U.S. Markets closed

Edited Transcript of TCP earnings conference call or presentation 21-Feb-19 4:00pm GMT

Q4 2018 TC PipeLines LP Earnings Call

DALLAS Feb 26, 2019 (Thomson StreetEvents) -- Edited Transcript of TC PipeLines LP earnings conference call or presentation Thursday, February 21, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Janine M. Watson

TC PipeLines, LP - Former 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

================================================================================

Conference Call Participants

================================================================================

* Alexis Stephen Kania

Wolfe Research, LLC - Utilities SVP

* Matthew Taylor

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

* Michael Jay Lapides

Goldman Sachs Group Inc., Research Division - VP

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Torrey Joseph Schultz

RBC Capital Markets, LLC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the TC PipeLines, LP 2018 Fourth Quarter Results Conference Call.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, operator, and good morning, everyone. I would like to welcome you to TC PipeLines Fourth Quarter 2018 Conference Call. I'm joined today by our President, Nathan Brown; our VP and General Manager, Janine Watson; and our Treasurer and 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 today with a review of TC PipeLines 2018 fourth quarter and annual highlights and results. Janine will provide an update on the Partnership's assets and the market environment, following which Chuck will provide a more detailed review of our financial results for the fourth quarter and for the year ended December 31, 2018. 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, adjusted earnings, adjusted earnings per common unit, EBITDA, adjusted EBITDA and distributable cash flow during our presentation. Adjusted earnings are used to provide a more comparable earnings measure from quarter-to-quarter and exclude the impact of certain nonrecurring items. 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Rhonda. Good morning, everyone, and thanks for joining us today. Looking at Slide 4, I'm pleased to report that TC PipeLines had another good quarter and solid annual results, although we reported a net loss of $413 million for the fourth quarter and $182 million for the year after excluding the impact of the noncash impairment charges for Bison and Tuscarora and for Bison's one-time contract buyout proceeds.

We generated adjusted earnings of $86 million during the fourth quarter of 2018 and $317 million on an annual basis. These represented 30% and 26% increases in our fourth quarter and annual adjusted earnings, respectively, versus the same periods in 2017.

These strong results reflect the high level of contracting across our portfolio, together with increased natural gas flows mainly out of the Western Canadian Sedimentary Basin. Similarly, our adjusted EBITDA was $140 million for the fourth quarter and $526 million for the full year in 2018. Again, 20% and 18% higher than the same periods in 2017.

We generated $95 million in distributable cash flow in the fourth quarter 2018, 32% higher than during the same period of 2017. And on an annual basis, our distributable cash flow of $391 million was 26% higher, year-over-year.

We paid out $47 million in distributions to our unitholders during the fourth quarter and $218 million in the full year of 2018. The Partnership also declared its fourth quarter distribution of $0.65 per common unit consistent with the distribution paid for each of the first 3 quarters of 2018. Chuck will discuss our financial results in more detail a little later in the call.

We also continued to progress a number of commercial activities during the fourth quarter. We are pleased to announce the progress on a new PNGTS expansion project last week, the Westbrook XPress project. This is another organic expansion opportunity in response to demand for incremental Western Canadian Sedimentary Basin natural gas supplies in the Northeast U.S. and Atlantic Canada markets.

And Phase 1 of our Portland XPress project became operational on November 1, 2018. These 2 projects, Westbrook XPress and Portland XPress, will increase PNGTS capacity by approximately 70% from 210,000 dekatherms a day to approximately 350,000 by 2021. Janine will discuss these commercial developments in more detail in a minute or 2.

During the fourth quarter of 2018, in response to the FERC actions earlier in the year, we finalized the regulatory approaches on all of our assets and obtained FERC approvals where applicable.

Following the elimination of tax allowance and the accumulated deferred income tax liability from rate base, recent rate settlements and related filings on all our pipelines, the estimated impact of tax-related changes to our revenue and cash flow is a reduction of approximately $30 million per year on an annualized basis beginning in 2019.

We believe our pipeline systems which are largely backed by long-term take-or-pay contracts will deliver consistent financial performance going forward and support our current quarterly distribution level of $0.65 per common unit for the foreseeable future.

With our cash savings related to our reduced distributions, we've repaid a portion of our indebtedness, such that our leverage is now approximately 3.1x. And our distribution coverage is very healthy, approximately 2.1x for the quarter ended December 31, 2018.

This positive performance was achieved despite a challenging year on the regulatory front and in the broader MLP space. As a result of these solid results, together with our prudent financial actions, we're ending 2019 with a healthy balance sheet, strong distribution coverage and a reset regulatory position.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Nathan. And good morning, everyone. First of all, I'm pleased to note that all of our assets operated safely and reliably throughout 2018. And that, due to the excellent efforts of our teams out in the field, none of our pipelines experienced a major outage or restriction to firm capacity during the polar vortex weather event that recently blanketed most of our geographic footprint.

Now moving to Slide 5, I will drill a bit further into the strong operating performance of TCP's assets in 2018. Long-term contracts continue to be the cornerstone of TCP's solid commercial fundamentals, underpinning 87% of our 2018 distributable cash flow.

In the West, demand is strong for transportation service on our GTN pipeline, serving the needs of -- in California and the Pacific Northwest. GTN held successful open seasons for the long-term capacity scheduled to come available over the next 2 years, and we are effectively sold out of firm capacity in and after 2020.

North Baja outpaced its usual steady performance, selling incremental short-term services in response to increased demand for southbound transportation in 2018. And this 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.

Bakken receipts have climbed as high as 1.3 to 1.4 Bcf per day and now accounts for more than half of the daily receipts on this line. Northern Border generally renews its contracts for terms of 5 years and is now substantially contracted through to the end of 2020.

Great Lakes benefited from increased levels of throughput in 2018 as well, due in part to its long-term transportation contract with TransCanada for 711,000 dekatherms per day that took effect on November 1 of 2017. This asset's financial results were also enhanced by the elimination of a revenue sharing mechanism that it formerly had in place with its shippers, prior to its 2017 rate settlement that took effect in Q1 of 2018.

In addition, Great Lakes sold substantially all of its available firm winter capacity for 2018, demonstrating the favorable shift in market dynamics for this asset over the past 2 years.

PNGTS benefited from a full year of revenue from its Continent to Coast contract and placed Phase 1 of its Portland XPress Project into service on November 1. This pipeline also successfully marketed short-term and interruptible transportation as various market opportunities arose throughout the year.

And as we've previously press released for Bison, 2 of its 4 customers bought out their firm transportation contracts at the end of 2018. This buyout of [60%] of Bison's revenue stream was used to decrease TCP's leverage. We remain committed to Bison, but recognize that this asset likely needs to be reconfigured to find a new role in the U.S. energy transportation market.

We're exploring 2 development opportunities for this pipeline. First, we're examining a potential gas reversal project that would make Bison bidirectional and connect the Bakken's gas production to third-party pipeline systems in the Rockies that link into the Cheyenne supply hub. And second, we're looking at the option of converting the Bison pipeline into liquids service.

Now turning to our regulatory update. Our commercial and regulatory teams worked throughout the last 3 quarters to develop customer outreach and regulatory actions for each of our individual pipelines and implemented these strategies in the fourth quarter. These initiatives appear to have been well received by our customers and our regulator. And we believe that but for the finalization and filing of our settlements on Tuscarora and Iroquois, we are finished with the 501-G process.

Now for your convenience, we have detailed each of our assets 501-G elections and outcomes in a chart in our press release and in the recent developments in our business section of our 10-K filing. We estimate that the impact of these tax-related changes on our revenue and cash flow will be a decrease of about $30 million per year, starting in 2019. Of the total impact, about 2/3 is attributable to GTN.

Turning to Slide 6. Production of natural gas continues to grow in the Western Canadian Sedimentary Basin. Receipts onto TransCanada's NGTL system went up again in 2018, increasing by almost 1 Bcf to approximately 12.3 Bcf per day. This system is the upstream source of gas for our Western and Midwestern pipelines. And about 40% of this supply is making its way to market via our system. Thus we are experiencing robust demand for our services, as is evidenced by strong contracting for increasing term.

TransCanada's Canadian Mainline deliveries have also increased year-over-year, due to initiatives like its long-term fixed price offering, which benefited Great Lakes starting in 2017. Now we expect this trend will continue going forward as the Mainline's recent North Bay junction LTFP offering creates the upstream capacity for Portland's recently announced Westbrook XPress project.

Westbrook XPress is a multiphase expansion project designed to help serve markets in northern New England and Atlantic Canada that have, until recently, been served by offshore gas production from Sable Island and Deep Panuke. Still subject to various conditions precedent and approval, the Westbrook XPress project is backed by long-term fixed price contracts with fixed shippers, for terms of 15 years or more.

Phase 1 of this project is to be supported by pressure agreements with our upstream affiliated pipelines, allowing Portland to bring an initial 43,000 dekatherms per 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 and at an estimated cost of $100 million and will bring a further 60,000 dekatherms of firm capacity onto this system. These new facilities are intended to be in service by November 1 of 2021 and will be funded using debt at the asset level. Once this project is fully in service, we expect this project will generate at least $30 million in revenue for Portland on an annual basis.

We're also progressing our Portland XPress Project and put the first phase into service on November 1. Phases 2 and 3 of this project are well underway and are projected to be on time and on budget and fully in service by November of 2020.

Now looking forward, TC Pipeline could continue to benefit from the continued growth in the WCSB as well as the Bakken. Because of the highly contracted nature of our pipeline assets, together with their generally strong market position, we expect they will continue to perform in a predictable manner, after taking into -- the impact of the 2018 FERC actions into account and thereby will produce steady results.

Now we do expect elevated levels of maintenance spending going forward due to the continued strong gas flows on our pipelines, and we estimate our share of maintenance spend, may be in the $97 million range this year. It should be noted that these -- this spending does contribute to our rate base and future rate-making proceedings.

Organic growth projects will be a management priority for the upcoming year as we continue to assess what other opportunities may arise to further take advantage of TCP's existing pipeline network. Great Lakes, for example, has about 1 Bcf of available capacity that we are working to market long-term on a stand-alone basis or as a combined offering with other of TransCanada's pipelines.

GTN will ramp up to its full term capacity of about 2.9 Bcf per day by 2020, as NGTL continues its upstream debottlenecking activity. Should NGTL secure shippers support to increase its West Gate export capability beyond this level and subsequent years, we have identified up to a further 0.5 Bcf of expandability on GTN.

And North Baja's situation continues to be interesting, as LNG export facilities in the area continue to be developed. We are actively exploring ways that our Northern Border and Bison assets could help provide incremental takeaway capacity for producers in the Bakken.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Janine, and good morning, everyone. Moving on to Slide 7, I'll now review the Partnership's fourth quarter and full year 2018 results.

The Partnership recorded a net loss attributable to controlling interests in the fourth quarter of $413 million. The net loss was a result of the recognition of noncash impairment charges of $537 million on our Bison pipeline and $59 million on Tuscarora during the quarter, partially offset by our solid results, and the $97 million cash payment by 2 of Bison's customers to buy out and terminate their transportation contracts. The impairment charges are noncash items and do not impact the Partnership's distributable cash flow.

Our adjusted earnings exclude the impact of these noncash charges as well as the onetime Bison cash payment to allow for better comparison to previous quarters.

Adjusted earnings increased to $86 million for the fourth quarter from $66 million in the same period of 2017. The increase was primarily as a result of higher revenues on GTN and PNGTS and higher equity earnings from Great Lakes during the period.

We saw a similar uplift in our adjusted EBITDA year-over-year to $140 million in Q4 of 2018 from $117 million in the same quarter of 2017.

On an annual basis, we reported a net loss in 2018 of $182 million, which after adjusting for noncash and onetime items, resulted in an adjusted earnings of $317 million, 26% higher than the $252 million recorded in 2017, reflective of the strong revenues across our systems as well as higher equity earnings.

Adjusted EBITDA increased to $526 million in 2018, up from $445 million in 2017. The Partnership paid distributions of $47 million in the fourth quarter. The $27 million decrease over Q4 2017 was primarily due to the decrease in the quarterly distribution of $0.35 per common unit paid beginning in Q1 of 2018, in response to the 2018 FERC actions.

On an annual basis, the Partnership paid $218 million in distributions in 2018, compared to $284 million in 2017 with the difference again due to the same factors that impacted the quarter.

As a result of the common unit distribution reduction noted above, the Partnership did not pay any IDRs to our general partner on distributions declared from the first to the fourth quarter of 2018.

We also paid $15 million to the Class B units in 2018 related to GTN's performance in 2017. In 2018, the 30% portion of GTN associated with the Class B units generated $40 million. $20 million above the threshold level, which would normally be allocated to the Class B units. However, as a result of the 35% reduction in the common unit distribution, the allocation to the Class B units is similarly reduced, resulting in a $13 million allocation to the Class B units for 2018. This amount was paid to the Class B units in February of 2019.

Distributable cash flow was $95 million in the fourth quarter of 2018. $23 million higher than the corresponding quarter in 2017. The increase was due to the same factors as impacted adjusted earnings, together with reduced distributions allocated to our general partner as a result of the lower declared common unit distributions. For the year ended December 31, distributable cash flow amounted to $391 million, $81 million higher than the DCF of $310 million in 2017.

Turning to Slide 8, revenues from our consolidated pipelines in Q4 of 2018 were $111 million higher than the same quarter of 2017, $97 million of which was a result of the Bison cash proceeds from the termination of the 2 of its 4 transportation contracts. The payment was recorded as revenues as the contract terminations released Bison from providing any future services.

Excluding the $97 million revenue proceeds from Bison's contract buyout, our revenues increased $14 million, largely due to the net effect of higher revenue from PNGTS from its Continent to Coast contracts and the Portland XPress Phase 1 contracts that began in November of 2018 and higher net revenue from GTN from incremental long-term contracts associated with the increased available upstream capacity, partially offset by lower revenues from its short-term discretionary services compared to the prior period.

Equity earnings in the fourth quarter of 2018 were $7 million higher than the same quarter of 2017, primarily due to higher income at Great Lakes as a result of the elimination of Great Lakes as revenue sharing mechanism in 2018 as part of its 2017 settlement. Additionally, Great Lakes experienced an increase in seasonal sales during the current period.

As noted earlier, the Partnership recorded a noncash asset impairment charge of $537 million for Bison. The Q4 contract buyout coupled with the persistence of market conditions which have inhibited system flows on the pipeline and the uncertainty regarding Bison's ability to generate positive cash flows after the expiry of its remaining customer contracts in January of 2021, led us to determine that the asset's current carrying value was no longer indicative of an estimable fair value. As a result, the noncash impairment charge was recorded in the fourth quarter of 2018. We continue to explore alternative transportation-related options for Bison.

Additionally, in connection with Tuscarora's annual goodwill impairment analysis, we evaluated Tuscarora's future revenues as well as changes to the other valuation assumptions including Tuscarora's regulatory outcomes. As a result, it was determined that the fair value of Tuscarora was lower than its carrying value, including goodwill. In that regard the Partnership recorded a noncash goodwill impairment charge of $59 million in the fourth quarter of 2018 and reduced our total consolidated goodwill balance from $130 million to $71 million.

Operating, maintenance and administrative expenses during the fourth quarter were $1 million lower than in the same quarter in 2017 and our depreciation was comparable. Financial charges were also comparable in the fourth quarter of 2018, versus the same period in 2017.

On an annual basis, the significant increase in equity earnings was largely the result of the addition of distributions of Iroquois for a full 12 months in 2018, as compared to only a 7-month period in 2017.

Moving now onto our financial position on Slide 9. Our investment-grade credit ratings provide us with the financial flexibility as we look to organically grow the 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 $475 million of undrawn and available borrowing capacity under our senior credit facility as of February 21, 2018.

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 used the cash savings from our reduced distributions and the funds from the Bison buyout to repay indebtedness, including the repayment of $170 million term loan, resulting in a bank leverage ratio of approximately 3.1x at December 31, 2018.

And our distribution coverage remains healthy at 2.1x for the fourth quarter of 2018, reflecting the positive operating performance of our assets during the period. That concludes my remarks on the fourth quarter financial results.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Chuck. I'll now turn over to Slide 10. This has been a very good quarter for our Partnership, we've made lots of progress on the regulatory front and returned our focus to other parts of the business. Our assets performed very well, and we remain confident that they were well-situated to benefit from solid underlying market fundamentals and will continue to generate value for our unitholders well into the future.

We have continued our proactive approach to managing our financial position over the past few months and are happy to report that our leverage ratio is now just over 3x, and our distribution coverage ratio is likewise healthy.

As we move into 2019, the annual regulatory impact to our revenue and cash flow of approximately $30 million negative will take effect, that along with the loss of revenue from the Bison contracts bought out in December, will impact both of our leverage and distribution coverage ratios such that going forward, we're targeting to maintain our leverage ratio in the low 4x range and our distribution coverage in the 1.5x area.

With this solid financial position, we reiterate that 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 and Westbrook XPress projects as well as other potential future opportunities. All of these will be progressed in a very disciplined manner with near-term opportunities sized and sequenced, so that we're at 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 and high-quality, low-risk, value creating projects for our unitholders.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Shneur Gershuni from UBS.

--------------------------------------------------------------------------------

Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [2]

--------------------------------------------------------------------------------

Just wanted to start off with the Bison option that you're exploring, you talked about potentially [getting] a bidirectional gas option, and the other one a crude option. Can you expand on what you're looking at and how long it would take to take a direction [and sizing] and so forth?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks for your question, Shneur, this is Nathan. I think it's early days on any of those options, so we're not going to be leading with any specifics. I'd say it's part of the accounting decision that we made, to write-off the carrying value of the assets at Bison, were in part because we can't really estimate what that's going to look like at this time. So in specific I'll would say, not much, but there is a -- there's obviously a need for gas to exit the Bakken, and so a reversal path is definitely an option. And as far as there's a liquid need, or a need for transportation of liquids, we're looking for that option as well. So apologies, I don't have any more specifics at this time.

--------------------------------------------------------------------------------

Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [4]

--------------------------------------------------------------------------------

If I was to look for signposts would I be looking for an open season or would you give us

(technical difficulty)

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [5]

--------------------------------------------------------------------------------

Sorry, your question broke up a little bit there. I lost you after signposts.

--------------------------------------------------------------------------------

Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [6]

--------------------------------------------------------------------------------

Yes, in terms of signposts to look for, would we be looking for just you announcing an open season to understand which direction you're going or would you give us some more color before that?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [7]

--------------------------------------------------------------------------------

I think I caught a little bit more of your question but I would say we'll announce things when and if we get commercial terms more solid.

--------------------------------------------------------------------------------

Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [8]

--------------------------------------------------------------------------------

Okay. And then a final question. In the crude concept that you're thinking about, I mean what signs -- what kind of capacity would be involved, if you were to actually go and (inaudible). Are we talking something fairly small or are we talking something fairly sizeable?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [9]

--------------------------------------------------------------------------------

Yes, again, in any kind of liquid solution, it's early days in discussions with players in the region, but not anything else that we'd be disclosing right now.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question is from TJ Schultz from RBC Capital Markets.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Just first on Westbrook XPress, what part of the cash flow is phased-in in 2019 and then in Phase 2? And then you point to some approvals that are required there, just maybe color on what you need to do to meet the right approvals?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, both phases are -- have the same rate attached to them. So it's pretty much 40% in Phase 1, [60%] roughly in Phase II. There will be -- necessary approvals will include obviously regulatory approvals from FERC, both to import the gas to increase our firm certificated capacity and as well as to build the facilities that are planned for Westbrook. So we did file a FERC application for Phase 1 in December actually and that's going ahead. And we would anticipate that we'd be filing the facilities -- for the facility's construction in -- towards the end of Q2 at this point. As well of course, the shippers are -- have various customary approvals that they will require board approval in some cases, that sort of thing.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [13]

--------------------------------------------------------------------------------

And then on GTN, some of the, I think, expansion subject to the West Gate export capabilities, and I think you mentioned 0.5 Bcf. Just any more color on timing to be able to make that decision and what costs would be or what needs to be done for that level of expansions.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, you point out the good constraint there. So it obviously has to be a package solution with exit capacity, either WCSB to then coordinate down GTN. I'd say our approach is a fairly new product in our design of what GTN is capable of doing but that's going to have to go hand in glove with everything else upstream. So as that would come together, we'd be able to announce more, but it's again early days and just highlighting the capability there.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [15]

--------------------------------------------------------------------------------

Okay, understood. Janine, I think you mentioned some benefits from some short-term services on some of your assets, I think specifically the North Baja and PNGTS, what's the expectation there for some of those benefits to kind of continue into '19?

--------------------------------------------------------------------------------

Janine M. Watson, TC PipeLines, LP - Former VP & GM of TC Pipelines GP Inc. [16]

--------------------------------------------------------------------------------

Well I think that on North Baja, the gas dynamic down there is shifting a little bit, but certainly 2018 was an unusual year for flowing gas into Southern California, so a lot of that gas was actually coming around and turning backup, flowing back into the U.S. That likely won't continue to the same level. But as the LNG process starts to firm up perhaps we'll see further contracting in anticipation of that as well as potentially some ability to expand the capacity of that line.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [17]

--------------------------------------------------------------------------------

Okay, understood. Go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sorry, I was just reminded, you also asked about PNGTS. Yes, PNGTS has -- these are market opportunities that present themselves at various points, sometimes it's pretty seasonal and it's pretty weather driven. But it will continue to have some -- a fair bit of interruptible capacity over the next few years, so depending on the market opportunities, if they're there, our marketing team is certainly poised to take advantage of them.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [19]

--------------------------------------------------------------------------------

Okay, great. Just last one. The bank leverage ratio at 3.1x. Can you just give me the bank debt and EBITDA that are used to calculate that?

--------------------------------------------------------------------------------

William C. Morris, TC PipeLines, LP - VP, Principal Financial Officer & Treasurer [20]

--------------------------------------------------------------------------------

It's Chuck here. So I'd have to get the details for you on that. Just hang on a sec. So certainly the bank leverage ratio is a little bit different than the -- I guess the financial statement ratio just by virtue of the fact that there is some add backs associated with property tax. So I guess our leverage is sitting somewhere around the $2.0 billion range. And I'm just trying to find the EBITDA number for you, I might have to flip for that and get back to you.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [21]

--------------------------------------------------------------------------------

That's fine. I can follow up off-line.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [23]

--------------------------------------------------------------------------------

Just on capital allocation, so with regulatory decisions in hand now and more growth in the outer years, but with '19 cash flows expected to be a bit lower, when do you start thinking about restarting distribution growth or further delevering, just want to know the dynamics there that you guys are thinking about?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [24]

--------------------------------------------------------------------------------

Yes. So we're definitely considering that and evaluating that continuously, I'd say we look for prudent management out in the curve of what we see on longer-term run rates. And certainly we want to retain the capacity to fund these organic growth projects in a real self-funding manner. So we're balancing all of those going forward. I would say as we've got more specific line of sight into cash flow spin on the near-term growth prospects that we have in front of us as well as maybe a little bit finer point or other things out the curve, within our pipeline assets portfolio, we'll be firming that up and making that reevaluation. But at this time, we're fairly comfortable that the distribution ratio we've got, the distribution level we've got, is sustainable for the foreseeable future.

--------------------------------------------------------------------------------

Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [25]

--------------------------------------------------------------------------------

That's helpful context. And then just moving over to the FERC positions you've taken, I understand the 501-G filings use '17 numbers. So in some cases like Great Lakes for the LTFP wouldn't have been fully included, how are you guys thinking about potential for Section 5s or longer-term risks or at least how should I be thinking about it?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [26]

--------------------------------------------------------------------------------

Well I think that the regular regulatory risk that you mentioned there is more back to status quo ante, if you will. So we're back to business as usual and managing that with our regulator and our customers as a normal course thing. So to the extent we've got Section 5 risk, we always make all our efforts to mitigate those and be proactive as we go. But as that's a normal business risk that we've got, we certainly have [our] team's focused on it to go forward with the best possible result on other side.

--------------------------------------------------------------------------------

Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [27]

--------------------------------------------------------------------------------

And that -- to be fair the, $30 million then would just be on the filing positions taken to date. Correct?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [28]

--------------------------------------------------------------------------------

Yes, that's correct based on where we're coming out at the other side of this 501-G process. And as mentioned, what we'll be doing is setting up going forward with what we really do think is a more positive position, all else being equal, given to have some of the moratoriums that we've been able to negotiate and extend as we go through this process. So as part of the overall strategy, we ended up at the higher end of the range that we disclosed last quarter and part of that is a good value play that we see.

--------------------------------------------------------------------------------

Matthew Taylor, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [29]

--------------------------------------------------------------------------------

Yes, that's great. And then maybe just one final one there on the $30 million impact. That -- I would assume that would include equity earnings revisions, correct, for Northern Border and Great Lakes, and actually EBITDA impact, wouldn't it be a bit larger?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [30]

--------------------------------------------------------------------------------

Yes, that's correct. So that's all-in impact for our share.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

The next question is from Michael Lapides from Goldman Sachs.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [32]

--------------------------------------------------------------------------------

Two questions for you. First of all, how should investors think about what the maximum expansion potential is for the PNGTS? I'm just trying to think about how much more incremental additions you could possibly bolt-on over the next 4 or 5 years onto that system.

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [33]

--------------------------------------------------------------------------------

I don't think we've disclosed any sort of engineering maximums that we put out there, but there is -- there is possibility for expansion, as PNGTS sits right now configured, it doesn't have any midpoint compression of its own. It runs off of compression that it receives north of the border and then on shared facilities at Westbrook, which we're enhancing now. But along the line, there is expandability through additional compression. In terms of absolute volumes, I wouldn't be able to give you a number.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [34]

--------------------------------------------------------------------------------

Got it. And also what happens now, just when you're thinking about Baja and the potential for LNG, what are the kind of the milestones? Or what are the things investors should keep their eyes on just to kind of get a view of whether this is real. Is this all related to just one specific project or you're thinking about others in the hopper?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [35]

--------------------------------------------------------------------------------

At this point we're looking at it more generally. As we saw here in this past year when there was disruption in the normal flow of gas in Southern California. North Baja came through and was able to fill some need down there. So as that region and that geography develops in what it's going to be with gas flows, we think there's an opportunity for North Baja to step in with the right-of-way and some fairly cheap expandability through additional compression. It's there ready to serve at a certain volume level pretty straightaway. And from there we obviously have our business development minds working on a larger solution as well.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Alex Kania from Wolfe Research.

--------------------------------------------------------------------------------

Alexis Stephen Kania, Wolfe Research, LLC - Utilities SVP [37]

--------------------------------------------------------------------------------

Just I guess 2 questions. First is on the maintenance CapEx number of, I think $97 million for 2019. Do you see that as a number that kind of persists going forward or is that just a kind of a near-term, kind of one-time type of number, where sustainability may fall back towards where it was more in 2018?

--------------------------------------------------------------------------------

Nathaniel Alan Brown, TC PipeLines, LP - President & Director of TC PipeLines GP, Inc. [38]

--------------------------------------------------------------------------------

Well, yes, unfortunately, I don't want to give too much guidance on that one. Depending on what we've got on throughput on our systems that can -- that level can be higher. I wouldn't say it would be any persistent at a particular level. We've got some of our major spend, particularly with compressor overhauls, that are very cyclical, so those can tend to come in waves, just depending on how the hours come out on our units. So that's something that's a component we may see more or less of in any one given year. We also look at what requirements we have and programs we put in place for pipeline integrity which is another driver of those dollars that we spend. And those come and go as we work through those programs cyclically. So unfortunately I wouldn't be able to say that's a given run rate or a [competitive] run rate going forward. But we will continue to keep update on activities as they become material.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes the question-and-answer session. If there any further questions, please contact Investor Relations at TC PipeLines, LP. I would now like to turn the call over to Rhonda Amundson.

--------------------------------------------------------------------------------

Rhonda L. Amundson, TC PipeLines, LP - Manager, IR [40]

--------------------------------------------------------------------------------

Great. Thank you, everyone, for your participation today. We certainly appreciate your interest in TC Pipelines, and look forward to speaking with you again, soon. Have a great day.