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TC PipeLines, LP (NYSE:TCP)

Q1 2013 Earnings Conference Call

April 24, 2013 11:00 am ET

Executives

Rhonda Amundson - IR

Steve Becker - President & Director

Sandra Ryan-Robinson - PFO

Analysts

James Jampel - HITE

Jeremy Tonet - JPMorgan

Rob Chisholm - Center Coast Capital

Operator

Good day ladies and gentlemen. Welcome to the TC PipeLines, LP 2013 first quarter results. I would now like to turn the meeting over to Ms. Rhonda Amundson. Please go ahead Ms. Amundson.

Rhonda Amundson

Thank you, operator and good morning everyone. I would like to welcome you to TC Pipelines first quarter 2013 conference call. I’m joined today by our President, Steve Becker and our Principal Financial Officer, Sandra Ryan-Robinson.

Please note that a slide presentation will accompany the remarks, and is available on our website at tcpipelineslp.com, where it can be found in the Investor Center section, under the heading Events & Presentations.

Steve will begin today with a review of TC PipeLines’ first quarter results. And he will then give an update on the natural gas market and highlight some related impacts to the Partnership. Sandra will follow with a more detailed review of our financial results for the first quarter. And Steve will return, and wrap up our opening remarks with a brief discussion of (response and) activities 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 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.

With that, I would now like to turn the call over to Steve.

Steve Becker

Thanks Rhonda and good morning, everyone. And thanks for joining us today.

As outlined this morning in our news release and shown on slide number 4, TC PipeLines generated partnership cash flow of $43 million in the first quarter. During the quarter we paid out $43 million in cash distributions to our unitholders.

Overall the partnership generated net income of $29 million in the first quarter compared to $39 million in the same period last year. The first quarter 2013, net income is equivalent to $0.52 per common unit. The partnership also announced its first quarter cash distribution in the amount of $0.78 per common unit.

Moving to slide 5, I would like to give a brief update on the macro factors that we see affecting the North American gas business and how they are impacting the partnership. Natural gas environment continue to be dynamic in the first quarter of 2013. The winter of 2012/2013 was colder than last year with winter weather extending through March and into April.

This resulted in higher gas demand to meet heating requirements. Aggregate natural gas production levels were essentially flat relative to last year. The combined result of the higher demand and unchanged production is that natural gas storage inventories are currently well below last year’s levels and are in fact now well below the five year average. These factors have resulted in a rebound in natural gas prices where they have recently risen to their highest levels in more than 20 months. However, in spite of the strong gas environment, the natural gas futures curve remains essentially flat while basis differentials across North America remain narrow.

Moving on to slide 6, looking at our portfolio the impact of these factors has remained relatively small. As we have highlighted in our previous Analyst Calls, Northern Borders financial results reflected their reduction in its tariff rates that arose from last year’s rate settlement with its shippers. That rate settlement came into effect on January 1, 2013, and is in effect for five years.

Northern Border remains fully contracted through the first quarter of 2014. The financial performance to the partnership investments in GTN, Bison, North Baja and Tuscarora was in line with our expectations continuing to deliver solid and consistent results. This is due to the fact that these pipelines have long-term contracted revenues where their customer pay for capacity regardless of the volume of gas shipped.

This reduces variability of revenues and limits the impact of macro factors. Great Lakes, however, was impacted by current gas market conditions. Great Lakes revenues and equity earnings were lower in the first quarter due to fewer contracted capacity sales. This is a continuation of the situation we saw in November and December of 2012 as we highlighted in our recent (indiscernible) discussion.

Moving on to slide 7, I will discuss Great Lakes current situation in greater detail. As we have outlined on our previous quarterly calls, Great Lakes is currently transitioning from a long-haul pipeline to more regional storage focused pipeline supported primarily with short-term, short-haul contracts for gas moving both westward and eastward.

Near term results through the end of 2013 will depend primarily on upcoming summer weather and the associated gas demand. Hot summer lead to higher demand for gas for a cooling requirements such a situation may lead to concerns of both storage levels going into the next winter which in turn may result in increase demand to fill out regions depleted storage reservoirs. This situation would be positive to Great Lakes as a conduit to move the gas into these key storage fields.

The National Energy Board issued its decision on TransCanada’s Canadian mainline pipeline in late March 2013. The mainline links Great Lakes, natural gas supplies in Western Canada. The market is still working through the details of the decision; as such there has been no further significant contracting on Great Lakes to report.

Looking to the medium term Great Lakes current rate case settlement expires on November 1, 2013 and is required to file for new rates on or before this date. Great Lakes continues to evaluate options that could possibly see changes to tariff rates and overall rate design to better reflect the current use of this system. Longer-term more overarching changes in the pipeline industry are expected to occur which could impact aggregate pipeline capacity and ultimately the value for such transportation.

TransCanada’s Energy East project is one such transformational project. This project involves a potential conversion of one of its mainline gas pipelines from gas to oil service. TransCanada announced a binding open season from mid-April to mid-June of this year to solicit from long-term commitment shippers to ship crude oil from Western Canada to Eastern Canadian markets. TransCanada announced that if the project receives sufficient commercial support and moves forward it could be in service by late 2017.

In order to facilitate the conversion a portion of the mainline gas capacity maybe taken out of gas service as early as 2015.In anticipation of this capacity change we may see near term recontracting actions by shippers to secure pipeline capacity. This development could positively impact our pipelines and most notably Great Lakes as it would reduce overall transportation capacity therefore increasing the value of Great Lakes transportation route.

It is important to note that Great Lakes continues to serve important heating load areas in Michigan, Minnesota, Wisconsin and as such remain a critical pipeline in balancing gas loads as seasonal demands change.

That concludes my prepared remarks. I would now like to turn the call over to Sandra, who will review our first quarter financial results in more detail.

Sandra Ryan-Robinson

Thank you, Steve and good day everyone. My remarks follow the presentation materials starting on slide 8. Partnership cash flows decreased to $43 million in the first quarter compared to $53 million in the same period of 2012. The $7 million decrease was primarily due to lower cash distributions from both Great Lakes and Northern Border. The partnership paid cash distributions of $43 million in the first quarter, an increase of $1 million compared to the same period of 2012 due to an increase in the quarterly distribution of $0.01 per common unit paid beginning in the third quarter of 2012.

Turning now to slide 9. The partnership’s overall net income decreased by $10 million to $29 million or $0.52 per common unit in the quarter compared to $39 million or $0.71 per common unit in the same period in 2012. This decrease was primarily due to lower equity earnings from Great Lakes and Northern Border. When compared to the partnership’s net income of $30 million in Q4 of 2012, however, the decrease was only $1 million but the decrease again marginally due to lower equity earnings from Great Lakes and Northern Border.

Equity income from Great Lakes was $2 million in the quarter down $7 million compared to $9 million in the first quarter of 2012 and down $2 million compared to $4 million in the fourth quarter of 2012. This decrease was due to lower transportation revenues from less capacity sold in the first quarter of 2013 compared to the same period of 2012 due to challenging market conditions.

Northern Border’s equity earnings decreased by $4 million for the three months ended March 31, 2013 compared to the same period in 2012 and by $2 million compared to Q4 of 2012. This decrease was largely due to Northern Border settlement with its shippers which was effective January 1, 2013 where its reservation rates was reduced by 11%.

Partnership expenses which are made of G&A and primarily financial charges decreased by $1 million in Q3, 2013 versus the same period in 2012 and were comparable in Q4 of 2012 versus Q1 of 2013. This decrease relates primarily to lower levels of debt outstanding and lower interest rates in the first quarter of 2013 compared to the same period of 2012.

Moving now to our liquidity and capital resources on slide 10. As of March 31, $309 million was drawn on the partnership’s senior credit facility. The average interest rate on this facility was 1.46% for the quarter ended March 31, 2013. The partnership will continue to maintain a prudent approach to managing its financial position. Our conservative capital structure at 34% debt and our mid-BBB investment grade credit ratings reflect our solid financial condition and provide us with substantial flexibility for future growth.

That completes my prepared remarks on the first quarter financial results. I’ll now turn the call back over to Steve.

Steve Becker

Thanks, Sandra.

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 almost $50 billion and is progressing through large growth program.

TransCanada has assets of almost $50 billion and is progressing through the 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 a number of significant oil pipeline projects such as the Gulf Coast project, the Keystone XL project and some regional oil pipelines and terminals as well as numerous gas pipeline and power projects including several natural gas pipelines in Mexico, expansions to TransCanada’s natural gas pipeline system in Alberta, two large LNG pipeline projects in the West Coast of British Columbia and various power generation projects.

In addition, as I noted earlier, TransCanada has announced an open season to obtain firm shipping commitments for the potential conversion of a portion of its Canadian mainline pipeline system from gas to oil, which would increase the size of TransCanada’s capital program. The capital program of this magnitude translates into the need for significant funding program.

TransCanada has the ability to access the public debt market for senior debt over the course of the next several years but we’ll also look to other sources of financing included subordinated capital. Dropdowns to our partnership are one of its options through which our sponsor can access the required funding. As you are aware, we concluded a dropdown from TransCanada back in 2011 and we continue to benefit from the diversification gained from our GTN and Bison acquisition together with the stability afforded by their long-term contact.

Moving on to slide 12, I would like to conclude my prepared remarks today with some key takeaways. First our priority continues to be that of delivering long-term value to our unitholders from a stable gas pipeline asset base. TC PipeLines has investments in the solid portfolio of key natural gas infrastructure assets, which collect their cash flows through their long-term shipper pay contracts the majority with utilities and major energy companies. Given the changing market dynamics, the partnerships first quarter results from five out of its six pipelines in our portfolio were relatively consistent reflecting their long-term contract status.

Second, we are supported by our strong sponsor TransCanada, who was also an industry leader in developing North American energy infrastructure. TransCanada is moving through a large capital program with $25 billion of projects through the end of the decade and this program could provide an opportunity to our partnership to grow our asset base. And third, we manage our 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 funding their future growth plans.

With that, I’ll now turn the call back over to Rhonda.

Rhonda Amundson

Thanks, Steve. I would now like to open the call up to questions. Operator, please go ahead?

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions). The first question is from Lynn Chen with HITE. Please go ahead.

James Jampel - HITE

It’s actually James Jampel from HITE. Just a couple of questions. Absent drop-downs, how do you see the acquisition market, is there anything out there that would be appealing or have synergies with your existing system?

Steve Becker

In terms of the acquisition market, we continue to look at various opportunities and normally those go through a bidding auction type of process. When you go through those processes you are usually signed in to Confidentiality Agreements and terms of disclosures so that at this point I can’t really comment because of that particular aspect. As a general rule though they kind of – there are sometimes a number of assets for sale and then there seems to be a few that aren't so it kind of ebbs and flows but at this particular time, I have nothing to report in terms of actual results.

James Jampel - HITE

Does it seem more active or less active that in terms of assets that might be synergistic with TCP?

Steve Becker

I can’t really comment on that because it starts to give away my confidentiality so I can’t really answer that directly I'm sorry.

James Jampel - HITE

Okay, fair enough. And then again absent drop-downs what’s a reasonable expectation for timing of resumption of distribution growth?

Steve Becker

I think in the partnership when we look at our assets what happens generally in the market, if you look a little bit over -- we look at a longer term horizon and the market is shifted quite dramatically with the shale growth where there’s been huge supply growth. We’re now starting to see demand growth coming back with additional power plants and fertilizer plants and industrial demand in varying spots and those take a little bit longer to actually build the facilities and come on stream. So that’s where we would expect to see smaller growth items and we also hope to make acquisitions. We’re opportunistic and disciplined in that sense. And they tend to come in lumps, so it’s a little bit hard to be very predictive in that sense on the acquisition front.

James Jampel - HITE

All right. Thank you very much.

Operator

Thank you. (Operator Instructions). The next question is from Jeremy Tonet with JPMorgan. Please go ahead.

Jeremy Tonet - JPMorgan

Good morning.

Steve Becker

Good morning, Jeremy.

Jeremy Tonet - JPMorgan

Looking at Great Lakes, we expect the summer quarters to be weaker than last year but I was just wondering if you could help us at all with an order of magnitude of what that might look like at this point, I imagine it won’t be the same year-on-year type of decrease as we saw in first quarter but I was just wondering if you could help us ballpark what that change could possibly look like as far as what you can tell right now?

Steve Becker

Well, I think it’s difficult to project at this particular time because of one or two external factors that are influencing that particular aspect and in some cases the sort of a shoulder season cold has influenced the storage levels in other cases there is variety of rate case implications going on that impact various [pass] [ph] and people haven’t quite worked through those details yet.

So the normal process that you would see of contracting has been delayed slightly and so that’s where it’s made it difficult to project the summer. So, I think that that’s where it will likely be slightly lower than last year but to the extent is very difficult to predict at this time and we may be able to give you more color on that in our next call.

Jeremy Tonet - JPMorgan

Okay, great. Turning over to GTN, it looks like there was a little bit of a decrease there year-over-year, could you possibly expand on what some of the drivers were there.

Steve Becker

I think in GTN; GTN is generally contracted and does sell about 300 million cubic feet a day into the market it has varying capacity. So that the results there on the revenue sometimes depend on the rate and the volume that sold on that very small volume generally the bulk of the revenue is contracted. The volume would then depend on things in California such as where their nuclear plants are running what’s the hydro level and a variety of other factors so there is a little wee bit of aspect that way and I don’t believe there is any significant items on the cost side that really impact that. So it’s generally the bulk of the revenue is from contracts with the shippers and there is a small amount that as both rate and volume variance mix that’s really what it is.

Jeremy Tonet - JPMorgan

That’s helpful. Thank you very much. That’s it from me.

Steve Becker

Thank you, Jeremy

Operator

Thank you, thank you. The next question is from Rob Chisholm with Center Coast Capital. Please go ahead.

Rob Chisholm - Center Coast Capital

Good morning guys.

Steve Becker

Good morning, Rob.

Rob Chisholm - Center Coast Capital

Steve in terms of going back to Great Lakes for a minute, do you feel that, from especially giving -- being a winter quarter, do you feel that $2 million in equity earnings is a floor at Great Lakes or how do you look at that?

Steve Becker

Well, I think when we look at that, the challenge that we have is, it’s going through a transitional stage in terms of where it is. And so, when we try and look going forward the one thing that we have is, we are required to file a rate case by November 1. And if we do file a rate case, we can change the rates to reflect the flows slightly. So you may have the same flows, but being charged at a different amount.

And generally the flows are in and out of the storage on the east side of the system and that’s where if you shift more of the rate recovery to that particular side of the system you can change what the net income is. The winter is also very weather dependent in the Wisconsin and Minnesota areas and even though we talk about the cold winter it wasn’t super freezing cold that can really dramatically change that.

So generally, the winter quarters are very variable, because of all of those factors, and it’s very difficult to kind of give a floor number, because both the change in the rate case and the weather optionality and variability embedded in it.

Rob Chisholm - Center Coast Capital

So do you, could you anticipate, if there is a rate increase especially impacting the eastern side of the system, could that impact demand for the services, what’s the elasticity of that demand on that side?

Steve Becker

There is sort of a two part in it, some its pretty core essential for people whether it’s weather and then for others there is a more use where it’s balanced across a broader geographic area. So that there is a core part that’s very definitely there and then there is a very low part that’s sort of on the very top that has probably the most variability in it. And that mix of shippers creates if you are saying well, will we get money of it? Yes, there is some people will absolutely use the service. But there is others that its one of many choices for how they would source their gas and that has to be sort of get played out within the combination of all the market factors.

Rob Chisholm - Center Coast Capital

Okay, thank you very much.

Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Ms. Amundson.

Rhonda Amundson

Thank you everyone for your participation today. We appreciate your interest in TC PipeLines and we look forward to speaking again with you soon. Bye for now.

Operator

Thank you. The conference as now ended. Please disconnect your lines at this time. And we thank you for your participation.

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