TC PipeLines, LP Q2 2009 Earnings Call Transcript

| About: TC PipeLines, (TCP)

TC PipeLines, LP (TCLP) Q2 2009 Earnings Call July 30, 2009 2:30 PM ET


Terry Hook - Manager, Investor Relations

Russell K. Girling - Chairman and Chief Executive Officer

Mark Zimmerman - President

Amy Leong - Principal Financial Officer and Controller



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

Terry Hook

Thank you, Operator, good afternoon everyone. Welcome to our Second Quarter 2009 Conference Call. We are pleased to provide you with an opportunity to discuss our achievements for the quarter and other general developments regarding TC PipeLines, LP. With me today are Mr. Russ Girling, Chief Executive Officer, Mr. Mark Zimmerman, President, and Miss Amy Leong, Controller.

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 2008 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 the underlying assumptions prove incorrect, actual results may differ materially from those described in the forward-looking statements.

Russ will begin today with a review of TC PipeLines' recent cash distribution announcement, the second quarter 2009 results, and an update on the activities concerning the partnership and its general partner, TransCanada Corporation.

Following that, Mark will provide some further details regarding our investments during second quarter, and finally, Amy will review our second quarter financial results. After that we will be pleased to take your questions. I will now turn the call over to our Chairman and CEO, Russ Girling.

Russell K. Girling

Thanks, Terry, and good afternoon everyone, and thank you all for joining us today. First off, I'd like to start today by saying I'm very pleased with the July 1st closing of the transaction which we announced in May to acquire the North Baja Pipeline from our sponsor, TransCanada Corporation, and to amend the general partners incentive distribution rights.

This transaction will help shape the partnership both immediately and for many years to come. Last week we also announced a 3.5% increase in our quarterly cash distribution to $0.73 per common unit. This represents a $0.025 increase over the first quarter of 2009, or $0.10 on an annualized basis. This is the 41st consecutive quarterly distribution paid by the partnership. TC PipeLines remains focused and believes it is well positioned to continue to deliver stable and growing cash distributions to our unit holders.

As outlined in today's news release, net income for the second quarter was $13.7 million or $0.31 per common unit, a decrease of $5.5 million compared to the $19.2 million or $0.47 per common unit for the same period last year.

As expected, lower system utilization and throughput volumes in Northern Border reduced its transmission revenues. Also contributing to the lower net income was $1.7 million of one-time expenses incurred in the second quarter associated with the acquisition of North Baja and the reset of inset set of distribution rights.

Partnership cash flows were $40.3 million in the second quarter of 2009, reflective of the one-quarter lag compared to earnings, and the solid cash flows generated in the first quarter by all of our pipeline investments. Cash distributions paid in the second quarter totalled $27.8 million.

Amy will provide additional details on the second quarter results later in this call.

I would like to now take a few minutes to talk about some of the opportunities at TransCanada that will have a positive impact on the volume throughput, cash flows, earnings, and growth prospects for the partnership going forward.

TransCanada remains committed and continues to advance the Bison Natural Gas Pipeline Project for November 2010 in service date. The regulatory approval process in the engineering and procurement work are progressing well. As mentioned in our last call, an application was filed on April 20th with the Federal Energy Regulatory Commission for the right to construct and operate the pipeline.

As you may recall, Bison has an initial contracted capacity of 407 million cubic feet per day with a potential expandability up to approximately 1 billion cubic feet per day. In addition, Northern Border has executed downstream contracts with Bison shippers for capacity from Port of Morgan, Montana to Ventura, Iowa on the Northern Border Systems that are contingent upon the completion of the Bison project. These projects are for approximately 400 million cubic feet per day.

The expected in-service of Bison is targeted for the fourth quarter of 2010 and will diversify the natural gas supply for 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 continues to advance Groundbirch and Horn River Pipelines, expected to connect approximately 1.5 billion cubic feet a day of new shale gas under development in Northeast British Columbia, starting in 2010 and moving on from there.

In April 2009, TransCanada submitted an application to the National Energy Board for approval to construct and operate the Groundbirch pipeline, which comprises a 77-kilometer natural gas pipeline and related facilities. This is an extension of TransCanada's Alberta system, which is expected to connect natural gas supply primarily from the Montney shale gas region in Northeast British Columbia to its existing infrastructure in Northwest Alberta.

In June 2009, the National Energy Board announced that it will hold a public hearing process on the application beginning November of 2009. Subject to regulatory approvals, construction of the Groundbirch Pipeline is expected to commence July 2010, with final completion anticipated in November of 2010.

In May 2009, TransCanada filed a project description with the National Energy Board to construct the Horn River National Gas Pipeline. The Horn River Pipeline is a proposed extension of TransCanada's Alberta system to service the Horn River shale gas region in Northeast British Columbia.

Horn River (inaudible) have notified TransCanada that they are extending their construction schedule for upstream production facilities, mainly the gas plant, which will enhance their ability to manage their project cost. Therefore, TransCanada will delay the inservice date of the Horn River Pipeline from 2011 to 2012.

In closing, I would like to reiterate that the partnership remains well positioned for growth, as evidenced by the recent dropdown of the Northern Baja Pipeline and the resetting of the incentive distribution rights for TransCanada.

TC PipeLines is expected to play an ongoing role in the financing of TransCanada's $21 billion capital program over the next couple of years.

I'll now turn the call over to Mark to review our second quarter 2009 activities.

Mark Zimmerman

Thanks, Russ, and good afternoon, everyone. First, I would like to echo Russ's comment that we were very pleased to close the transaction on July 1st, to restructure the incentive distribution rights with the general partner, and to also acquire the North Baja Pipeline system from TransCanada.

To recap, the transaction was valued at approximately $395 million and was financed by a combination of cash, $170 million drawn on the partnership's $250 million senior revolving credit facility, and the issuance of 6.37 million of new partnership common units to facilities of the general partner.

The restructuring of the IDRs better positions the partnership to pursue acquisitions and expansion projects in the future by reducing our cost of capital and eliminating the top tier in resetting and rebasing the distribution levels will make us more competitive.

As for the North Baja acquisition, it is a high-quality asset offering supply and geographic diversity, long-term contracts, stable earnings, and solid cash flow. The integration of this pipeline into the partnership will be seamless as TransCanada will remain the operator. It is essentially business as usual for North Baja. We expect North Baja will be immediately accretive to cash flows.

In addition, the acquisition included a provision that if the expansion of the system from the Mexico-Arizona border to Yuma City, Arizona, if completed by June 30th, 2010, the partnership will pay up to an additional $10 million for this growth opportunity. The actual amount shall be determined using a formula based upon transportation service agreements to be entered into.

I would now like to take a few moments to highlight the performance of our assets and share our thoughts on potential go-forward opportunities for the partnership. Similar to last quarter, Tuscarora delivered consistent and stable earnings and cash flow for the partnership. The asset is generally unaffected by shifting natural gas market fundamentals because of its unique location and profile of its long-term contracts. Tuscarora operates under long-term contracts and had 98% of its design capacity contracted for the second quarter of 2009, compared to 95% for the same period last year. As of June 30th, 2009, 98% design capacity was contracted in our firm bases for the remainder of the year with a weighted average remaining life of 11.2 years overall.

Turning to Great Lakes, throughput in the second quarter of 2009 averaged 2,530,000 MMcf a day of gas and was approximately the same as the second quarter 2008. We are encouraged by the continued demand for services on the Great Lakes System. Increases in short-term and discretionary volumes are offsetting the underutilization of firm contracts.

Decreases in throughput related to the underutilization of firm contracts have not had a negative impact on revenue. In fact, our revenues are slightly higher.

Great Lakes average contract capacity was 97% of its design capacity for the second quarter, compared to 95% for the same period last year. As of June 30th, 2009, 96% of its average design capacity was contracted on a firm basis for the remainder of the year and the weighted average remaining life of firm contracts for Great Lakes is 2.4 years.

I'd like to reiterate that Great Lakes competitive rates, combined with strong spread values between Alberta and Ontario, continue to support strong transportation values for this system which was able to take advantage of daily sales in the short-term market.

With respect to Northern Border, prevailing market conditions and competitive factors in North America, including the Rockies Express Pipeline or REX, continued to impact the value of Northern Border's transportation and its ability to market available capacity. Norther Border's average contract to capacity was 55% of its design capacity for the second quarter of 2009, compared to 74% for the same period last year.

As of June 30th, Northern Border had approximately 49% of its assigned capacity uncontracted beginning in the third quarter of '09, and approximately 53% beginning in the fourth quarter of '09. Also at June 30th, the weighted average remaining life of Northern Border's firm transportation contracts is 2.4 years.

As previously shared with you, shipper demand for transportation on Northern Border has been impacted by the commencement of the western segment of the Rockies Express Pipeline, which allowed volumes to flow out of the Rockies Basin eastward, creating a supply alternative for some of Northern Border's shippers. However, as of June 29th, the second phase of REX has now been extended further east to limit on (inaudible) in Ohio which was placed into service, thus mitigating some of the market oversupply at our Ventura delivery point.

Going forward, we understand the final phase of REX extending further east to Clarington is expected to be brought into service in November of this year, which will further mitigate the oversupply at all delivery points downstream of Ventura.

In addition, we have seen in the first half of this year some additional gaps entering the region from Southern US shale plates. However, as we have seen, other mid-continent pipelines are coming into service recently, which are providing additional transportation alternatives for this increasing shale production. We expect we will continue to see the movement of some of this excess supply away from the Midwest and mid-continent to markets further east.

As Russ mentioned, there are several development projects at the TransCanada level that bode well for new supply to be transported onto our systems in the near and midterm, including the Bison Project and large shale gas discoveries in Northeast British Columbia.

With a strong balance sheet and ongoing solid cash flows from our quality investments we continue to pursue additional growth opportunities for long-term benefit of our unit holders. We are increasingly encouraged for the potential to continue to grow over the near and longer term.

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

Continuing to grow the partnership through further asset dropdowns from our corporate sponsor also remains probably. As Russ mentioned, TransCanada is in the midst of executing a $21 billion capital program in both its pipeline and energy businesses. To partially finance this goal, TransCanada is considering further asset sales to the partnership from their considerable portfolio of qualifying assets.

This would provide us with additional opportunities to grow, while still 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 second quarter 2009 was $13.7 million or $0.31 per common unit, a decrease of $5.5 million compared to $19.2 million or $0.47 per common unit for the same period last year.

The second quarter decrease in earnings compared to the same period last year was primarily due to lower equity income from both Northern Border and Great Lakes, and one-time costs incurred relating to the North Baja acquisition and the amendment to the IDRs. Partially offsetting these decreases was the favorable impact of lower financing costs.

Equity income from Great Lakes was $12.9 million in the second quarter of 2009, a decrease of $0.9 million, compared to $13.8 million for the same period last year. The decrease in equity income was primarily due to higher operating expenses, which were partly offset by increased transmission revenues.

At the Great Lakes level, revenues were up $1.5 million as higher short-term revenues from increased sales of daily transport capacity more than offset lower long-term service revenues. Operating expenses at the Great Lakes level increased $3.4 million, primarily due to higher pipeline integrity expenses and property taxes.

Equity income from Northern Border was $5.4 million in the second quarter of 2009, a decrease of $3.3 million compared to $8.7 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, revenue decreased $7.1 million due to reduced system utilization as volume shifts were negatively impacted by incremental supply of Rockies' gas being transported into the midcontinent markets. Operating expenses continue to be lower on Northern Border and were down by $500,000 during the quarter.

Tuscarora's net income of $4.1 million in the second quarter of 2009 was comparable to the same period last year. Costs at the partnership level for second quarter 2009 were $8.7 million, an increase of $1.1 million compared to the same period last year.

Operating expenses increased approximately $1.7 million as a result of one-time costs associated with the transaction to acquire North Baja and reset the incentive distribution rights. Financing charges decreased $0.6 million due to the combined effect of lower interest rates and lower debt balances.

Turning to cash flow, in the second quarter, partnership cash flows were $40.3 million, a decrease of $6.6 million compared to $46.9 million in the same period last year. The decrease was primarily due to lower cash distributions from Norther Border and Great Lakes, in addition to higher costs at the partnership level, partially offset by higher cash flows provided by Tuscarora's operating activities.

Northern Border's decreased distribution was primarily due to lower net income, partially offset by a reduction in maintenance capital expenditures. Great Lakes decreased distribution was primarily due to scheduled debt repayments, partially offset by lower maintenance capital expenditures.

As mentioned earlier, costs at the partnership level increased due to one-time costs relating to the North Baja acquisition and the amendment to the IDRs, partially offset by lower financial charges, net and other. Cash flows provided by Tuscarora's operating activities increased primarily due to decreases in working capital.

Our solid financial performance in the quarter and conservative coverage ratio continue to provide strong support for our cash distributions to unit holders. The partnership pays $27.8 million or $0.705 per common unit of cash distributions to unit holders and its general partner in the second quarter of 2009. By comparison, the partnership generated cash flows of $40.3 million.

The partnership repays $2.3 million of its outstanding debt balance during the second quarter of 2009. As of June 30th, 2009, the partnership had no outstanding borrowings under the $250 million revolving portion of its credit and term loan agreement, and was in compliance with the covenants of the agreement.

On July 1st, 2009, subsequent to our June 30th reporting data, $170 million was borrowed on this revolver to partially fund the North Baja acquisition. The partnership continues to view its core banking group as solid 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 levels, investing in ongoing operations, positioning for growth opportunities and growing distributions to unit holders.

That concludes my comments for the second quarter 2009 financial results. I'll now turn the call back to Terry.

Terry Hook

Thanks, Amy. Now at this time we'll open the call to questions.

Question-and-Answer Session

Thank you. We will now take questions from the telephone lines. (Operator's Instructions) There are no questions registered at this time. I would now like to turn the meeting back over to Mr. Hook.

Terry Hook

Great, thanks very much. I'd like to thank all of you for taking the time today to listen into this call. We appreciate your interest in TC PipeLines and we look forward to talking to you soon. Bye for now.


Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation, and have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!