TC PipeLines, L.P. (NYSE:TCP) Q2 2019 Results Conference Call August 1, 2019 5:30 PM ET
Rhonda Amundson - Investor Relations
Nathan Brown - President
Janine Watson - Vice President and General Manager
Chuck Morris - Principal Financial Officer
Conference Call Participants
TJ Schultz - RBC Capital Markets
Praneeth Satish - Wells Fargo
Michael Lapides - Goldman Sachs
Marc Solecitto – Barclays
Good afternoon, ladies and gentlemen. Welcome to the TC PipeLines, LP 2019 Second Quarter Results Conference Call.
I would now like to turn the meeting over to Ms. Rhonda Amundson. Please go ahead, Ms. Amundson.
Thank you, and good afternoon, everyone. Welcome to the TC PipeLines' second 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 Web site at tcpipelineslp.com, where 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' 2019 second 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 second 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 afternoon, everyone and thanks for joining us today. As outlined this afternoon in our news release, I'm looking at Slide 4, pleased to report TC PipeLines had a very good quarter with solid results, and our portfolio of pipeline assets continues to perform as expected.
We generated $55 million in net income during the second quarter of 2019, 25% lower than the $73 million we earned in the same period of 2018, largely due to the partial buyout of licensed contracts in late 2018, together with lower rates on many of our pipelines following the 2018 FERC actions. Our EBITDA is generally lower year-over-year at $99 million per quarter compared to $124 million in 2018.
Our distributable cash flow was $70 million for the second quarter of 2019 compared to the second quarter in 2018 when our DCF was $101 million. The drivers for the decrease were lower earnings and EBITDA, together with generally higher maintenance capital expenditures related to major compressor overhauls on GTN and pipe integrity costs on Tuscarora, North Baja and GTN, all the result of higher natural gas transportation volumes. Northern Border's maintenance spending was lower this quarter year-over-year but we expect it to pickup as the year progress. All told, our results reflect the expected decreases from both our Bison contract payouts, as well as from the rate decreases resulting from 2018 FERC actions.
And higher maintenance costs, although a drag on distributable cash flow, reflect the good news story of higher natural gas flows on our pipeline. And these costs will be added to rate base in due course and enjoy return on our capital for future rates. We paid out $47 million in distributions to our unit holders during the quarter, the same as we paid out in the second quarter of 2018. The partnership also declared second quarter distribution of $0.65 per common unit, which is consistent with our first quarter 2019 distribution and for each quarter in 2019.
Besides our distribution, in 2018, to respond to the FERC actions last year, we believe that maintaining it at current levels put in order to continue building and help financial position, and allow us to self fund organic growth as we move forward. Chuck will discuss our financial results in more detail a little later in call. As we reported last quarter, we continue to progress a number of organic growth projects. Phase 1 of our Portland XPress project was placed in service in November of last year, and is contributing to our bottom line results. And number of PNGTS legacy contracts expired earlier this year, which has resulted in lower revenue of PNGTS in Q2 of this year. But revenues will increase at previous levels when Phase II comes into service later this year, and increase again when Phase III goes into service in late 2020.
Westbrook XPress is moving forward as well with Phase I expected to be in service in November of this year, Phase II in late 2021 and Phase III in late 2022. Janine will discuss these and other commercial developments in more detail in a minute or two. During the second quarter, looking at our financial position, we have continued to repay our outstanding debt balance with available cash that our bank leverage ratio is now approximately 2.8 times. Our distribution coverage also remains very strong at approximately 1.5 times for the quarter ended June 30, 2019. These results are a testament to the resiliency of our asset portfolio, and a continued success of our commercial strategies, which combined create ongoing value to our unit holders. And last week, S&P Global ratings updated the Partnership's credit rating from BBB -- to BBB from BBB minus. The rationale was based primarily on our strength of credit profile.
I will now turn the call over to Janine Watson, our VP and General Manager, to provide additional color on our assets, commercial development together with our market outlook.
Thanks, Jason and good morning, everyone, or good afternoon everyone. Moving on to Slide 5, I will now drill a bit further into the continued solid operating performance of our assets. In the west, demand continues to be strong for transportation service on GTN pipeline, serving energy needs in California and the Pacific Northwest. GTN is effectively sold out a firm capacity in and after 2020, and continues to benefit from discretionary sales of parking loan and short-term firm services. In the Northeast, PNGTS placed Phase I of its Portland Express project into service on November 1st of last year. And we therefore benefited from additional revenue from this phase in Q1 and Q2 of 2019.
Looking to our equity investments, 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 Q2, and our commercial teams successfully generated incremental revenue by offering at seasonally available capacity on short-term basis. Bakken receipts have climbed as high as 1.4 bcf per day and now account for more than half of the daily receipts onto this line.
Demand for Great Lakes transportation services continues to be strong. Though, there is some seasonality to its revenues and there were fewer opportunities to generate discretionary revenues on this asset in Q2 compared to this quarter last year. The remainder of our pipelines operated as expected, generating solid results during the quarter.
Now, we remain committed to our Bison pipeline and continue to explore both the natural gas line reversal and liquids repurposing development opportunities for this asset. So you can take advantage of this pipelines' proximity to the Bakken. There is commercial interest in both options, and we continue to advance both opportunities. I will discuss the gas reversal options in a bit more detail later in my remarks.
Overall, we are confident that our assets are well positioned geographically with last mile connections into key market centers across North America. They are highly contracted, reflecting ongoing demand for their natural gas transportation services. We have key connections out of the Western Canadian sedimentary basins, one of the most prolific supply basins in North America, through GTN, Northern Border and Great Lakes and through Iroquois and PNGTS at the Eastern and of TC Energy's mainline system. We are very encouraged by the high utilization rates on our pipeline, which are driving solid revenues and cash flows.
Now these high rates are necessitating maintenance and other capital spending on our assets, but also set TCP for continue -- to continue to provide value for its stakeholders. We believe our portfolio of assets will continue to benefit from their connections between low cost supply sources and stable and growing demand centers. Our business development team is in the process of soliciting customer interest in several potential projects across TCP's footprint, designed to meet the demand for incremental transportation at competitive costs. And I will discuss those a little bit further on in the next slide.
Now turning to Slide 6, as Nathan touched on earlier, we are excited to provide an update on PNGTS expansion projects. Our Portland Express project is proceeding on time with Phase I in service last November, and phases II and III planned to be in service for November 1 of this year and 2020 respectively. This project is approximately $85 million in total capital costs and will add about 183,000 dekatherms per day of capacity to PNGTS.
We are also advancing our Westbrook XPress project at PNGTS. This is an approximately $125 million multi-phase expansion project, designed to help serve markets in Northern New England and Atlantic Canada, but 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 pipelines, 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 in associated facilities at an existing station on the Portland system, and is also reliant on planned construction activities north of the border. This space will bring a further 59,000 dekatherms of firm capacity to this pipeline system, and is intended to be in service by November of 2021.
The Phase III expansion will provide capacity for an additional 18,000 dekatherms per day to be in service by November of 2022. The cost of these projects will be financed at PNGTS through its credit facility. Once both projects are fully in service, PNGTS's capacity will have almost doubled from 10 MDF per day at the beginning of 2018 to close to 400,000 dekatherms per day by the end of 2022.
Now looking forward, we continue to assess what other opportunities may arise to further take advantage of TCP's existing pipeline network. You can see on the map that we have highlighted five current opportunities being developed. As we noted in our Q1 earnings call, we are developing the Northern Baja express project, and estimated $90 million projects to transport additional volumes of natural gas along North Baja mainline system. The project was initiated in response to market demand to provide firm transportation service of up to approximately 495,000 dekatherms per day between Ehrenberg, Arizona and Ogilby California.
A successful open season was conducted in April of 2019 with a potential in service date as early as 2023. The project is still subject to various commercial and other conditions as we move forward. We are currently anticipating an FID decision on the project in about July of 2020. Also of note is the potential expansion project on our Iroquois system, which we are referring to as Iroquois Enhancement by Compression, or the [ExP] project.
In early May, one of Iroquois' customers Con Edison announced that they had reached a precedent agreement to develop and seek to permit incremental pipeline delivery capacity into their service area in New York City. This project has the potential to optimize the Iroquois system to meet current and future gas supply needs of utility customers, while minimizing environmental impacts through compressor enhancements at existing compressor stations along the pipeline.
If successful, this project's total capacity is expected to be approximately 125,000 dekatherms per day with an estimated in-service date in November of 2023. Still subject to various approvals, the capital costs of this project is still to be determined as the optimal facility stack is finalized during the course of the regulatory process. This project is intended to be 100% underpinned by contract with 20 year term.
Now, turning to the Bakken area. We note that there is a significant supply push seeking incremental gas takeaway capacity that could be met by our Northern Border and Bison pipeline. Our business development team continues to assess shipper support for two potential capacity expansions for natural gas delivery out of this basin. The first development project contemplates a capacity enhancement project on Northern Border between the Bakken connect -- interconnected at Stateline, Watford City to Ventura, Iowa, potentially coming into service in two phases, the first in Q3 of 2021 and the second in Q4 of 2023.
The second project is our Bison reversal project, which contemplates a multi-lake supply path from Northern Border Stateline Watson City receipt point down Bison for delivery onto third party transporters' lines, destined for ultimate delivery to Cheyenne Hub. This alternative could also potentially come into service in two phases, in Q3 of 2021 and in Q4 of 2022. Both of these alternatives remain in the early stages of development. But we are nonetheless pleased to be able to offer a diversity of solutions to Bakken producers as they seek a path to market. These routes have the potential to move approximately 400 to 550 MDS per day of incremental firm capacity to market. We continue to refine and optimize each potential expansion path, design and cost.
And switching focus further to the West, GTN launched an open season yesterday for incremental capacity on its system. GTN is looking to right size a cost competitive compression based expansion from [Kingsgate to Mullin], and is holding its open season in conjunction with TC Energy's NGTL and Foothill system to determine the shipper interest in about a 250,000 dekatherm per day expansion project with a potential partial in service date as early as 2022. This open season is scheduled to close on September 6th.
And finally, our business development team is focused on finding opportunities to offer seamless transportation service from Canada to U.S. markets via several paths, which include our Great Lakes pipeline. During the second quarter of 2019, Great Lakes reached an agreement on the terms of a new long-term transportation capacity contract with its affiliates in our pipeline company. The contract is for a 15-year term from late 2021 to 2036 with a total contract value of $1.3 billion. In summary, TC PipeLines management is pleased with our progress as we execute on our existing growth program. And we continue to work towards new incremental growth opportunities across TCP footprint.
I will now turn the call over to Chuck Morris, our Principal Financial Officer, to discuss our second quarter financial results in more detail.
Thanks, Janine, and good morning, everyone. Moving on to Slide 7, I'll now review the Partnership's second quarter 2019 results. Net income in the second quarter was $55 million, down approximately 25% from $73 million in the second quarter of 2018. This equates to $0.75 per unit compared to $1 per unit in 2018. Several factors impacted our Q2 2019 results, the net effect of which led to the decrease year-over-year.
First, revenue from Bison was marketably lower as a result of the election of two of its customers in Q4 of 2018 to payout their transportation agreements. Second, as Nathan mentioned earlier, we saw rate reductions on several of our pipelines emanating from the 2018 FERC actions. GTN had a scheduled 10% rate decrease on January 1st of this year as part of a settlement reached with its customers in 2018.
Great Lakes and Northern Border also had 2% rate reductions in early 2019 related to the 2018 FERC actions. And Iroquois had scheduled 3.25% rate reduction on March 1st of this year as a result of its 2019 settlement. PNGTS's revenues were also lower this quarter as a result of the expiration of certain legacy contracts. However, revenues will increase later this year when Phase 2 of the Portland XPress project is scheduled to come into service.
Partially offsetting these decreases was a reduction in financial charges due to the repayment of $170 million term loan late in the year, combined with continued debt repayment in the first six months of 2019. The partnership paid distributions of $47 million to common unitholders in the second quarter, the same amount that was paid in Q2 of 2018. And as Nathan mentioned earlier, we declared our second quarter 2019 distribution of $0.65 per common unit. This is consistent with the distribution declared in the first quarter of 2019 and for each proceeding quarter in 2018.
The Partnership's EBITDA was $99 million in the second quarter, 20% lower than in the same period in 2018. And distributable cash flows were $70 million in the second quarter of 2019, $31 million lower year-over-year. The decrease was due to the same factors impacting net income, together with generally higher maintenance capital expenditures during the quarter as Nathan and Janine had mentioned earlier.
Turning to Slide 8. Revenues from our consolidated pipelines of $93 million were lower than in the same quarter last year for the same reasons as impacted our earnings as I mentioned earlier. Equity earnings in the second quarter of 2019 were $6 million lower than in the same quarter of 2018, primarily due to rate reproductions emanating from the 2018 FERC actions. Operating, maintenance and administrative expenses during the second quarter were comparable to those in the same quarter of 2018. And depreciation expense was lower by approximately 21%, resulting from the asset impairment on Bison that we recognized during the fourth quarter of 2018.
Financial charges were slightly lower in the second quarter of 2019 versus the same period in 2018, due to the repayment of the $170 million term loan in Q4 of 2018, and further reductions in our outstanding debt balance in the first and second quarter of this year.
Moving on to our financial position on Slide 9. Our solid financial position is reflective of the proactive measures that we have taken over the past 15 months. Our balance sheet is strong with a solid capital structure reflective of our high-quality energy infrastructure pipeline assets. Our investment grade credit ratings provide us with the financial flexibility as we look to organically grow the portfolio in the future, and we believe our ratings reflect our solid financial condition and outlook.
As Nathan mentioned earlier, we received a one notch upgrade in our credit rating from S&P to triple B flat from our previous rating of triple B minus. S&P cited our stable cash flow from our diversified portfolio of pipeline assets and our improved debt-to-EBITDA ratio as a rationale for the increased rating.
Our liquidity position remains strong. The partnership has $500 million of undrawn and available boarding capacity under our senior credit facility as of August 1, 2019.
Consistent with our self funding model, in order to build capacity for future organic growth, we continue to execute on our deleveraging program. In that regard, we have continued to use available cash to repay our indebtedness during the quarter, resulting in a bank leverage ratio of approximately 2.8 times. The bank leverage ratio is expected to migrate to the high-3s and low-4 times area as an impact of one-time items including the Q4 2018 Bison contract payouts go through the calculation of the bank leverage ratio.
In response to the 2018 quick actions we have right sized our distribution in 2018 and maintained it in 2019, resulting in a solid distribution coverage ratio of 1.5 times for the quarter ended June 30, 2019. As Janine outlined earlier, we continue to execute on our organic growth program, with both the PXP projects and the Westbrook XPress projects proceeding on time and on budget. And we continue to use our steel undergrounded advantage across our entire pipeline system to explore additional growth opportunities.
That concludes my remarks on the second quarter financial results. I'll now turn the call back over to Nathan.
Thanks, Chuck. I'll now refer Slide 10. As mentioned at the outset, we had a very good quarter this year and our assets continue to perform well, proving out their resilience and strong competitive position.
Going forward, our cash flow will continue to be derived from our portfolio of critical natural gas pipeline infrastructure assets underpinned by long-term shipper pay contracts from credit worthy shippers. We continue to prudently manage our financial position and believe our actions have resulted in a strong balance sheet. Our bank leverage ratio is currently approximately 2.8 times and our distribution coverage this quarter is very healthy 1.5 times.
Longer-term we're targeting to maintain our bank leverage ratio in a high-3 to low-4 times, area, distribution coverage ratio approximately 1.3 to 1.4 times. We reiterate that we do not need to access equity capital markets to fund our current growth program. As Chuck noted, consistent with our self funding model, and in order to build capacity for organic growth, we continue to pay down debt levels and execute on our delevering program.
Our focus remains on the optimization of our asset portfolio and will include organic growth over time, such as our current Portland and Westbrook XPress projects and our North Baja and Iroquois and GTN development opportunities. And we will continue to advance other options that fit within our geographic footprint and be our return on expectation.
Bottom line is the FERC actions are behind us. We have right sized our distribution. Our balance sheets are healthy and we're focused on executing our current and potential growth projects in order to drive long-term growth and continued value for our stakeholders.
I'll now turn the call over back over to Rhonda.
Thanks, Nathan. I'd like to open the call up for questions. Operator, please go ahead.
Certainly. Ladies and gentlemen, we will now take questions from the telephone lines. [Operator instructions]. And the first question is from Jeremy Tonet at JP Morgan. Please go ahead. Your line is now open.
This is actually [Toran] for Jeremy. I just wanted to go to the Bakken solution, specifically with that Northern Border. Your partner mentioned kind of two to three year range in terms of maybe potential expansion there. I was just curious, can you talk a little bit more on the timing just given how full that pipe is currently running? And especially with the BTU content kind of where that stands today?
Yes, thanks for the question. I'd say, in terms of timing, we really do have to wait for all those factors to come together just right, in order to move a specific project forward. And then there's the permitting construction time we have. So we're not putting too finer point on exactly when that might happen. But yes, we've certainly got options and we're moving forward along with same dynamic that our partner is making.
And then in terms of debt and you talked to the about the high 3s, low 4s target there. I'm just curious, what the near -- if there's kind of more of a near term goal, just given that you want to have room for capacity to self fund some of the future growth and just given the amount of projects you have in development, is there any reason to think differently about kind of the next couple of years versus kind of that longer term target?
Well, I'd say we're, we feel comfortable with where we are right now with the way that we are managing our balance sheet. The remainder of the Bison contracts fall off at the beginning of 2021. So we're taking all of that and other moving parts into account as we focus through what our actual leverage metrics are going to be. So as things change, we think we're right sized, and we're focused on the ability to execute on the growth programs that we have. And we think we've got the capacity to do it. So really, in terms of targets, we're focusing on the longer term run rate. In the shorter term we’ll just make sure we have the flexibility when the time comes.
The next question is from TJ Schultz at RBC Capital Markets. Please go ahead. Your line is now open.
Just first on Bison. At what point do you need to decide type of service there, whether it gets liquid repurposed. I think some of the in-service or some of the options you indicated were into late 2021 for some of the reversals. So just trying to back into how much work would need to be done for some of these different options, potential costs to hit in-service states, just any color would be helpful? Thanks.
Unfortunately, I don't have a lot of specifics there to share with anybody right now. Clearly the two options are mutually exclusive and would be competing against one another. So as those develop kind of in farewell as we reach a critical point on one or the other then we can compare and contrast. But right now I don't have anything to share.
On North Baja, anymore information you can provide just on some of the conditions to reach FID? It seems like you have a project scopes with the cost estimate. And the open season was successful. So just trying to understand kind of what's left outstanding on the commercial condition that you need?
Just waiting on counterparty commercial considerations on that one. So, as mentioned sometime next summer is when we anticipate getting checked off. But really don't have any subsequent changes over the past quarter on that one.
Thank you. The next question is from Praneeth Satish at Wells Fargo. Please go ahead. Your line is now open.
In the Bakken, do you see enough demand for both the Bison reversal and the Northern Border expansion or do you think it will be one way or the other?
Don't know right now. We still got kind of an engineering critical solution that would accommodate both. So, we'll take one at a time.
Okay. And then, just touching on Northern Border again on the BTU value there so keeps creeping higher, is there a point -- and Canadian gas keeps getting displaced, so is there a point where you just -- the BTU just get too high and you just can't displace Canadian gas? Is there a cap there and if so when do you think that bottleneck will occur?
Certainly there is a physical limit to what our systems could have, but we work with our customers to make sure we are ahead of that when happens. I don't think we're seeing that as imminent, so it’s not a near-term concern. So, sorry if I did not answer there. We don't really calibrate an amount or foresee it here in the near future.
Got it. And then just, last question from me on the Iroquois gas project I guess, what are the next steps to move forward with the project? And then just to clarify, will be it TCP that's handling the permitting and regulatory or will it be [indiscernible 9:1-42] that's doing it?
Janine on that one?
Iroquois will handle their own permitting, but I do believe that their customers will be there and supporting further process. The next steps right now they are in the middle of government and local community outreach and they are reaching out and talking to all related or affected counterparties along the line, and are taking in feedback and likely would be looking to file for permits in Q1 or Q2 of next year.
Thank you. The next question is from Michael Lapides with Goldman Sachs. Please go ahead. Your line is now open.
Hey, guys. Just a question on PNGTS. Can you talk about how much more you could physically expand that system, meaning after you're done -- and I know you're doing a lot with it right now. After you're done with the multi-stage and then when you're done with Westbrook, how are you thinking about what's left or how much physical more capacity could actually be a compression?
I don't know if we've formalized it, but the current expansion that we have is contemplated to be accomplished through inside the fence, additional compression work done in existing facility. Outside of those shared facilities and what we got going upstream, there is no midpoint compression yet on PNGTS.
So, if we can go through the process of adding additional compression, there's certainly a lot of additional capacity that's periodically possible. But I don’t see any firm numbers modeled into it just yet to be able to close the kind of end specific. But the capacity is there for additional midpoint compression on PNGTS that's not yet gained benefit. But we’re going to through a project like that that’s again similar to what we just we described with Iroquois is one that we want to step into -- very careful make sure we reach out to all the stakeholders who are interested in going about that rightly. But it’s a good opportunity, it’s a great asset, it does have sustainability.
And can you talk a little bit about -- you touched on it some in the prepared remarks about potentially upsizing GTN. Just trying to think about how much incremental capacity you could add and whether that's kind of inside the fence or whether it's something that's more complex from asiding and permitting process in kind of some of the Pacific Northwest states?
So, we're early days in our open season process here. And it's a bit of a longer story that involves upstream, new builds as well. So both our footholds in NGTL systems affiliated within TC Energy are working on that as well. And on the other side of this, we will be able to see what kind of volumes come out of kind of additional customer demand there. And then we'll be able to answer those questions a little more specifically.
Thank you. [Operator instructions]. And the next question is from Marc Solecitto at Barclays. Please go ahead. Your line is now open.
For the 50 million of revenue that you're expecting with the Portland XPress project, would you be able to confirm what that number would be in that -- the volumes that were re-contracted?
We don't have that handy, but maybe we could follow up with you. Janine?
Yes, I actually haven't got it. The C-to-C contracts have read is about 82,000 dekatherms. So it is about 20% of the total 400 a day that we're headed to. So that will give you a rough guide. But it is at a slightly lower rate.
And then for the Great Lakes agreement with ANR, what is the line commitment on that? Sorry, if I missed it.
I believe that’s 800,000 a day.
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. Ms. Amundson, I will now turn the call back over to you.
Great, and thank you, everybody for your participation today. We appreciate your interest in TC Pipelines, and certainly look forward to speaking with you again soon. Thanks.
Thank you. Ladies and gentlemen your conference has now ended. All callers are asked to hang -up their lines at this time, and thank you for joining today's call.