TC PipeLines, LP (NYSE:TCP)
Q4 2012 Earnings Conference Call
February 8, 2013; 10:00 a.m. ET
Steve Becker - President
Sandra Ryan-Robinson - Principal Financial Officer
Stuart Kampel - Vice President & General Manager
Rhonda Amundson - Treasurer of the General Partner, Investor Relations
Darren Walker - Bank of America, Merrill Lynch
Good day ladies and gentlemen. Welcome to the TC PipeLines LP, 2012 fourth quarter results.
I would now like to turn the meeting over to Ms. Rhonda Amundson. Please go ahead Ms. Amundson.
Thank you Melanie and good morning everyone. I would like to welcome you to TC PipeLines’ fourth quarter 2012 conference call. I’m joined today by our President, Steve Becker; Principal Financial Officer, Sandra Ryan-Robinson; and Vice President and General Manager, Stuart Kampel.
Please note that a slide presentation will accompany their remarks and is available on our website at www.tcpipelineslp.com, where it can be found in our investor center under the heading Events and Presentations.
Steve will begin today with a review of TC PipeLines’ fourth quarter results and then give an overview of the natural gas market. Stewart will highlight some key items concerning the partnership and Sandra will review in detail our financial results for the fourth quarter.
Steve will then return and wrap up our remarks with a brief discussion of our sponsor’s activities and close with some key takeaways. Following his 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 2011 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.
And with that, I’ll now turn the call over to Steve.
Thanks Rhonda. Good morning everyone and thanks for joining us today. As outlined this morning in our news release and shown on slide number four, TC PipeLines generate Partnership cash flow of $51 million in the fourth quarter. During the quarter we paid out $43 million in cash distributions to our unit holders. Overall the Partnership generated net income of $30 million in the fourth quarter compared to $38 million in the same period last year.
The fourth quarter 2012 net income is equivalent to $0.56 per common unit. The Partnership also announced its fourth quarter cash distribution in the amount of $0.78 per common unit.
Moving to slide five, I’d like to give a brief overview of the macro factors that we see affecting the North American natural gas business and how they impact our Partnership. The natural gas market proved to be very dynamic in 2012, which has presented some challenges to market participants.
North America experienced the warmest winter weather on record during the winter of 2011, 2012 significantly reducing the need for gas or heating requirements and thus for gas transportation. This lower demand combined with increase supply from shale gas production led to gas prices reaching their lowest level in ten years.
Gas storage fields, which have historically provided a means for producers to even out seasonal production levels, experienced limited withdrawals and remained at all time high levels. And finally, the increased production in numerous areas across North America resulted in narrowing basis differentials across the continent, all of which has had an impact on natural gas pipeline companies, some more than others and we are no exception.
In the Partnership’s portfolio, the financial performance of five or six pipeline assets was relatively stable due to their long-term contract based business model. These contracts require our customers to pay per capacity, regardless of the volume shift on the system. This reduces variability and limits the impact of earnings and cash flow, offsetting some of these macro environmental factors.
Great Lakes, however has been impacted by these recent changes. The majority of its long-term, long haul contracts expired at the end of October 2012. Great Lakes is responding to the changing environment by transitioning from its historic long haul contracted status to that of being a regional storage pipeline, focused on summer refill and winter peaking transportation needs, with gas flowing both west to east and east to west on the pipeline.
That concludes this section of my prepared remarks and I’ll now turn the call over to Stewart to discuss some of the key asset development in more detail.
Thank you very much Steve and good morning everyone. Turning to slide six, I’d now like to take a moment to discuss the Partnership’s assets in more detail.
Northern Borders financial performance reflects another excellent quarter, where it continued to run at full capacity. Overall financial results this quarter were mostly unchanged versus the same period of last year. In January 2013, Northern Border received final approval from the FERC on a settlement with its shippers regarding transportation rates and other services. New tariff rates were effective January 1, 2013.
With the existing contracts in place, the Partnership anticipates that the direct impact of the settlement will result in an approximate $10 million reduction in both 2013 equity earnings and Partnership cash flows.
Of key significance, Northern Border is not required to file for new rates until January 1, 2018, providing five years of rate certainty. Additionally, Northern Border is substantially contracted through March of 2014 and 74% contracted through to the end of 2014.
The majority of Northern Borders contracts that came up for renewal in 2012 were renewed for terms of three years or longer. Northern Border remains a key pipeline in this marker due to its connections to three major supply basins, and as position will continue to drive performance for the foreseeable future.
Four of our other five pipelines our supported by long-term contracts. GTN has long-term contracts through 2023. A smaller number of contracts that expire prior to 2023 are primarily with local distribution companies, which have historically tended to renew due to the utility like nature of their businesses. Bison, Tuscarora and North Baja are all contracted beyond 2020. They operate under long-term contracts and as such, deliver solid and consistent cash flows.
Moving to slide seven, I would now like to discuss our Great Lakes asset. Great Lakes has historically been supported by long-term, long haul contracts, and the majority of these contracts expired in late 2012. Great Lakes is currently in a transition period, moving from a long-haul contracted pipeline, due as Steve said, to a more regional, storage focus pipeline.
As those long-haul contracts expired last year, a portion of them will be replaced with a number of short-term, short haul contracts for gas moving both westward and eastward on the system.
The more normal weather this winter has created some demand for short-term transportation on Great Lakes. So far this year gas has been flowing westward on Great Lakes up into Canada, and then eastward on TransCanada’s mainline system into Northeast markets as that region has experienced colder weather this year. Near-term results on Great Lakes will continue to depend primarily on weather and the amount of gas withdrawn from storage, leading into the storage refill season.
Looking out to the medium term, two factors are primarily expected to influence Great Lakes results; these are the Canadian mainline toll application division, and the upcoming Great Lakes rate case.
Regarding the mainline toll application, we expect the National Energy Board to issue its decision in late first quarter or early second quarter 2013. This decision will provide more toll certainty for the Mainline, which is the upstream pipeline for Great Lakes.
The second factor is that Great Lakes current rate case settlement expires on November 1 of this year and is required to file new rates on or before this date. Great Lakes is continuing to evaluate its options that could possibly see changes to tariff rates and overall rate design to better reflect the current use of the system.
Longer term, more overarching changes in the pipeline industry are expected to occur, such as TransCanada’s potential conversion of a portion of it’s mainline from gas to oil service. This development could positively impact our pipelines and most notably Great Lakes, as it will reduce overall transportation capacity in the region, thereby increasing the value of the Great Lakes transportation route.
It's important to note that Great Lakes continues to serve important heating loads in areas of Michigan, Minnesota and Wisconsin, and as such will remain a critical pipeline in balancing gas flows as seasonal demands change.
That concludes my prepared remarks. I would now like to turn the call over to Sandra, who will review the fourth quarter financial results in more detail.
Thanks Stewart and good day everyone. My remarks follow the presentation materials starting on slide eight. Partnership cash flow decreased to $51 million in the fourth quarter, compared to $82 million in the same period of 2011. $28 million of the $38 million decrease however related to distributions from GTN and Bison from prior periods in 2011, and were not comparable quarter-over-quarter.
The remaining $3 million decrease was primarily due to reduced cash distributions from Great Lakes, partially offset by lower financial charges. The Partnership paid cash distributions of $43 million in the fourth quarter, an increase of $1 million compared to the same period in 2011, due to an increase in the quarterly distribution of $0.01 per common unit beginning in the third quarter of 2012.
Turning to slide nine, the Partnership’s overall net income decreased by $8 million to $30 million or $0.56 per common unit in the quarter, compared to $38 million or $0.70 per common unit in the same period in 2011. This decrease was primarily due to lower earnings from Great Lakes, but was partially offset by lower financial charges.
Equity income from Great Lakes was $4 million in the quarter, down $7 million compared to $11 million in the fourth quarter of 2011. This decrease was primarily due to lower transportation revenues from long haul capacity sold at lower rates.
Partnership expenses, which are made up of G&A and primarily financial charges decreased by $1 million. This decrease relates primarily to lower interest charges as a result of using floating rate debt in 2012 versus fixed rate debt in 2011.
Moving down to our liquidity and capital resources on slide ten, as of December 31, $312 million was drawn on the Partnership’s senior credit facility. The average interest rate on the facility was 1.54% for the quarter ended December 31, 2012.
The Partnership will continue to maintain a prudent approach to managing financial position, our conservative capital structure at 34% debt and our mid BBB investment grade credit ratings from both S&P and Moody's reflect our solid financial condition and provide us with financial flexibility for future growth.
That concludes my remarks on the fourth quarter financial results. I’ll now turn the call back over to Steve.
Thanks Sandra. At first I would like to first highlight our relationship with our sponsor, TransCanada on slide 11 and then conclude my prepared remarks today by leaving everyone with some key takeaways shown on the final slide.
Our sponsor, TransCanada, has a 33% interest in our Partnership, including its general partner interest. TransCanada has assets of approximately $48 billion and is progressing through a large growth program, having commercially secured upwards of $25 billion in capital projects to be completed by the end of this decade.
These projects include the Gulf Coast project, the Keystone XL project, several natural gas pipelines in Mexico, expansions to its natural gas pipeline system in Alberta, two large LNG pipeline projects on the west coast of British Columbia, other regional oil pipelines and terminals, as well as various power generation projects.
A capital program of this magnitude translates into the need for a significant funding program. TransCanada has the ability to access the public debt market for senior debt over the course of the next several years, and we'll also look to other sources of financing. Drop downs to our Partnership are one of its options, through which our sponsor can access the required funding.
Moving on to slide 12, I would like to conclude my prepared remarks today with some key takeaways. First, we are focusing on delivering long-term value to our unit holders from a stable gas pipeline asset base. TC PipeLines has investment in a solid portfolio of key natural gas infrastructure assets, which collect their cash flows through the long-term shipper pay contracts, majority with utilities in major energy companies.
Given the changing market dynamics, the Partnership's fourth quarter results from five of the six pipelines in our portfolio were relatively consistent year-over-year, reflecting their long term contract status.
Secondly, we are supported by a strong sponsor, TransCanada, who is also an industry leader in developing North American energy infrastructure. TransCanada is moving through a large capital program, with $25 billion of projects to the end of the decade. And third, we manage are financial position in a conservative manner as evidenced by our continued investment grade credit ratings. Our financial flexibility and liquidity position us well as a financing option for TransCanada to assist in the funding of their future growth plans.
With that, I'll now turn the callback over to Rhonda.
Thanks Steve. I'd now like to open up the call for questions. Melanie, please go ahead.
Thank you. (Operator Instructions). The first question is from Gabe Moreen of Bank of America, Merrill Lynch. Please go ahead.
Darren Walker - Bank of America, Merrill Lynch
Hi, good morning guys. This is Darren Walker calling on behalf of Gabe Moreen. Just a quick one regarding the potential funding needs from TransCanada. I think previously they indicated $500 million to $600 million potential funding. Have you guys had any initial conversations regarding what the potential assets might be dropped-down as adjusting from our interest on the equity of the current pipeline that you guys own or is it potentially new assets from TRP?
I think at this stage as they are trying to go to their program, there's several different milestones they are trying to reach and so the decisions on which assets would be dropped down if any haven't been reached yet. And so I think as they try to finalize a few more of the projects that are underway, they'll have to make the decision on whether they would prefer to drop some assets down and the exact assets, there's a number of choices and that particular decision is theirs to make and would have to be announced by them, and so there is nothing that we can sort of add further than that at this time.
Darren Walker - Bank of America, Merrill Lynch
Okay, no that's great. And then just a quick one for me on Great Lakes. You mentioned the change in dynamics there. As far as cash distribution is from Great Lakes, is $10 million a quarter sort of a good run rate to assume here or would you expect some more volatility over this year?
Darren, it's Stuart Kampel. I’ll answer that. It's hard to predict that at the current time. Obviously results are going to depend on a number of factors, especially the weather as you go through the remainder of the season here and going into the injection season. I guess the good news for us is there's more cold weather coming to your area of the world, so that certainly is a positive focus for us.
However, regarding expectations for Great Lakes, considering that we've lost a lot of the long-term, stability of the long-term contracts that we used to have and that it would be rational to assume that we are going to be closer to the result of the fourth quarter of 2012 than we would be relative to the same period last year. So I think that provides some sort of view to kind of the current situation.
Darren Walker - Bank of America, Merrill Lynch
Great. I appreciate the time guys.
Thank you. (Operator Instructions). There are no further questions registered at this time. I'd like to turn the meeting back over to Ms. Amundson.
Well, thank you everyone for your participation today. We appreciate your interest in TC PipeLines and we look forward to speaking again with you. Bye for now.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.
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