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TC Pipelines L P (TCP) Q1 2019 Earnings Call Transcript

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TC Pipelines L P (NYSE: TCP)
Q1 2019 Earnings Call
May. 8, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the TC PipeLines, LP 2019 First Quarter Results Conference Call.

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

Rhonda Amundson -- Investor Relations

Thank you operator and good morning everyone. Welcome to DC pipelines first quarter 20 19 conference call. I'm joined today by our president. Nathan Brown Our V.P. 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 T.C. Pipelines LP dot com where it can be found in the Investor section under the heading Events and Presentations. Nathan will begin our call today with a review of TCE pipelines 2019 first quarter results.

Jeanine will provide an update on the partnership's assets in the market environment following which check will provide a review of our financial results for the first quarter. Nathan will return and wrap up her 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. Our forward looking statements are based on our beliefs as well as assumptions made by the 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 10k 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 9 gap financial measures EBITDA and distributable cash flow during our presentation even that is an approximate measure of our operating cash flow during the period and reconciles directly to net income and distributable cash flows 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 get financial results and we provide a reconciliation to the most closely related gap measures in our S.E.C. filing.

With that let's turn the call over to Nathan.

Nathan Brown -- President and Director

Thanks Ron. Good morning everyone and thanks for joining us today. As outlined this morning in our news release and looking at Slide Four please report to see pipelines at a very good quarter with solid results in our portfolio of pipeline assets continued to perform as expected. We generate 93 million dollars in net income during the first quarter carrying nineteen point three percent lower than the 96 million we earned in the same period. We are a team despite the impact of 2018 for actions and a decreased review of our base and pipeline is primarily due to the strong results due to an increased contract together with additional revenue from CNG to us for phase one of its Portland Express project came onstream late last year.

Our equity earnings from northern border were also higher this quarter compared to 1 2018 although our earnings were very bleak. Your point we're not quite as strong as last year at this time or even does similarly lower year over year at one point forty two million for the quarter compared to 150 million in 2018 our distributable cash flow was 116 million for the first quarter 2018 a 4 percent increase over the comparable period in 2018 or more strong results drove a higher distribution which offset the lower distributions from our other equity investors and our interest expense was slightly lower this quarter as a result of our continued overall debt reductions.

We paid out forty seven million dollars in distributions to our unitholders during the quarter. Together with 13 million to our Class B units down significantly from a total of 91 million paid in Q1 2018 the partnership also declared its first quarter distribution of 65 cents per common unit was consistent with our fourth quarter 2018 distribution and for each of the other three quarters in 2018. Chuck will discuss our financial results in more detail a little later in the call. We continue to progress a number of organic growth projects outside or on their status. I mentioned earlier phase one of our Portland Express project was placed in service in November of last year as contributing to our bottom line results. Phase two will be in service later this year. Final Phase 3 is scheduled for late 2020.

Westbrook Express is moving forward as well with Phase 1 expected to be in service in November of this year and Phase 2 in 2021. About a third phase of this project had an additional eighteen thousand experts per day to PND gas cap capacity such that it will the total PGD capacity will grow to almost 400000 a day for its expansion basket two hundred ten thousand a day expansion project north box presses is currently being managed in response to market demand for natural gas transportation in the region and we look forward to sharing more details on the future as this project develops. Jeanine will discuss these commercial developments in more detail in the near term.

During the first quarter our regulatory progress continued. We filed uncontested right settlements for both the record and ask for and received approval for both in early May. These settlements were final step in the completion of our regulatory strategy resulting from the first actions of 2015. Yet our financial position with the cash savings from our reduced distributions.

We have continued to repair up that balance that we have no drawings on our senior credit facility and our bank leverage ratio is now approximately three times our distribution coverage. Also remains very strong and proximate to enough times for the quarter ended March 31 2019. These results are a testament to the resiliency of our asset portfolio and the continued success of our commercial strategies which combine to create ongoing value to our unit holders.

I will now turn the call over to Janine Watson for VPN general manager to provide additional color on our assets and these partial elements together with our market outlook.

Janine M. Watson -- Vice-President and General Manager

Thanks Nathan and good morning everyone. Moving on to Slide 5. I will now review the partnership's first quarter 2019 results and drill a bit further into the continued solid operating performance of our assets long term contracts continue to be the cornerstone of peacekeepers solid commercial fundamental underpinning 87 percent of our 2018 distributable cash flow in the West. Demand is strong for transportation service on our GTA and pipeline serving energy needs in California and the Pacific Northwest D.C. and benefited from incremental parking loan and incorruptible sales revenue in Q1 and is effectively sold out of firm capacity in and after 2020.

In the Northeast ETF place is one of its Portland express projects into service on November 1st of last year and we therefore benefit benefited from a full quarter of additional revenue in Q1. Looking at our equity investments and as has been the case for the past few years northern border continues to experience strong demand for its capacity operating at very high levels of throughput its firm capacity was once again sold out in Q1 and our commercial team successfully generated incremental revenue by offering its maintenance and seasonally seasonally available capacity on short term basis. Balkan receipts have climbed as high as one point three to one point four B.C. F per day and now account for more than half of the daily receipts onto this line for the remainder of our pipelines operated as expected generating solid results during the quarter.

We remain committed to our bison pipelines and continue to explore both line reversal and liquids repurposing development opportunities for this asset. There is commercial interest in both options and we continue to advance them both. Although we have no concrete update for you at this time. Turning to our regulatory update. As Nathan mentioned we filed settlements for Iroquois and tough Carrara in February and March of this year and received further approvals for both.

Also in early April northern border filed with Ferg to amend its 2017 settlement agreement and incorporate the 2 percent rate reduction in February of this year into that amended agreement for the life of the settlement through to July 1 of 2024. The 2 percent reduction was part of the limited Section 4 filing made by northern border in late 2018 with these actions behind us. We believe that our responses to the firm actions initiated last year are complete. Now for your convenience we have updated our chart of the impact of the two thousand eighteen first actions on each of our pipeline assets and placed it on our website. On the right hand side of our home page.

Turning to Slide 6 as Nathan touched on earlier we are excited to provide an update on our Portland expansion projects. Our Portland Express project is proceeding on time and on budget with Phase 1 in service last November and Phases 2 and 3 planned to be in service November 1 of this year and 2020. Respectful respectfully. This project is approximately 80 million dollars in total capital cost and will add about 70000 deca firms per day of capacity to Portland's at the same time we're also advancing our Westbrook Express project at Portland.

This is an approximately 100 million multi phase 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 nook. Phase 1 of this project will be supported by pressure agreements with our upstream affiliated pipelines allowing Portland to bring an initial forty three thousand deck a day into service in November of this year without the need for any construction phase to require the addition of a compressor and associated facilities at an at an existing station on the Portland system and is also reliant on planned construction activities north of the border on the T QM system.

This phase will bring a further fifty deca firms of firm capacity to this pipeline system. These new facilities are intended to be in service by November of 2021. We also just signed agreements with a group of shippers to add a Phase 3 expansion for an additional 18000 deaths per day of capacity to be in service by November of 2022. This final phase will be enabled by capacity enhancements north of the border on the Canadian Mainline and does not require significant capital capital spending on the Portland's system.

The cost of these projects will be financed at PMG yes. To its credit facility once this project is fully in service and together with Portland express PMG yes its capacity will have increased by approximately 70 percent from 20 to 210000 Dec rhythms to almost 400000 deca firms per day. Looking forward because of the highly contracted nature of our pipeline assets together with their generally strong market position we expect that they will continue to perform in a predictable manner and thereby produce steady results. We continue to assess other opportunities which may arise to take further advantage of people's existing pipeline network North ball.

The situation is one such opportunity. We noted in our earnings release today that we are developing the north by express project an estimated 90 million dollar project to transport additional volumes of natural gas along North of North borehole mainline system. The project was initiated in response to market demand to provide firm transportation service of up to approximately four hundred ninety five thousand deca firms per day between Aronberg Arizona and Ogilvy California as successful open season was concluded in April of 2019 with a potential in-service date in 2023. The project is subject to various commercial and regulatory conditions as we move forward.

I will now turn the call over to Chuck Morris our principal financial officer to discuss our first quarter financial results in more detail.

William C. (Chuck) Morris -- Vice-President, Principal Financial Officer and Treasurer

Thanks Gene and good morning everyone. Moving on to Slide 7 I'll now review the partnership's first quarter 2019 results. Net income in the first quarter was ninety three million dollars down approximately 3 percent from 96 million in the first quarter of 2018. This equates to a dollar 28 per unit compared to a dollar 32 per unit in 2018. Several factors impacted our Q1 2019 results. The net effect of which led to the decrease year over year first revenue from bison was markedly lower as a result of the election of two of its customers in Q4 of 2018 to pay all their transportation agreements.

This decrease was offset however by higher demand a GP in leading to higher revenues on that system together with the additional revenue from phase one of being GTL says Portland Express project that went into service in November of 2018 equity earnings were lower by five million dollars in Q1 of 2019 compared to 2018 2019 and winter months were not as cold as in 2018 leading to lower earnings at both air acquired and Great Lakes northern border.

However was able to sell additional short term term services during the quarter and generate higher earnings which partially offset the lower results from our other two equity investments the partnership paid distributions of forty seven million dollars to common unitholders in the first quarter and 13 million dollars to our class B unit holder the latter of which related to the cash flow from 30 percent of G10 for the year ended December 30 first twenty eighteen between a million dollar decrease and common unit distributions that was paid in Q1 of 2018 was primarily due to the decrease in quarterly distributions of 35 cents per common unit paid beginning in May of 2018 as a result of our response to the 2018 for ACC actions during Q1 and 2019.

The 30 percent portion of GDP and associated with the Class B units generated 12 million dollars none of which was allocated to the Class B units as the annual threshold of twenty million dollars had not been exceeded. As Nathan mentioned earlier we declared our first quarter 2019 distribution of 65 cents per common unit. This is consistent with that declared in the fourth quarter of 2018 and for each preceding quarter in 2018 the partnership's even though I was one hundred and forty two million dollars in the first quarter 5 percent lower than that of the same period in 2018 and this distributable cash flows were and million dollars in the first quarter of 2019 four million dollars higher year over year increase was due to the same factors impacting that income.

Together with the decrease in interest expense due to the repayment of one hundred and seventy million dollar term loan in the fourth quarter of 2018 and the continued repayment of our senior credit facility in the first quarter of 2019 turning to Slide 8. Revenues from our consolidated pipelines of one hundred and thirteen million dollars were slightly lower than those in the same quarter last year for the same reasons as impacted our earnings equity earnings in the first quarter of 2019 with 5 million dollars lower than in the same quarter of 2018 primarily due to winter weather warmer winter wet weather temperatures this year impacting your acquiring Great Lakes offset by the higher earnings coming from northern border operating maintenance and administrative expenses during the first quarter were comparable to those in the same quarter of 2018.

Depreciation expense was lower by approximately 17 percent resulting from the asset impairment on buys and they'll be recognized during the fourth quarter of 2018. Financial charges were slightly lower in the first quarter of 2019 versus the same period in 2018 due to the repayment of one hundred and seventy million dollar term loan in Q4 of 2018 and further reductions in the outstanding balance of our senior credit facility during the first quarter of this year moving on to our financial position on Slide 9 our investment grade credit ratings provide us with the financial flexibility as we look to organically grow our portfolio in the future.

We believe our ratings reflect our solid financial condition and outlook the partnership's liquidity position remains strong. The partnership has five hundred million dollars of undrawn and available borrowing capacity under its senior credit facility as of May 8 2019 consistent with our self funding model in order to build capacity for organic growth. We continue to execute on our deleveraging program in that regard.

We have used available cash to repair indebtedness during the quarter including the repayment of our senior credit facility resulting in a bank leverage ratio of approximately three times. We anticipate that we will continue to repay a portion of our outstanding floating rate debt with available cash balances going forward with the end goal of maintaining our conservative leverage profile.

That concludes my remarks in the first quarter financial results and I'll turn the call back over to Nathan.

Nathan Brown -- President and Director

Thanks Chuck. On our first slide 10. As I mentioned at the outset a very good quarter this year and our assets continue to perform well proving out their resilience and strong competitive position going forward. Our cash flow will continue to be derived from our portfolio of critical natural gas pipeline infrastructure assets underpinned by long term shipper pay contracts credit worthy shippers. We continue to prudently manage our financial position such that our bank leverage ratio is current excuse me currently approximately three times in our distribution coverage this quarter is a very healthy two and half times. Longer term we're targeting to maintain our bank leverage ratio in the high three to a low 4 times area in the distribution coverage ratio of approximately one point three to one point four times with a solid financial position. We iterate reiterate that we do not need access to the equity capital markets to fund our current growth program.

Our focus remains on the optimization of our asset portfolio including organic growth over time such as our current Portland and Westport express projects. We continue to advance our business operators in our geographic footprint or by Express project is a good example of the type of development projects in which we will share all of it will be progressed in a very disciplined manner with near-term opportunity sized sequence so that we're in a position to be self funding. We believe our portfolio of solid pipeline infrastructure assets will continue to be critical in their markets and we will continue to serve our North American stakeholders.

And I'll turn the call back over to Ron.

Rhonda Amundson -- Investor Relations

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

Questions and Answers:

Duration: 36 minutes

Call participants:

Rhonda Amundson -- Investor Relations

Nathan Brown -- President and Director

Janine M. Watson -- Vice-President and General Manager

William C. (Chuck) Morris -- Vice-President, Principal Financial Officer and Treasurer

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