Q3 2020 TC PipeLines LP Earnings Call
Good morning, ladies and gentlemen, well.
Welcome to the TC pipelines LP 2023rd 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 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 RVP principal financial Officer, and Treasurer checked Morris please.
Please note that a slide presentation will accompany their remarks and is available on our website at TC pipelines LP Dot 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 2023rd quarter results.
He will provide a commercial update on the partnership's assets at our growth program.
During which Chuck will provide to be a review of our financial results for the third quarter may some overturned 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 that are subject to various risks uncertainties and assumptions as discussed in detail.
In our 29, <unk> 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.
He's also note that we use the non-GAAP financial measures EBITDA, adjusted EBITDA and distributable cash flow during her 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 FCC filings with that I will turn the call over to Nathan.
Thanks, Rhonda good morning, everyone. Thanks for joining us today.
2020 is proving to be a very extraordinary around the persistence of the code 19 pandemic together with significant impact it's having on people around the world.
We truly hope you and your families continue to stay healthy and safe during these uncertain times.
TC pipelines business continuity plan has been in place across our companies since early March from COVID-19 have declared war and done it.
Our services are brought to consider 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 advance our projects in a safe and reliable manner. Following a rigorous health hygiene distancing protocols.
Action to ensure the energy that is vital to the daily lives of so many good teams 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 four I'm pleased to report TC pipelines solid quarterly results of our portfolio of pipeline assets continue to perform as expected.
With approximately 90% of our cash flow coming from long term take or pay contracts you continued to be largely insulated from the short term volatility associated with volume throughput commodity prices.
Customer demand for our services remains strong despite the impact of a 19 on a broader <unk> 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 and net income during the third quarter of 2020 significantly more than 56 million in the same period in 2019.
EBITDA was 118 million for the third quarter adjusted EBITDA was 117 million compared to 100 million and 125 nine respectively generate between 19 over the same period.
We generated 36 million and distributable cash flow in the third quarter 2020, compared to 2019, where do you see it was considerably higher at 78 million.
The decrease was largely a result of higher maintenance and integrity capital expenditures as well as commercial IP system purchase by certain of our subsidiary an equity method investment pipeline.
The higher maintenance costs, although a drag on distributable cash flow reflects positive environment higher natural gas flows and these costs will be added to rate base and enjoy a return on capital.
We paid out 47 million and distributions to our unit holders during the third quarter. The same as it was paid in the same period in 2019.
The partnership also declared its third quarter distribution of 65 cents per common unit, which is consistent with our quarterly distributions as the first quarter 28.
The stability of our low risk business model, which is underpinned by long term take or pay contracts and strong demand for our central energy services.
Provided the basis for our solid financial performance and our ability to maintain distribution to our unit holders even in periods of economic stress and uncertainty.
Chuck will discuss our financial results in more detail a little later in the call.
We also continue to advance our organic growth program work continued on ballpark you can't Express project and our customer expansion.
Our other PNG Ts organic projects are progressing well well provided for incremental capacity, our PNG Ts system.
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We anticipate 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 I believe this will not be material to our operations.
Jay 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 PNG, Ts, which was utilized to repay its revolver borrowings.
And which will also provide the necessary capital for the remainder of his current expansion program.
We take pride in having completed this transaction despite the uncertainty in the financial markets and viewed as representational continued confidence in our credit.
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Additional notable credit events during the quarter included reaffirmation by both standard and Poor's and Moody's of our partnership credit rating, Patrick will be stable and you don't like to stable respectively.
Together with hasn't piece up rate and northern borders outlook to Triple B plus positive.
Subsequent to the third quarter in early October S&P revised the partnership's outlook to credit watch positive, reflecting their opinion that Tc energy to offer to acquire all the outstanding units will increase the level of support for <unk>.
Looking at our financial position during the quarter, our bank leverage ratio was approximately 3.8 times and our distribution coverage is approximately 0.8 times.
Our liquidity position is likewise very strong no.
No outstanding Bank borrowings, we have full availability of our 500 million dollar credit revolving credit facility.
And while we're proud of our financial performance and the returns we generate for our unit holders. 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 priority 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 and all that we do.
Our natural gas assets are critical to the quality of life securities. They serve and we believe that our systems will be important contributors to achieve greenhouse gas emissions targets for carbon footprint in North America.
Responsible and sustainable manner.
Lastly, we announced on October 5th 2020 at the partnership had received a non binding offer from TC Entergy Corporation to acquire all the outstanding publicly held common units.
Exchange for common shares at Tc energy.
Offer was made to the board of directors of the general partner to TCP.
Given the general partner indirect wholly owned subsidiary of TC Energy conflicts Committee composed solely of independent directors of the TCP Board was for to consider the offer pursuant to its processes.
Independent financial and legal advisors have been retained by the conflicts committee to assist their fairness determination.
Given their work has yet to be concluded we're precluded from commenting any further at this point.
I'll now turn the call over to Janine Watson, our VP and general manager to provide additional color on our assets and our commercial elements together with our market outlook.
Thanks, Nathan and good morning, everyone.
Moving on to slide five.
As Mike noted class cash flows from our pipeline system 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 that period.
Consistent with the fact that more than 90% of our cash flows are received from creditworthy customer.
Now turning first to GTN.
The beneficial results of cheap the energy de bottlenecking activities at its Westgate 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.
How about a quarter of a bcf more than flowed at that time last year.
Phase one of our GTN Express project got underway in Q3 with horsepower replacement and other reliability work being undertaken at several sites across Gtlds footprint.
Intended to be in service by the end of Twentytwenty. One. This work is being done to meet the needs of gtlds existing customers for reliable and affordable transportation of clean burning natural gas.
Turning to the Midwest long term and seasonal demand remains strong for northern border capacity, though.
So short term fundamentals were challenged.
Utilization rates on northern border northern border trended back to more normal levels compared to those seen in Q2 flows.
Close to Glenn Olin averaged about 2.4 Bcf per day in Q3.
Operationally northern border experienced two minor force majeure outages in Q3, the required very small firm capacity restrictions for short periods in July and August.
Buck in 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 it's strong market demand in the Midwest will keep this pipeline highly utilized and support contract renewal on this asset.
As we discussed last quarter.
Request was filed on May the first four and 1100 BT you heat content safe Harbor provision for the natural gas that northern border received into its many receipt points across its system.
On August six FERC held a technical conference and heard from many stakeholders upstream and downstream of the pipeline.
On November 2nd FERC rejected the proposal without prejudice to fuel future filings.
Encouraging northern border to continue to work with its shippers on a solution.
We continue to monitor the operations of northern border system and work with stakeholders to provide safe and reliable transportation for our shippers.
Results on your claims were slightly down in Q3, and the shed yield maximum recourse rate step downs, we're not completely offset by discretionary opportunities.
So there have been some incremental from contracting on this asset.
Iroquois received a lump sum payment of $48.5 million from Williams resolving all issues in claims associated with the constitution pipeline termination of the REIT interconnect project agreement teeth.
<unk> share of these funds was received as a return of equity at the beginning of Q3.
Quarterly reports on their results on the remainder of our trends mission systems were roughly comparable to Q3 2019.
Do you think these assets are highly contracted critical infrastructure that was evidenced in their steady performance this past quarter.
Now finally phase three.
In GTS is Portland Express project was placed commercially in service on November the first building.
Well the backed by long term fixed price contract. This project has increased the firm capacity of B Portland system by 170000, Dekatherms a day, making it the largest growth project TC pipelines has completed thus far in its 20 year history.
Turning now to slide six.
This chart illustrates our capex outlook for our major projects over the 2020 to 2023 period it.
It is largely unchanged from what we presented in May.
To date Weve experienced no significant slowdown in our permitting preconstruction or construction activity, 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 of the COVID-19, and its many challenges may have on our projects.
It's still too early to know what unexpected impacts this pandemic may have on our capital programs.
The bars on the graph represent TC pipelines proportionate share of estimated capex based on our ownership level.
Work is underway and as I've mentioned on time and on budget on phase one of our GTN Express project.
This initial phase will enhance the reliability of gtlds existing transportation service.
Yeah horsepower replacement and other reliability work being performed at brownfield compressing compression facilities, along GTN 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 reports right.
The required section seven seas filing is being prepared for submission to FERC for phase two of the GTN Express project.
The second phase will provide 250000 dekatherms per day of additional firm transportation service on the full power of the GTN system, and then to anticipated to be commercially phased into service through November of 2023.
No. Our Westbrook Express project also continues to progress on time and on budget. Its major FERC and state Air permits are in hand, and phase two is expected to be in service November Onest Twentytwenty one.
Looking to North Baja Express you will recall that this isn't an approximately half a bcf per day proposed expansion <unk> meant to transport gas to I. Inovas Costa is dual LNG export facility.
I know it was in the process of securing the Mexican export permit needed for its project. There were reports that it expects to reach an F.I.D. decision shortly.
North Baja has agreed to extend I know the date for its F.I.D. decision to the fourth quarter of this year.
The estimated plot project cost remains about $90 million, excluding if beauty C and the estimated in service date is February 2023.
FERC staff issued the environmental review for this project on September the eight recommending that Commission the commission fine no significant environmental impact.
Just garage Express 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 test growth capacity by 15000 Dekatherms per day at a cost of about $13 million with a planned in service date of November Onest Twentytwenty one.
Iroquois continues to make progress on its section seven c. application with FERC to construct the compression only enhancements to its system contemplated by its proposed ex the project.
FERC staff issued an environmental assessment recommending a finding of no significant impact on September thirtyth.
As part of its FERC filing Iroquois quantified the indirect downstream emissions expected to result from the project as well as the admin emissions expected from the construction and operation of the XP facilities.
<unk> also called quantitatively addressed indirect upstream admission impacts.
We therefore believe Iroquois has met or exceeded FERC requirements and continue to expect that FERC will issue with the ticket by Q1 of next year.
Of course, the Xcede project requires varies state permit that well 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 G.H.T. analysis concern rain raved in the course of the FERC Environmental assessment project by the D. C and continue to work cooperatively cooperatively with this agency on all matters related to that air permit.
Finally, we continue to plan to self fund the capital during this period through a combination of debt at the asset level and contributions from TC pipelines. The ladder funded with the cash from operation together with our revolving credit facility if required.
Those small portion of our planned maintenance activities have been shifted to subsequent periods because of our business continuity planning 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 I T 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.
Thanks, Thanks, Janine and good morning, everyone.
Moving on to slide seven I'll now review the partnerships third quarter financial results.
Net income attributable to controlling interest in the third quarter was 65 million or 90 cents per common unit compared to 56 million or 76 cents 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 are PNG Ts 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 a $100 million that your 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 Uruguay.
Great Lakes did not pay the partnership with distribution in Q3 as it used its cash generated during the quarter for the one time purchase of their commercial IP 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 through its owners of surplus cash from its balance sheet from the date of our investment and Eric walk and the Q4 2019 installment Mark the final payment associated with that obligation.
The partnership paid distributions of $47 million to common unit holders 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 65 cents per common unit. This is consistent with that declared in each quarter since Q1 of 2018.
Our adjusted distributable cash flow was $36 million in the third quarter of 2020 $43 million lower year over year.
The primary drivers of the decrease in DCF was or lower adjusted EBITDA together with the one time purchase of the commercial lighting 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 a sustained increase natural gas transportation volumes.
So higher maintenance costs in our systems, although a drag on distributable cash flow reflect the positive environment of higher natural gas flows.
Additionally, the commercial IP system purchase is expected to reduce future operating costs both.
Both the maintenance capital and the IP system purchase costs will be added to our pipelines respective rate basis and will attract a return on capital through future tools.
Turning to slide eight 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 PNG Ts is growth projects. The went into service on November Onest of 2019.
The increase was partially offset by a scheduled rate reduction of 6.6% on GTN effective January onest of this year and.
10.8% decrease on Tuscarora effective August Onest of 29 team together with more 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 and northern border, resulting from non recurring incremental revenue related to certain prearrange contracts entered into buying northern border with its affiliate one oak Rockies midstream.
These contracts were subsequently council by the FERC effective October 15th and the capacity was remarketed and awarded under terms that approximate northern borders maximum recourse rates, which are lower than the pre arranged contract rates and more consistent with historical results.
Third quarter oil M&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 Puget PNG Ts during the quarter.
Financial charges, and other were $3 million or 15% lower in the in the third quarter of 2020 versus the same period of 2019, primarily attributable to higher allowance for funds used during construction or if you do see.
It's more than offset higher interest charges, resulting in the decrease.
If you do see 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.
Thanks, Jeff I'll now refer to slide nine for some key takeaways.
As I mentioned at the outset, we had another good quarter this year and our assets continue to perform well proving out the resilience and strong low risk business model.
Florida cash flow continued 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 have resulted in a strong balance sheet.
Bank leverage ratio is currently approximately 3.8 times and our distribution coverage. This quarter is there a 0.8 times.
Softness in the latter primarily reflection of the onetime commercial system purchase in Q3, together with increased normal course maintenance Capex and we anticipate it will migrate higher in Q4.
As we said in previous quarters, and expect our distribution coverage on a run rate basis to be in 1.3 to 1.4 times.
These healthy metrics are enabling us to self fund our organic growth on each of our GTN Tuscarora and PNG Ts projects.
Capital market conditions in 2020 has been significantly impacted by the COVID-19 pandemic, resulting in periods of high 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 NPL GTS to provide the required funding for the remainder of their organic growth projects.
As Dan outlined earlier, we 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.
I believe our business will continue to deliver consistent financial performance going forward.
I'll now turn the call back over to Rob.
Thanks Nathan.
Where I open the call up for questions I would ask that you framed from asking questions about the TC energy offer to acquire all outstanding publicly held common units at the partnership and where could 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.
Q.
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Our next question comes from Donald Labonte of Emera trade. Please go ahead.
I'd like to know if the dividend going up.
Okay. Thanks for your question, we will review our distribution on a quarterly basis with the full board of directors and we make that make that termination as we as we look forward on our our forecast that we don't currently but at this point we.
Our we declared a dividend for distribution work.
Q3 at the same 65 cents that we've had since Q1 of 2018 and we'll announce changes as we make further analysis. Thank you.
Thank you.
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Ladies and gentlemen, this concludes the question and answer session. If there any further questions. Please contact investor relations at TC pipelines LP I will now turn the call back over to Rhonda Amundson.
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.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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Thanks.
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