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Executives

Russ Girling - CEO

Mark Zimmerman - President

Amy Leong - Controller

Analysts

Gabe Moreen - Banc of America

TC PipeLines, LP (TCLP) Q1 2009 Earnings Call April 30, 2009 3:00 PM ET

Operator

Good day, ladies and gentlemen. Welcome to the TC PipeLines LP 2009 First Quarter Results Conference Call. I would now like to turn the meeting over to Terry Hook, Manager of Investor Relations. Please go ahead, Mr. Hook.

Terry Hook

Thank you, Operator. Good afternoon everyone, welcome to our first quarter 2009 conference call. We are pleased to provide you with an opportunity to discuss our achievements for the quarter, and other general issues concerning TC PipeLines LP.

With me here this afternoon are Mr. Russ Girling, Chief Executive Officer; Mr. Mark Zimmerman, President, and Ms. Amy Leong, Controller.

Before we begin, I'd 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 our assumptions made by 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 2008 10-K.

If one or more of these risks and uncertainties materialize or if the underlying assumptions proving correct, actual results may differ materially from those described in the forward-looking statements.

Russ will begin today with the review of TC PipeLines LP's first quarter 2009 results. The recent cash distribution announcement and an update on the activities concerning the Partnership and its general partner, TransCanada.

Following that, Mark will provide some further details regarding our investments during the first quarter. And finally, Amy will review our first quarter financial results. After that, we will be pleased to take your questions.

I'll now turn the call over to our Chairman and CEO, Russ Girling.

Russ Girling

Thanks, Terry. Good afternoon, everyone, and thank you very much for joining us today. I am pleased to say the TC PipeLines started off 2009 with a solid first quarter from and earnings and cash flow perspective. Our quality pipeline investments continue to perform as expected. Great Lakes with it's competitive market position delivered results ahead of last year. Contributions from Tuscarora were also higher in the first quarter of 2009, as result of an expansion completed in early 2008. It's long-term contract continue to provide consistent and predictable earnings in cash flow.

Northern Border results were challenged this quarter by lower weather related demand combined with a competitive presence of an additional of Rockies gas. Additional, Rockies gas currently delivered into its market. We continue to view this shift and supply to be temporary and expect the situation to ease as additional capacity comes on line to Mid-Continent gas further east.

As outlined in today's news release net income for the first quarter was $31.8 million or $0.82 per common unit. This represents a 6% decrease on a per unit basis compared to the same period last year. Partnership cash flows increased $36.5 million, that's a $3.5 million or 11% increase over the same period last year.

These cash flows are on a quarter lag compared to earnings. This increase is reflective of a strong cash flows generated in the fourth quarter by all of our pipeline investments. Cash distributions paid in the first quarter increased to 8%, $27.7 million.

Earlier this month, on April 17, we announced our quarterly cash distribution of $0.705 per common unit. It is equivalent to the fourth quarter of 2008 and an increase over the first quarter of 2008. This is our 40th consecutive quarterly distribution paid by the partnership. The Partnership remains focused and believes that it is well-positioned to continue to deliver unit holders stable and growing cash distributions.

I would like to take a few minutes to talk about some of the opportunities at TransCanada level that have a lot of positive impact on throughput, cash flow and earnings of the partnerships assets going forward.

TransCanada continues to advance the buys in natural gas pipeline project. On April 20, an application was filed with the Federal Energy Regulatory Commission for the right to construct, own and operate that pipeline. Bison will consist of 302 miles of 30 inch diameter pipe designed to transport gas from the Powder River Basin in Wyoming to the Midwest US markets. It will have an initial contracted capacity of approximately 407 million cubic feet a day with potential expandability of up to 1 billion cubic feet a day.

As mentioned in our last call, Northern Border has executed downstream contracts with buys and shippers for capacity for Port of Morgan, Montana to Ventura, Iowa on the Northern Border System. Those contracts are contingent upon the completion of the Bison. Those contracts are for approximately 400 million cubic feet a day as well.

The completion and placing in the service of Bison in the fourth quarter of 2010 will diversify the natural gas supply available to Northern Border strengthen its contract portfolio and provide another transportation solution for shippers exporting natural gas from the Rockies Basin.

In addition to advancing the Bison project, TransCanada has recently concluded a successful binding open season to connect 378 cubic feet a day of new shale gas supply from the Horn River basin in Northeast British Columbia.

Combined with the previously TransCanada announced successful binding open season for gas transmission service from the Montney ground Birch shale play, TransCanada has now signed firm commitments to connect approximately 1.5 billion cubic feet a day of new shale gas under development in Northeast British Columbia starting in 2010 and partially in to 2011.

This new supply of unconventional gas will increase overall flows of natural gas out of the Western Canadian sedimentary basin and the export of natural gas out of Canada in to the United States.

Overall flows out of the WCSB are expected to be lower in 2009 compared to last year due mainly to a decrease in drilling activity and declining production. The new supply of shale gas is expected to more than offset that decline of conventional production in the western sedimentary basin in subsequent years post 2009. This is an extremely important and positive development for partnership. Our pipelines are well positioned to move that new gas to high value US markets.

Looking out longer term TransCanada's efforts to bring Mackenzie and Alaska gas to market could provide further diversification to the partnerships pipeline systems.

I will now turn the call over to Mark to review our 2009 first quarter activities.

Mark Zimmerman

Thanks Russ and good afternoon everyone. First I would like to repeat Russ's comments we are pleased with our start to 2009. The partnership had a solid first quarter. I would like to take a few minutes to highlight the performance of our assets and share our thoughts on potential go forward opportunities for the partnership.

First off, Great Lakes experienced a strong quarter, gas volumes delivered increased by 3% compared to the prior year as sales of short-term and interruptible capacity continue to be strong. As a result operating revenues, net of expenses increase 4%, average contracted capacity for the first quarter was 106% of its summer designed capacity. We are encouraged by the continued demand for services on the Great Lakes system and look forward to continue to stable cash flows.

Similar to last quarter, Tuscarora delivered higher earnings due to incremental transmission revenues associated with a new long-term firm transportation contract that supported the likely compressor station expansion. That facility went into service of April of last year. Tuscarora is generally unaffected by shifting natural gas market fundamentals because of its new unique location and profile of its long-term contracts. We also expect Tuscarora will continue to generate stable and sustainable earnings and cash flow for the partnership.

With respect to Northern Border, the Des Plaines Project was placed in service in March of this year, the $17 million compressor and interconnect facilities are fully subscribed under long-term contracts. As Russ mentioned, Northern Border's results and system utilization was negatively impacted in the quarter by a combination of reduced whether related demand and incremental supply of gas delivered into the market it serves.

As previously shared with you, shipper demand for transportation on Northern Border have been impacted by the commencement of the western segment of the Rockies express pipeline or REX which allows volumes to flow the Rockies basin eastward, creating a supply alternative for some of Northern Boarder shippers.

In addition, we have seen some additional gas entering the region from Southern US shale plays. However as Russ mentioned we feel that shift to supply should be temporary. When the final eastern segment of REX is fully placed in service in the late fall of 2009.

It is expected to transport natural gas further eastward thereby eliminating some of the excess supply in the mid-continent market served by North America. As well as we see other mid-continent pipelines coming into service they too will move some of this excess supply away from the mid-continent to market further east.

In addition sales in Northern Border capacity into the summer maybe favorably impacted by gas storage levels in the Western Canadian Sedimentary basin which are currently at very high levels. If production volumes remain the same in the WCSB the gas producers would look to flow these volumes to refill storage facilities in the east.

From a financial perspective the partnership's overall liquidity position remains solid and we believe we are well positioned to continue to weather these current unstable financial markets and take advantage of appropriate opportunity should they arrive.

Between our strong distribution coverage ratio and available undrawn credit facility we are confident in our stability going forward. With a strong balance sheet and ongoing solid cash flows from our quality investments we continue to pursue additional growth opportunities for the long term benefit of our unit holders.

We are increasingly encouraged for the potential to grow over the near and longer term. As Russ mentioned there are several development projects at the TransCanada level that bode well for new supply to be transported on to our systems, in the near and mid term including the Bison project in the large shale gas discoveries in the Northeast British Columbia.

On the acquisition front, we continue to assess a number of opportunities available on the marketed today. However we will remain diligent pursue those that provide the ability to grow earnings cash flows and distributions in the stable low risk manner.

And as mentioned in the past there is also the option to grow the partnership due to potential acquisition of an asset from our corporate sponsor, TransCanada. Currently, TransCanada is in the midst of executing a large portfolio of organic growth projects in both it’s pipeline and the energy business. To finance this growth, TransCanada has a number of alternatives available to it, which include the sell down of a US pipeline asset to the partnership which provide us with an opportunity to grow while providing TransCanada the ability to maintain a strategic interest in the asset.

That concludes my prepared remarks and I would now like to turn the call over to Amy Leong for a more detailed discussion on our financial results.

Amy Leong

Thanks Mark. Net income for the first quarter 2009, was $31.8 million or $0.82 per common unit, a decrease of $1.8 million compared to $33.6 million or $0.87 per common unit for the same period last year.

The first quarter decrease was primarily due to lower equity income from Northern Border partially offset by a combination of higher equity income from Great Lakes, increased Tuscarora transmission revenues and slightly lower costs at the Partnership level.

Equity income from Northern Border was $15.6 million in the first quarter of 2009, a decrease of $3.9 million compared to $19.5 million in the same period last year. This was primarily due to lower transmission revenues partially offset by a decrease in operating expenses. At the Northern Border level revenues decreased $9.3 million while operating expenses were down by $0.9 million. As Mark mentioned earlier, firm demand transmission revenues for Northern Borders were negatively impacted by incremental supply of Rockies gas being transported into the Midwest markets.

Equity income from Great Lakes was $19.5 million in the first quarter of 2009, an increase of $0.9 million or 5% compared to $18.6 million for the same period last year. The increase in equity income was primarily due to higher overall transmission revenues partly offset by higher operating expenses.

At the Great Lakes level revenues were up $2.8 million, higher short-term revenues from increased sales of daily transport capacity more than offset lower long term service revenues.

Tuscarora's net income was $4.1 million in the first quarter of 2009 and increase of $0.9 million or 28% compared to $3.2 million in the same period last year. The increase is due to incremental transmission revenue associated with a new long term firm transportation contract that supported the likely compressor station expansion that went into service in April of 2008.

Costs at the partnership level for the first quarter of 2009 were $7.4 million comparable to the same period last year.

Turing to cash flow, in the first quarter partnership cash flows were $36.5 million, an increase of $3.5 million or 11% compared to $33 million in the first quarter of last year. The increase was primarily due to higher cash flows provided by Tuscarora's operating activities and higher cash distribution received from both Great Lakes and Northern Border.

Cash flows provided by Tuscarora's operating activities increased by $1.2 million to $7.2 million primarily due to likely compressor station expansion project mentioned earlier. Cash distribution from Great Lake and Northern Border increased by $2 million in total for the first quarter 2009 compared with the same period last year.

Distributions paid by Northern Border were higher primarily due to a reduction in maintenance capital expenditure in Q4 of 2008 compared to Q4 of 2007.

Our solid financial performance in the quarter continues to provide strong support for our cash distribution to unit holders. The Partnership paid $27.7 million or $0.705 for a common unit of cash distribution to unit holders, and it's general partner for the first quarter of 2009. By comparison, partnership generated cash flows of $36.5 million.

As of March 31 2009, the Partnership had no outstanding borrowing under the $250 million revolving portion of its credit and term loan agreement and was incompliance with the covenants of the agreement.

The Partnership views its core banking group as solid, particularly in light of the current market environment and has established a strong relationship with these institutions. We continue to maintain a prudent approach to cash flow management, directing our free cash flow to maintaining appropriate debt level, investing in ongoing operations and growing distributions to unit holders.

That concludes my comments on the first quarter 2009 financial results. I will now turn the call back to Terry.

Terry Hook

Thanks, Amy. Now at this time, we will open the call to questions. Operator, go ahead.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Gabe Moreen from Banc of America. Please go ahead.

Gabe Moreen - Banc of America

Good afternoon everyone. Couple questions. Amy, do you have just, I don’t know, if you said it on your review at this quarter end, debt and cash balances?

Amy Leong

No we haven’t included in the review but some, as at the end of this quarter, we have not drawn on our 250 revolver. I think we have at the partnership level about $475 million at the partnership level and including Tuscarora's debt which we consolidated we have about $544 million.

Gabe Moreen - Banc of America

Okay. And then just in terms of, are there any parking and lending services on any of your pipelines.

Mark Zimmerman

There is a small amount both at Great Lakes and at Northern Border. That is one of the services that are provided but it tends to be a very low component of our overall revenue.

Gabe Moreen - Banc of America

Okay thanks Mark. Can you also talk about just kind of what your capacity contracts are looking like heading in to the shorter season in Northern Border, how they compare to like, let's say last year at this time?

Mark Zimmerman

So I think Amy is going to give me the number here. They are down from where we were at last year. I think we disclosed in our Q that we are at 60% and I think it was the number.

Amy Leong

Yeah, so Northern Border were about 60% of design capacity, for Great Lake it was about 106% actually for the first quarter of '09. And so at March 31, we disclosed our 95% of average design capacity being contracted on the Great Lake system.

Gabe Moreen - Banc of America

Okay and that 69% figure for Northern Border was the remainder of the year for all of 2009 or just…

Amy Leong

It's beginning in the second quarter of '09 through to the remainder of the year.

Gabe Moreen - Banc of America

And just for some color on that, Gabe. We mentioned a couple times that we did see the Northern Border revenue being down relative to our expectations in the first quarter. And that was very much in February and March as we've seen relative to 2008, a bit more of a warmer climate than we had in 2008. With that said we have seen the differentials in the market areas that Northern Border serves start to come back into our favor over the last little while. So while the contract of capacity for the remainder of the year is lower than last year, we are hopeful that things are coming back into line and the market fundamentals are starting to firm up. And as we have mentioned, we expect that over the long-term one some of this excess capacity continues to move further East, it will get us back to more of a historic sort of profile that we’ve had in Northern Border.

Gabe Moreen - Banc of America

Got it. And one last question, Mark. Did I hear you correctly in saying that you are currently in negotiations with your parent over a potential asset drop down? Or that’s just a potential avenue you might pursue down the line?

Mark Zimmerman

Potential avenue, I think as we heard a speak over the last few quarters that as TransCanada continues to build our its Greenfield portfolio in to ’09 and 2010, the amount of dollars are growing and its definitely an increasing opportunity for us to perhaps be viable alternative, I would also observe that’s as our unit prices come back here from lows experienced in November, that I think we have become even more of a viable alternative than we were back then.

Gabe Moreen - Banc of America

Thanks.

Mark Zimmerman

Thank you, Gabe.

Operator

Thank you. (Operator Instructions). There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Hook.

Terry Hook

I would like to thank all of you for taking the time today to listen into our call, we appreciate your interest in TC PipeLines LP, we look forward to talking to you soon. Bye for now.

Operator

Thank you. The conference has now ended.. please disconnect your line at this time and thank you for your participation.

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