 2018 primarily due to winter were -- normal winter weather temperatures this year impacting Iroquois and Great Lakes offset by the higher earnings coming from northern border.
Operating maintenance and administrative expenses during the first quarter were comparable to those in the same quarter of 2018. Depreciation expense was lower by approximately 17% resulting from the asset impairment on Bison that will be recognized during the fourth quarter of 2018.
Financial charges were slightly lower in the first quarter of 2019 versus the same period in 2018, due to the repayment of our $170 million term loan in Q4 of 2018 and further reductions in the outstanding balance of our senior credit facility, during the first quarter of this year.
Moving onto our financial position on slide 9, our investment grade credit ratings provide us with the financial flexibility as we look to organically grow our portfolio in the future. We believe our ratings reflect our solid financial condition and outlook. The partnership's liquidity position remains strong. The partnership has $500 million of undrawn and available borrowing capacity under a senior credit facility as of May 8, 2019.
Consistent with our self funding model in order to build a capacity for organic growth we continue to execute on our deleveraging program. In that regard, we have used available cash repay our indebtedness during the quarter including the repayment of our senior credit facility resulting in a bank leverage ratio of approximately three times. We anticipate that we'll continue to repay a portion of our outstanding floating rate debt with available cash balances going forward with the end goal of maintaining our conservative leverage profile. That concludes my remarks in the first quarter financial results.
I'll now turn the call back over to Nathan.
Thanks, Jeff. I'll now refer to slide 10. As I mentioned at the outset, we had a very good quarter this year and our assets continue to perform well proving out the resilient and strong comparative position. Going forward, our cash flow continue to be derived from our portfolio of critical natural gas pipeline infrastructure assets underpinned by long-term shipper pay contracts of credit worthy shippers.
We continued prudently manage our financial positions such that our bank leverage ratio is currently approximate three times than our distribution coverage this quarter is very healthy 2.5 times. Longer term we are targeting to maintain our bank leverage ratio and high three times to low four times area in the distribution coverage ratio of approximately 1.3 times to 1.4 times. With this solid financial position we reiterate that we do not need to access the equity capital markets to fund our current growth program.
Our focus remains on the optimization of our asset portfolio including organic growth over time such as our current Portland and Westbrook XPress projects and we continue to advance our business opportunities within geographic footprint. And North Baja XPress project is a good example of the type of development projects in which we will. All of these will be progressed in a very disciplined manner with near-term opportunities size and sequence so that we're in a position to be self funding. We believe our portfolio of solid pipeline infrastructure assets will continue to be critical in our markets and then we will continue to serve our North American stakeholders.
I'll now turn the call back over to Rhonda.
Thanks, Nathan. I'd now like to open the call up to questions. Operator, please go ahead.
Thank you. [Operator Instructions] The first question is from TJ Schultz from RBC Capital Markets. Please go ahead.
Great. Thanks. Good morning. I think first on North Baja express does that in service need to coincide essentially with LNG export Phase 1? Just wanted to understand the commercial conditions that have to be met hit that 2023 in service? And then if I understand the LNG right, is there an opportunity to expand further and supply into a larger Phase 2. It seems there may be some various options to supply that a bit?
Yes. Thanks for question, TJ. I'll say for now, in terms of further details we've got around North Baja Xpress, we've pretty much stopped it what we've already disclosed. There's -- across our asset footprint with a lot of the development opportunities we certainly have conditions precedent that have to be met before to go forward. So we'll watch those and update as we have information come available.
Okay, fair enough. And then so Westbrook XPress looks like Phase III was added with no change to the cost of the overall scope to some better returns. Is there more to flex into that project improved that any further? And then I guess it kind of broadly or more broadly as you alluded to that next wave of growth projects, what options you had similar to that Phase II on Westbrook? Or are there kind of larger scale or new build type projects that you are also thinking.
With regard to Westbrook Xpress, I think that the limiting factor is going to be the availability of incremental capacity on TQM north of the border. So I would say that that's for -- these kinds of project we're getting – there might be little bit more of room that they could find. But we are getting to the end of these choice of the easier compression only in that respect.
Speaking to our larger set our portfolio what we're looking at, no we don't have any large Greenfield projects on the horizon. We are looking at this type of expansion across our entire footprint. The kinds of things we can do in the geography, we are in already with relatively minimal environmental footprint just to see what we can do to link the -- our existing market up to source of the supply we’ve already got.
Great. Thanks I will just leave it there. Appreciate it.
Thank you. The next question is from Matthew Taylor from Tudor Pickering Holt. Please go ahead.
Hi there. Thanks for taking my questions here. Just I know you said you don’t have anything concrete to stay on Bison, but I'm just thinking through a sellout, if contracts starts to roll at the end of next year when do you think you’re going to have to update the market with – if there is a path forward there I'm just thinking in terms of construction timeline?
I hear you on that. The thing is that the solution for Bison will be market driven, not really driven by the expiration dates of our contract. So we continue to work with the commercial interests that we've got and will continue to explore that. As far as construction costs well -- we'll be obviously dependent on the pathway ultimately choose and we do have these two competing -- these two potential paths we can go. Align reversal is of course simpler path that requires less construction -- and less construction time.
Okay, great. Thanks for the color there. And then I'm just thinking, so TC Energies talked about doing a supply push GTN project that might be announced later this year obviously still early days there. But can you give us some sense of expandability on that pipe and even just financing of that project?
Yes. In terms of physical expandability there’s design constraints and specific planning that has to be done all up and down, the deliberate change. So GTNs are link in that chain. We think depending on the scope and scale of the volumes that are required, GTN can be manageably handled within what we can financer at the asset level or with additional market at TCP. But again to reiterate, we're not anticipating any moves in the equity capital markets this time.
So I think it's too early to say a precisely what kind of facility the capital outlay will be required for GTN and specific, because again it would be part of a multi phase type of deal with because of supply push situation that's going to the premium market that we got on GTN.
Okay. Just to be cleared, does it require looping and more pipe, or can you still -- is there still room to do compression adds on that pipe?
It's compression adds in localized build would give us a measure of expansion on GTN. So it's not – we’re not contemplating complete loop.
Okay. And then moving now to FERC impact, I know you mentioned the guidance since previously disclosed. But can you give us just some color on how you're thinking about that, the amount of impact and time line of that guidance in light of recent settlement?
So our chart has all the details. So I won't step through pipeline, but we still say on the other side of what we had prior to the FERC actions, the $30 million number on an annualized run rate, is still fairly accurate, I’d say as it’s been developing, we get back into our normal commercial situations is really kind of hard to lose – or to keep track of the specific impact of anyone change.
But we've been successful engaging our customers at reaching others settlement that will keep us going forward, and then we'll be able to just roll back into normal operations. The full impact of the $30 million, I would say would come in later this year as the settlements as we list on our chart at Westside, kind of look in place, and then we move into the other perks in terms of our settlements, so we got that and they may have not been adjusted as we move through years.
Okay, great. One last one, it's my understanding that 2017 revenues were used for those 501-G filings, just thinking about the large uptick in revenues like some of highs like Great Lakes, GTN, Northern Border that benefited from additional contracts and even Canadian volumes with maybe those are our lease tracking ahead at 12% threshold? Are you guys risking that at all in your guidance, especially on Northern Border and Great Lakes that have no lake moratorium?
Look, the final one that you process was, 2017 numbers, but it was an exercise to quantify the impact of the tax changes. And for the purposes of whatever the FERC maybe doing forward, it was really isolated in that. So to the extent that FERC has a addition in place to look at other aspects or customers are engage with our parts we’re treating that as a normal commercial condition. We always look at and we always evaluate.
So, I think we've moved past whatever it was specifically quantify the 501-G process that are moving into what we're going to see going forward and certainly the settlements that we entered into contemplated the full commercial position of each of our assets and certainly the risks that we disclose continue to be there and we continue to match those prudently as we can.
Q – Matthew Taylor
Okay. Thanks for taking my questions.
Thank you. The next question is from Alex Kania from Wolfe research. Please go ahead.
Hi good morning. Thanks. I guess the question is just with respect to the leverage targets and coverage. I guess that Q1 was kind of -- it was very strong relative to those targets. Do you feel like as you look over the course of the year that you need to do anything different as you kind of roll in the FERC settlement to get maybe a more normal seasonality and you find yourself in the targets you want right now? Or do you need to do anything additional beyond as you mentioned before paying down some of the employment rate debt?
Yeah Alex, it’s Chuck here. I'll speak to the leverage ratio and then I guess that the leverage that we’re reporting too in terms of the target range going forward is relative to our bank leverage ratio. So the calculation there is debt over adjusted cash flow and there are some nuances in terms of the calculation with respect to property tax associated with that calculation, but ultimately, we see ourselves as we will through 2019 here, the calculations based on the last 12 months basis where we're still having the impact of the Bison buyout at the end of Q4 of 2018.
So as we roll through 2019, we see ourselves migrating up to that height reasonable force area as we go through the year here. So the target still is looking to -- like I said migrate to that sort of high reasonable force. With respect to coverage ratio, again it is a bit of an artifact of all the quarter here. We still see ourselves again migrating to that 1.3 times to 1.4 times on an average kind of run rate bases going forward.
Great. Thanks very much.
[Operator Instructions] The next question is from Michael Lapides from Goldman Sachs. Please go ahead.
Hey guys. Can you talk about volume trends that you sell year-over-year in the quarter relative to kind of what your expectations were? Which specific pipes made surprised to the upside in terms of volume? Which ones may have surprised the other direction? And then how are you thinking about which ones could have the biggest upticks for the rest of the year?
Yeah, thanks for the question. I'd say we surprised too much by volumes that we certainly have some upside that come when we have one over time services such as parking loan to a greater extent in some years versus other, but our big pipes primarily GTN northern border are performing very well, running essentially full, so no real surprises there. Our commercial guys can optimize things on some margins with some services to customers.
But really in terms of volume flow, no real surprises. Yes, the swing pipe can be Great Lakes sort of varies from season to season precisely how much volume once you get into or out of Michigan storage area or go around underneath the lakes to serve markets toward down Ontario. But that said which is great exactly a couple years and our marketing departments have done well there. So no real anomalies, no real surprises, I wouldn't say.
Got it. And then, when you think about the Northeast U.S. in the PNGTS system. How -- once you get done with Westbrook, how much more incremental capacity could you physically add like. When does just the outright sizes of the system become a constraint kind of keeping you from using more compression to keep adding capacity there?
Yes. So -- as Janine mentioned, I think the first constraint we have to rotate actually upstream. But once those volumes come to the border or PNGTS pick them up. There's an additional expandability of potentially another 400 a day, but that's kind of right way early days definitely to say. PNGTS continues to not having midpoint compression of its own, runs off of compression, north of the border as well as pressure on shared facilities that are being modified now for both PXP and Westbrook. But midpoint compression being added along, could add potentially around another 350, 400 a day. But it’s early day.
Got it. And then last thing, I just want to make sure I'm following all the various rate changes and revenue changes tied in the 501-G. Are any on the pipes, have all of the -- are all of the revenue changes that are coming from 2019 over the next couple years the ones that are known? Are they all off-shoot now of the 501-G process or there some legacy settlements that still have revenue changes -- revenue reductions potentially that will kick-in that were unrelated to the 501-G?
Yeah. Let’s take the latter. So, we modify some of the terms of the existing legacy settlements in places and other places we sort of blend right into the original rate changes that were previously agreed upon. We separated in a chart as well as our discussion that we got in our 10-Q. So, yeah, there is a blend.
Got it. Thank you, guys. Much appreciated.
Your next question is from Jeremy Tonet from JPMorgan. Please go ahead.
Hey, guys. This is Tryon [ph] for Jeremy. Most of our questions have been asked. I just wanted to do one quick follow-up on the last question related to the kind of pipe activity. Last quarter there was more short-term activity in North Baja and no smaller pipe you bought. It seems like dynamics would have been driving some of that didn’t change a lot. So just curious if you could provide any color on that, and maybe what you're seeing in this quarter.
On North Baja specifically, it has some flexibility and capacity available when southern California market needs some additional volumes and in quarters past we’ve seen it’s been optimized for that one. I don’t want to misquotes into wrong system but there's some disruptions in the normal system that allow those customers use. And North Baja serves as a bit of a relief valve for that commercial situation. So that has happened -- as that heads in flows those make activities completed that can come back off. But as for right now I’d say Baja is going back to its study state that were used over history.
All right. Fair enough. Thank you.
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 over to Rhonda Amundson.
Great. Thank you, everyone for your participation today. We 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.