TC PipeLines, LP reported net income attributable to controlling interests of $65 million and distributable cash flow of $36 million for the three months ended September 30, 2020.
“During the third quarter of 2020, our diversified portfolio of essential energy infrastructure continued to perform well and generated solid results,” said Nathan Brown, president of TC PipeLines, GP, Inc. “These results continue to highlight the resiliency of our assets during these unprecedented times. We also continued to advance our suite of organic growth projects with PNGTS’ Portland XPress project being placed into service on November 1 as planned and our other projects progressing on schedule.”
“Despite our third quarter net income being sixteen percent higher year-over-year reflecting new projects in service and continued strong contracting levels, distributable cash flow was considerably lower this quarter compared to last year primarily the result of increased normal-course maintenance spending at GTN along with the one-time purchase of a commercial IT system by several of our pipelines,” added Brown. “The increased maintenance capex at GTN on its compressor fleet resulted from higher throughput, operating hours and strong demand for natural gas transportation. Notwithstanding the impact to DCF in the quarter, these expenditures will reduce future operating costs and increase our pipelines’ respective rate bases and we anticipate will generate a return on and of capital in future rates.”
“We continue to believe that our assets are well situated to serve our customers and their need for natural gas and other potential energy transportation and will create value well into the future,” concluded Brown.
Third quarter highlights (unaudited)
- Generated net income attributable to controlling interests of $65 million;
- Paid cash distributions of $47 million;
- Declared cash distribution of $0.65 per common unit for the third quarter of 2020;
- Generated adjusted EBITDA of $117 million and distributable cash flow of $36 million;
- Continued permitting, engineering and construction activities on our PNGTS, GTN and Tuscarora growth projects;
- Continued to progress our North Baja XPress and Iroquois’ ExC projects;
- Received affirmation of the Partnership’s credit rating by Standard and Poor’s (S&P) at BBB/Stable and by Moody’s at Baa2/Stable;
- The Partnership’s outlook was revised by S&P from Stable to Creditwatch Positive in connection with TC Energy's offer to acquire the Partnership's outstanding common units;
- Northern Border’s credit rating outlook upgraded to Positive by S&P;
- Reached agreement for reimbursement of Iroquois’ expenditures for the terminated Wright Interconnect Project;
- PNGTS issued $125 million of 10-year fixed rate Senior Notes in early October and established a 3-year Private Shelf Facility for an additional $125 million to secure the funding for its expansion projects; and
- Received offer from TC Energy in early October to acquire all outstanding publicly-held common units.
Recent business developments:
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. As primary operator of our pipelines, TC Energy Corporation’s (TC Energy) business continuity plans remain in place across the organization and TC Energy continues to effectively operate our assets, conduct commercial activities and execute on projects with a focus on health, safety and reliability. Our business is broadly considered essential in the United States given the important role our infrastructure plays in providing energy to North American markets. We believe that TC Energy’s robust continuity and business resumption plans for critical teams, including gas control and commercial and field operations, will continue to ensure the safe and reliable delivery of energy that our customers depend upon.
Our pipeline assets are largely backed by long-term, take-or-pay contracts resulting in revenues that are materially insulated from short-term volatility associated with fluctuations in volume throughput and commodity prices. More importantly, a significant portion of our long-term contract revenue is with investment-grade customers and we have not experienced any material collection issues on our receivables to date. Aside from the impact of maintenance activities and normal seasonal factors, to date we have not seen any material changes in the utilization of our assets. Additionally, to date, we have not experienced any significant impacts on our supply chain. While it is too early to ascertain any long-term impact that the COVID-19 pandemic may have on our capital growth program, we note that we could experience some delay in construction and other related activities. For more information on our capital growth program, see “Status of our capital growth program” below.
We continue to conservatively manage our financial position, self-fund our ongoing capital expenditures and maintain our debt at prudent levels and we believe we are well positioned to fund our obligations through a prolonged period of disruption, should it occur. Based on current expectations, we believe our business will continue to deliver consistent financial performance going forward and support our current quarterly distribution level of $0.65 per common unit.
The full extent and lasting impact of the COVID-19 pandemic on the global economy is uncertain but to date has included extreme volatility in financial markets and commodity prices, a significant reduction in overall economic activity and widespread extended shutdowns of businesses along with supply chain disruptions. The degree to which COVID-19 has a more significant impact on our operations and growth projects will depend on future developments, policies and actions which remain highly uncertain.
TC Energy’s offer to acquire the Partnership’s outstanding publicly-held common units
On October 5, 2020, the Partnership announced receipt of a non-binding offer from TC Energy Corporation (TC Energy) to acquire all of its outstanding common units not beneficially owned by TC Energy or its affiliates in exchange for common shares of TC Energy. Under the proposal, the Partnership’s common unitholders would receive 0.65 common shares of TC Energy for each issued and outstanding publicly-held Partnership common unit, representing an implied value of $27.31 per common unit based on the closing price of TC Energy common shares on the New York Stock Exchange (NYSE) on October 2, 2020. This reflects a 7.5 percent premium to the exchange ratio implied by the 20-day volume weighted average prices of the Partnership’s common units and TC Energy’s common shares on the NYSE as of October 2, 2020.
The offer has been made to the board of directors of the General Partner (the TC PipeLines Board). As the General Partner is an indirect wholly-owned subsidiary of TC Energy, a conflicts committee composed of independent directors of the TC PipeLines Board was formed to consider the offer pursuant to the Partnership’s Fourth Amended and Restated Agreement of Limited Partnership.
The transaction is subject to the review and favorable recommendation by the conflicts committee and approvals by the TC PipeLines Board, the board of directors of TC Energy, and the holders of a majority of the outstanding common units of the Partnership. It is also subject to the negotiation and execution of an agreement and plan of merger, which would provide the definitive terms of the transaction, including the exchange ratio, and customary regulatory approvals. Any definitive agreement is expected to contain customary closing conditions. There can be no assurance that any such approvals will be forthcoming, that a definitive agreement will be executed or that any transaction will be consummated.
Status of our growth capital program:
- PNGTS’ Portland XPress (PXP) Phase III was commercially placed in service on November 1, 2020;
- PNGTS Westbrook XPress Phase II construction is progressing as planned;
- GTN XPress Phase I reliability enhancement is progressing as planned. Work at several points along the line requires further permitting under the normal FERC process, as do the expansion facilities that will be constructed in 2022 and 2023;
- North Baja XPress is subject to a final investment decision by Sempra expected in the fourth quarter and dependent upon North Baja securing regulatory approvals and other requirements for the project; and
- Iroquois’ ExC project continues to progress through its regulatory process and received a favorable environmental assessment in September 2020. Receipt of the FERC decision authorizing construction of the project is anticipated in the second quarter of 2021.
On October 8, 2020, PNGTS entered into a Note Purchase and Private Shelf Agreement (PNGTS Private Shelf Agreement) whereby PNGTS issued $125 million of 10-year Series A Senior Notes (PNGTS Series A Notes) with a coupon of 2.84% per annum and entered into a 3-year private shelf agreement for an additional $125 million of Senior Notes (the PNGTS Private Shelf Facility). The PNGTS Series A Notes do not require any principal payments until maturity on October 8, 2030. Proceeds from the PNGTS Series A Note issuance were used to repay the outstanding balance of PNGTS’ Revolving Credit Facility and for general partnership purposes including funding of growth capital. PNGTS expects to draw the remaining $125 million available under the PNGTS Private Shelf Facility by the end of 2021, the estimated completion date of Phase II of its Westbrook XPress project. The PNGTS Private Shelf Agreement contains a covenant that limits total debt to no greater than 65 percent of PNGTS’ total capitalization and requires PNGTS to maintain a leverage ratio of no greater than 5.00 to 1.00.
Credit rating affirmation:
On September 30, 2020, S&P affirmed the Partnership's BBB/Stable credit rating. S&P continues to consider the Partnership's business risk profile to be a key strength underpinned by its highly contracted, long-term, take-or-pay contracts with creditworthy counterparties. S&P further recognizes the Partnership's strong basin diversification and benefits associated with its strategic relationship with TC Energy despite the expected higher leverage due to the funding of its growth projects.
On October 6, 2020 S&P revised the Partnership's outlook from Stable to Creditwatch Positive in connection with TC Energy's offer to acquire the Partnership's outstanding common units. The Creditwatch reflects S&P's opinion that TC Energy's offer to acquire all of the outstanding units will increase the level of parental support from TC Energy. Tuscarora was also placed on Creditwatch Positive.
Iroquois’ Wright Interconnect Project:
During the first quarter of 2020, Iroquois received a notice of termination of its precedent agreement with Constitution Pipeline Company, LLC (Constitution Pipeline) related to its Wright Interconnect Project. In April 2020, Iroquois exercised its contractual right for reimbursement through a guarantee from Williams Partners, L.P., a 41 percent owner of the Constitution Pipeline. During the third quarter of 2020, the parties reached a reimbursement agreement for $48.5 million, recovering all but $3 million of the capital spent to date by Iroquois on the project. The proceeds received by Iroquois were distributed to its partners, of which the Partnership's proportionate share was approximately $24 million. The proceeds received by the Partnership were treated as a return of capital and used for general partnership purposes.
Northern Border Credit Rating upgrade:
On September 3, 2020, S&P affirmed Northern Border’s credit rating at BBB+ and upgraded the outlook from Stable to Positive based on strong recontracting, continued stable cashflows, conservative leverage, solid shipper base and strong sponsors.
On October 21, 2020, the board of directors of our General Partner declared the Partnership’s third quarter 2020 cash distribution in the amount of $0.65 per common unit payable on November 13, 2020 to unitholders of record as of November 2, 2020. The declared distribution to our General Partner was $1 million for its two percent general partner interest.
Results of operations
The Partnership’s net income attributable to controlling interests increased by $9 million in the three months ended September 30, 2020 compared to the same period in 2019, mainly due to the following:
Non-GAAP Financial Measures
Our EBITDA was higher for the three months ended September 30, 2020 compared to the same period in 2019. The $18 million increase was primarily due to higher revenue from PNGTS and equity earnings as discussed above.
Our Adjusted EBITDA was lower for the three months ended September 30, 2020 compared to the same period in 2019. The $8 million decrease was primarily due to the net effect of the following:
- higher revenue from PNGTS as discussed in more detail above;
- no distributions from Great Lakes during the quarter as it used the cash it generated during the period to fund a one-time commercial IT system purchase from a TC Energy affiliate on August 1, 2020. This will reduce future operating costs and increase Great Lakes’ rate base and we anticipate will generate a return on and of capital in future rates; and
- lower distribution from Iroquois as it satisfied its final surplus cash distribution obligation of approximately $2.6 million in the fourth quarter of 2019 along with an additional one-time $15 million distribution in the third quarter of 2019 representing our proportionate share of the excess cash accumulated by Iroquois between 2018 and 2019 from its earnings.
Our distributable cash flow decreased by $42 million in the three months ended September 30, 2020 compared to the same period in 2019 due to the net effect of:
lower Adjusted EBITDA;
one-time impact related to the funding of a commercial IT system purchase by GTN, Tuscarora and North Baja from a TC Energy affiliate on August 1, 2020. These expenditures will reduce future operating costs and increase our pipelines’ respective rate bases and we anticipate will generate a return on and of capital in future rates; and
higher normal-course maintenance capital expenditures at GTN as a result of increased spending on major equipment overhauls at several compressor stations and certain system upgrades.
Cash flow analysis
Operating cash flows
The Partnership's operating cashflows for the nine months ended September 30, 2020 compared to the same period in 2019 were lower primarily due to decreased distributions received from the operating activities of its equity investments as a result of the following:
- the timing of receipt of Iroquois' third quarter 2019 distribution from its operating activities, which we would ordinarily have received during the fourth quarter of 2019 but instead received early in the first quarter of 2020 offset by an additional distribution of cash accumulated from the earnings of previous years from Iroquois in the third quarter of 2019; and
- lower distributions from our equity investment in Northern Border largely due to its higher maintenance capital spending.
Investing cash flows
During the nine months ended September 30, 2020, the cash used in our investing activities was a net cash outflow of $136 million compared to a net inflow of $1 million in the nine months ended September 30, 2019 due to the net effect of:
- higher maintenance capital expenditures at GTN for its overhaul projects together with continued capital spending on our GTN XPress, PXP and Westbrook XPress projects;
- $24 million return of capital distribution received from Iroquois, representing our 49.34% share of the reimbursement proceeds received by Iroquois from the termination of its Wright Interconnect Project; and
- $50 million distribution received from Northern Border during the second quarter of 2019 that was considered a return of investment.
Financing cash flows
The $255 million change in cash used for financing activities was largely due to a net debt issuance of $135 million in the nine months ended September 30, 2020 compared to a net debt repayment of $115 million for the same period in the prior year, primarily due to financing executed for the capital expenditures on our GTN XPress, PXP and Westbrook XPress expansion projects.
Overall current financial condition:
Cash and Debt Level - Our overall long-term debt balance increased by approximately $135 million primarily the result of the financing put in place during the period for our expansion projects. The increase included an incremental $75 million of liquidity from GTN's issuance of Series A Senior Notes at a fixed rate of 3.12 percent which effectively secured the funding required for GTN XPress for the balance of 2020.
The $75 million liquidity position related to GTN, together with the $24 million return of capital special distribution we received during the third quarter from Iroquois representing our 49.34% share of the reimbursement proceeds received by Iroquois from its terminated Wright Interconnect project, and net excess cash generated by our solid operating cashflows, resulted in an increase in the balance of our cash and cash equivalents to $253 million at September 30, 2020 compared to our position at December 31, 2019 of approximately $83 million.
Working Capital - At September 30, 2020, our current assets totaled $300 million and current liabilities amounted to $499 million, leaving us with a working capital deficit of $199 million compared to a deficit of $14 million at December 31, 2019. Our working capital deficiency is considered to be normal course for our business and is managed through:
- our ability to generate predictable and growing cash flows from operations;
- cash on hand and full access to our $500 million Senior Credit facility; and
- our access to debt capital markets, facilitated by our strong investment grade ratings, allowing us the ability to renew and/or refinance the current portion of our long-term debt.
- We continue to be financially disciplined by using our available cash to fund ongoing capital expenditures and maintaining debt at prudent levels and we believe we are well positioned to fund our obligations as required.
We believe our (1) cash on hand, (2) operating cash flow, (3) $500 million available borrowing capacity under our Senior Credit Facility at November 9, 2020, and (4) if needed, and subject to customary lender approval upon request, an additional $500 million capacity that is available under the Senior Credit Facility's accordion feature, are sufficient to fund our short-term liquidity requirements, including distributions to our unitholders, ongoing capital expenditures, required debt repayments and other financing needs such as capital contribution requests from our equity investments without the need for additional common equity.