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Edited Transcript of TCP earnings conference call or presentation 9-Nov-18 4:00pm GMT

Q3 2018 TC PipeLines LP Earnings Call

DALLAS Dec 17, 2018 (Thomson StreetEvents) -- Edited Transcript of TC PipeLines LP earnings conference call or presentation Friday, November 9, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Janine M. Watson

TC PipeLines, LP - VP & GM of TC Pipelines GP Inc.

* Nathaniel Alan Brown

TC PipeLines, LP - President & Director of TC PipeLines GP, Inc.

* Rhonda L. Amundson

TC PipeLines, LP - Manager, IR

* William C. Morris

TC PipeLines, LP - VP, Principal Financial Officer & Treasurer

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Conference Call Participants

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* Matthew Taylor

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research

* Ryan Michael Levine

Citigroup Inc, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the TC PipeLines, LP 2018 Third Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Rhonda Amundson. Please go ahead.

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Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [2]

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Thank you very much, operator, and good morning, everyone. I would like to welcome you to our third quarter 2018 conference call. I'm joined today by our president, Nathan Brown; our VP and General Manager, Janine Watson; and our Principal Financial Officer, Chuck Morris. Please note that a slide presentation will accompany their remarks and is available on our website at 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' third quarter highlights and results. Janine will provide an update on the partnership's assets and the market environment, as well as a brief regulatory update following which Chuck will provide a more detailed review of our financial results for the third quarter. Nathan will return and wrap up our remarks and close with some key takeaways. Following the prepared remarks, I will ask the conference operator to coordinate the questions. We will take questions from the investment community, but if you are a member of the media, please contact Grady Semmens following this call and he will be happy to address your questions.

Before we begin, I would like to remind you that certain statements made during this conference call will be forward-looking regarding future events and our future financial performance. All forward-looking statements are based on our beliefs as well as assumptions made by 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 2017 10-K as well as our subsequent filings with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, actual results may differ materially from those described in the forward-looking statements.

Please also note that we use the non-GAAP financial measures EBITDA and distributable 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 will now turn the call over to Nathan.

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Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [3]

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Thanks, Rhonda. Good morning, everyone, and thanks for joining us today. As outlined this morning in our news release, and looking at Slide 4, I'm pleased to report that TC PipeLines had another very good quarter with solid results and our portfolio of top line assets continue to perform as expected.

We generated $62 million in net income during the third quarter of 2018, $8 million higher than the $54 million earned during the same period of 2017. This is primarily due to our higher revenues from PNGTS in North Baja together with increased equity earnings from Great Lakes, partially offset by lower net revenue at GTN. Our EBITDA was similarly higher year-over-year at $113 million for the quarter compared to $103 million in 2017. Our distributable cash flow was $83 million for the third quarter in 2018, an increase of $18 million from the comparable period in 2017. Our cash flow was bolstered by the reduction in distributions related to our General Partner and Class B unitholders, partially offset by an increase in maintenance capital expenditures on GTN.

We paid out $47 million in distributions or $0.65 per unit to our common unitholders during the third quarter. The partnership also declared a third quarter distribution of $0.65 per common unit, which was consistent with our second quarter 2018 distribution. Jeff will discuss our financial results in more detail a little later in the call. On the regulatory side of the business, we have made good progress in response to the FERC's final ruling back in the summer. As we reported in mid-October, GTN reached an uncontested settlement with its shippers and 4 of our other pipelines have already complied with FERC requirements, leaving only Northern Border, Great Lakes, and Tuscarora to file their Form 501-Gs in early December.

We've utilized our cash savings related to our reduced distributions to repay a portion of our indebtedness, reducing our leverage position from a covenant perspective to just over 4x. And our distribution coverage is very healthy this quarter at just under 2x. This puts us in a much stronger financial position and we are confident that we will not require any additional equity, either discrete or via our ATM program to fund our ongoing organic growth opportunities. Further, due to our regulatory progress, our estimated -- excuse me, our estimate of the tax-related impact to our business from the FERC actions improved to negative $20 million to $30 million on an annualized basis starting in 2019 from our previous estimate of negative $40 million to $60 million. Given this improvement, we do not see the need for corporate restructuring and we are confident that our distribution is sustainable at the current level without the need to consider any further reductions.

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

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Janine M. Watson, TC PipeLines, LP - VP & GM of TC Pipelines GP Inc. [4]

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Thanks, Nathan, and good morning, everyone. Moving to Slide 5, you will see that TCP continues to benefit from its diverse pipeline network, which is anchored on major regional hubs and spans key supply and demand markets. In the third quarter, our entire portfolio of assets continued to perform well, reflecting the fact that our pipelines are well-positioned in these key areas, are highly contracted and have seasonal opportunities to realize incremental revenue.

On the East Coast, Portland benefited from increased contracting from its Continent to Coast customers as its legacy contracts mature. These are long-term transportation contracts, which together with the Portland XPress Project contracts will serve to replace expiring legacy contracts and expand the Portland system to approximately 0.3 bps per day. North Baja benefited from an increase in short-term transportation services sold during the quarter. And this potential to deliver south band -- bound gas into Mexico that can then be routed back into Southern California, stimulated interest in this asset's available short-term capacity.

We saw continued strong demand for transportation service on our GTN pipeline, serving energy needs in California and the Pacific Northwest. However, the incremental demand revenue earned by this asset was offset by the 2018 revenue refund agreed to with its shippers as part of GTN's recent uncontested settlement. Upstream debottlenecking on TransCanada's NGTL system continued, and basis differentials between the Western Canadian Sedimentary Basin and Midwestern markets are very supportive of gas flows in those regions on TCP's assets.

Great Lakes is benefiting from the strength of a supply push out of the WCSB, resulting in incremental short-term sales. Great Lakes revenues were also improved compared to Q3 of 2017, due to the elimination of revenue -- the revenue sharing mechanism, that was a feature of this asset's tolls and tariffs prior to the 2018 settlement with its shippers. Northern Border's capacity is largely sold out until the end of 2019 as it continues to enjoy the advantage of both its upstream tie to the WCSB and its proximity to Bakken associated gas. The remainder of our asset portfolio performed as expected and reported continued stable results during the third quarter.

And now, turning to our outlook. TC PipeLines' assets are geographically varied, strategically located and enjoy many synergies with TransCanada's assets, allowing TCP to potentially benefit from some unique opportunities. First, though, because of the highly contracted nature of our pipeline assets, we expect that they will continue to perform in a consistent matter -- manner with past periods and thereby produce steady predictable results. Our Portland natural gas pipeline system is strategically located in a geographic area that is otherwise significantly bottlenecked, providing this asset with some relatively easy expansion opportunities to serve markets in New England and up in Atlantic Canada. Our Portland XPress, or PXP expansion project, provides an example of the type of appropriately scaled, well-placed and well-timed expansion projects we are seeking out across TCP's footprint, providing a competitive path to market with a fairly minimal environmental and regulatory footprint.

Work on the PXP project is currently on time and on budget. Phase I of the project came online in November of this year, bringing an incremental 40,000 dekatherms a day of flows onto Portland. Phase 2 of this project, which will extend or recontract existing legacy volumes on this line, is expected to be in service in November of 2019. This phase of the PXP project is supported by compression facilities to be built on pipelines in Canada upstream of the Portland system. TransCanada has the regulatory approvals needed for those capacity additions in hand and construction of their facilities has commenced.

The final phase of this project entails a fairly modest brownfield construction project entailing a compressor and associated facilities on Portland's joint facilities at an estimated cost of about $80 million to be self-funded at the asset level. Permitting and preconstruction work is underway, on schedule for the planned November 2020 in-service date. In total, these 3 phases will add an incremental 70,000 dekatherms of firm long-term contracting on the Portland system. Beyond this opportunity, the combination of ongoing permitting difficulties in the U.S. Northeast together with recent declines in Atlantic Canada's offshore gas production is driving additional market interest in the Portland System.

The TransCanada mainline has recently launched 2 open seasons for new capacity on its system to bring natural gas to Northeast and Atlantic Canadian markets, the results of which are still pending and are expected to be announced by month's end. Portland is working with the mainline to capture the next wave of growth opportunities on this path in response to these market drivers. At the same time, LNG backed opportunities are arising in the West, creating potential for additional organic growth at North Baja. As was in the news as recently as a few days ago, Sempra's LNG export project located in Baja California, Mexico is -- appears to be going forward. If it proceeds, the North Baja's pipeline's existing footprint could provide a competitive connection to this new export market.

Great Lakes is well-positioned to move incremental WCSB production to Eastern markets as well. TransCanada's Canadian and U.S. pipeline groups are working in tandem to explore alternatives that optimize the use of Great Lakes' existing capacity to markets that provide value to its shippers, as was the case with TransCanada's mainline long-term fixed price agreement that took effect November of 2017. In summary, we are working to identify the next wave of growth opportunities for TCP, taking advantage of the competitive strengths and strategic importance of our major pipeline systems as a platform to develop low-risk, value-creating projects supported by long-term contracts.

Now turning to Slide 6. Let me provide a little more detail on our regulatory developments during the third quarter. We continue to execute our regulatory strategy in response to the FERC actions earlier this year. Our Bison pipeline submitted its FERC Form 501-G yesterday explaining that all of Bison's long-term firm contracts are at negotiated rates and that no rate change is warranted. On October 17, we announced that GTN had reached an uncontested settlement with its shippers, which was filed with the FERC the day prior. This settlement is structured as an amendment to GTN's 2015 settlement with its shippers, addressing the FERC's recent actions in the context of that previous arrangement. Importantly, GTN and its customers have agreed upon a moratorium on further rate changes prior to January 1, 2022.

North Baja and Portland filed their Form 501-Gs on October 11. And on October 12, Iroquois filed with FERC requesting a waiver of its requirement to file a Form 501-G based upon its existing moratorium to 2020. FERC's decision on this request is still pending. Our remaining assets are scheduled to file by December 6, 2018. In light of our negotiated settlement on GTN, and as we progressed through the Form 501-G process and engaged in discussions with our shippers, management's views of the range of possible outcomes has improved.

The impact in 2018 is expected to be limited to the $10 million payment to GTN's shippers this December. The full revenue impact of the FERC's recent initiatives and Form 501-G process is now estimated at a negative $20 million to $30 million a year starting in 2019. We are very pleased with our progress in these matters so -- thus far. I will now turn the call over to Chuck Morris, our Principal Financial Officer, to discuss our third quarter financial results in more detail.

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William C. Morris, TC PipeLines, LP - VP, Principal Financial Officer & Treasurer [5]

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Thanks, Janine, and good morning, everyone. Moving on to Slide 7, I'll now review the partnership's third quarter 2018 results. Net income in the third quarter was $62 million, up approximately 15% over $54 million in the third quarter of 2017. This equates to $0.79 per unit compared to $0.61 per unit in 2017. Several factors impacted our Q3 2018 results, the net effect of which led to the increase year-over-year. We experienced higher contracting on PNGTS and higher demand for short-term services on North Baja, which resulted in higher revenues. Equity earnings on Great Lakes increased year-over-year due to the elimination of the revenue sharing agreements and incremental short-term seasonal sales. These increased results were partially offset by lower net revenue at GTN resulting from a combination of its refund provision and its recent settlement and lower short-term sales.

The partnership paid distributions of $47 million to common unitholders in the third quarter. The $27 million decrease over Q3 2017 was primarily due to the $0.35 decrease per common unit in the second quarter 2018 distribution that was paid in August of 2018. As Nathan mentioned earlier, we declared our third quarter 2018 distribution of $0.65 per common unit. This represents a decrease of 35% to that declared in the third quarter of 2017 but is consistent with our first and second quarter distribution following the FERC actions. The partnership's EBITDA of $113 million in the third quarter was 10% higher than that in the same period in 2017. And the distributable cash flows were $83 million in the third quarter of 2018, $18 million higher year-over-year. The increase was due to the same factors impacting net income, together with the reduction in distributions allocated to both our General Partner and our Class B unitholders, partially offset by an increase in maintenance capital expenditures of $2 million on GTN related primarily to the timing of pipeline reliability work.

Turning to Slide 8. Revenues from our consolidated pipelines of $103 million were approximately 3% higher than those in the same quarter of last year. The increase was a result of the incremental contracting on both PNGTS and North Baja, partially offset by the lower revenue at GTN. Equity earnings in the third quarter of 2018 were $7 million higher than the same period in 2017, primarily due to the increased results at Great Lakes. Operating, maintenance and administrative expenses, depreciation and financial charges during the third quarter were all comparable to the same quarter in 2017.

Moving on to our financial position on Slide 9. Our investment-grade credit ratings provide us with the financial flexibility as we continue to fund our organic growth. Our liquidity position remains strong. The partnership has $430 million of undrawn and available borrowing capacity under our senior credit facility as of November 9, 2018. As we continue to execute our deleveraging program, we've used our cash savings related to our reduced distributions to pay a portion of our outstanding borrowings on our revolving credit facility in advance of the anticipated reductions in future cash flows resulting from the FERC actions. As a result, our bank leverage ratio is approximately 4.1x at September 30, 2018. Similarly, our distributable cash flows this quarter resulted in a very healthy distribution coverage ratio of 1.8x in the third quarter. This concludes my remarks on the third quarter financial results. I'll now turn the call back over to Nathan.

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Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [6]

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Thanks, Chuck. I'll now refer to Slide 10. This has been a very good quarter for our partnership. We've made a lot of progress on the regulatory front and believe that we can see a clear path forward and can return to focusing on other parts of our business. Our assets are performing very well and we remain confident that they are well situated to benefit from solid underlying market fundamentals and will continue to generate value for our unitholders well into the future.

We've taken a proactive approach to managing our financial position over the past few months and are happy to report that our leverage ratio is just over 4x and our distribution coverage ratio is solid as well. Going forward, we are targeting to maintain our coverage ratio in the 1.5x area and our leverage ratio in the low 4x range. With this solid financial position, we have no plans to access the equity capital markets to fund our current growth program.

Our focus remains on the optimization of our asset portfolio and we're working to secure the next wave of growth opportunities on our assets. These include organic growth projects on PNGTS such as our current Portland XPress Project as well as potential opportunities on our North Baja pipeline. All of these will be progressed in a very disciplined manner with near-term opportunities, sized and sequenced so that we're in a position to be self-funding. We have a history of prudently managing our partnership and are confident that our portfolio of crucial energy infrastructure assets will continue to generate solid financial results with opportunities for organic growth in high-quality, low-risk, value-creating projects for our unitholders. I'll now turn the call back to Rhonda.

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Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [7]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Jeremy Tonet with JP Morgan.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [2]

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This is Ryan for Jeremy. I was wondering if we could just circle back to the regulatory update. It seems like a lot of operators are going with that third option similar to what you did with Portland, in explaining why no rate change is needed. I was just curious as we look forward to some of your remaining pipes that you still need to submit Form 501-Gs for in December. Any thoughts there on expectations? And are you kind of already maybe speaking with shippers to maybe come to a settlement prior to submitting that form similar to what you did on GTN?

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Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [3]

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

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [4]

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Okay, great. And then just on some of these growth opportunities you outlined, specifically with North Baja. Can you just explain a little bit more in detail what kind of the size and scope of this opportunity would be? And sorry -- is this -- the Sempra LNG project, is this the one -- is this ECA? Is that what this is -- would be supplying? (multiple speakers) Yes, okay. Right.

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Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [5]

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Well, it's early days on that front, but certainly, there is some fairly easy brownfield compression hats that we can do along that line to move in the 4 to 5 -- even up to 400 or 500 a day to meet the needs of that new LNG export facility should it come to pass.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [6]

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What's the expectation on timing on that?

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Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [7]

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

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Operator [8]

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The next question is from Matthew Taylor from Tudor, Pickering, Holt.

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Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [9]

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Still early stages on the ongoing open seasons. On those, do you need new capacity? And can you just remind us how much you can expand those systems, if say, more volumes start showing up in the Eastern triangle?

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Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [10]

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Yes, the TransCanada is open season, they have one that's still open and one that is closed but not yet announced. So the amount of capacity needed in the triangle, I think, is unknown at this point. We're hoping that they'll be -- it seems like they've got a positive response but we'll see when they're ready to come forward with that -- what that looks to be. PNGTS and Iroquois both have some ability to add -- PNGTS actually has quite a robust ability to add more compression to move more gas if that proves to be the direction that those new shippers want to take. And then Iroquois as well, has some potential but I think it's a little bit more built out at this point.

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Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [11]

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

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Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [12]

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

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Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [13]

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And then if I just switch over to Northern Border, just as you look at volumes on that system, I don't think you highlighted any sort of growth opportunities there. I'm just thinking Canadian volumes on that system are trending downward and then you often get questions about Bison. Is there any opportunity to use some of that northern latent capacity that may otherwise would have been filled with Canadian volumes that now might not be seeing the same volume flow to connect into Bison? Or maybe not even Bison, but to do something else with that northern piece of Northern Border?

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Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [14]

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Well, that's certainly something that we're looking at. The dynamic you're describing is just reflective of the rise in volumes coming out of the Bakken that are flowing on to Northern Border. And certainly, there is a regional solution to be had there among there -- several different things. So within the asset of Bison, we've got some open capacity whether it's a reverse flow of gas or some other product conversion along the way. There are certain opportunities there that we're pursuing. But again, it's fairly early days on those, but we do think the value of our assets and the value of the pipe in the ground will ultimately, kind of, prove out to be something that we can capitalize upon. Whether that translates into another solution that involves Northern Border as well, that's certainly within the realm of possibility and within the realm of things that we're going to pursue to try and manage the volumes that we see in the Bakken and the dynamic that's happening right there around the intersection of the 2 pipes.

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Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [15]

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Great, that's really helpful. And then just last one. As you're messaging now more strongly about growth and no need for corporate restructuring, et cetera. Can you give us what you're thinking on distribution, where now the FERC impact is supposed to be negative $20 million to $30 million, trending in the right direction, I think, there. Can you just give us some sense on how you're thinking about distributions? Is that going to be tied to cadence of growth or you're just in wait and see mode? Just any color there would be helpful.

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Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [16]

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Sure. We're watching the outcomes of all the remaining FERC filings that we have to do so we can get a little more precision around those. We're also evaluating these near-term growth opportunities we have as they're -- as they come to fruition, and in working through how our cash flow situation works through our distributions with a view on being self-funding. And with a view on staying within our means and not counting on the additional capital coming from TransCanada. So from that perspective we're working through a lot of fairly significant moving parts that are yet to be finalized. We do feel confident that another distribution decrease isn't necessary. In terms of an ongoing growth story from here, we think we've got some good underpinning dynamics that'll push us in the right direction and look forward to finalizing those, putting some more precision around them and being able to have a very clear message when the time comes.

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Operator [17]

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The call has now concluded. If there are any further questions, please contact Investor Relations at TC PipeLines, LP. I will now turn the call over to Rhonda Amundson.

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Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [18]

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

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Operator [19]

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