Terry Hook - Investor Relations Manager
Russ Girling - CEO
Mark Zimmerman - President
Amy Leong - Controller
TC Pipelines LP (TCLP) Q3 2009 Earnings Call November 6, 2009 12:00 PM ET
Good day, Ladies and Gentlemen. Welcome to the TC Pipelines LP 2009 Third Quarter Results Conference Call. I'd like to turn it over to Mr. Terry Hook, Manager of Investor Relations. Please go ahead.
Thank you, operator, and good day everyone. Welcome to our third quarter 2009 conference call. We're 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 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 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 if 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 announcements, third 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 the quarter and finally Amy will review our third 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.
Thanks, Terry, and good day everyone and thank you for joining us. I'd like to start off by saying that I'm very pleased the Partnership has seamlessly integrated the acquisition of North Baja into its portfolio of natural gas pipeline assets during the third quarter.
The $395 million transaction with TransCanada Corporation, which closed July 1, included restructuring of the incentive distribution rights, as well as the acquisition of North Baja. The amendment of the incentive distribution rights reset the IDRs to 2% and the maximum threshold to 25% from the level of 50% prior to the transaction.
The amendment will make the partnerships cost of capital significantly more competitive in acquiring high quality assets. Earlier this month, we announced our third quarter cash distribution of $0.73 per common unit or 2.92 on an annualized basis.
The quarterly cash flow distribution is equal to the second quarter distribution and represents a 3.5% increase from the third quarter of 2008 due to the 42nd consecutive quarterly distribution paid by our 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 the news release, net income for the third quarter was $27.4 million or $.65 per common unit.
Earnings from the Great Lakes and Tuscarora systems were solid and ahead of last year. As expected, lower system utilization and throughput volumes on the Northern Border system continued to reduce transmission revenues.
In the third quarter of 2009, net income from Northern Border was $1.3 million lower than the same period in 2008. Excluding the $8.1 million one-time gain on the sale of Bison Pipeline LLC recorded in the third quarter of 2008.
North Baja contributed net income of $6.2 million or $.15 per common unit. This acquisition has both enhanced and diversified the earnings and cash flows from our portfolio of pipeline investments.
Partnership cash flows were $40.4 million in the third quarter of 2009, of which $8.5 million was attributable to North Baja.
Last, cash distributions paid to unit holders in the third quarter totaled $30.7 million. Amy will expand on our third quarter results and explain the financial statement presentation for North Baja later in this call. I'd like to now take a few minutes to update you on some of the opportunities at TransCanada that may have a positive impact on volume throughput, cash flow, earnings and growth prospects for the Partnership going forward.
As you know, TransCanada continues to develop and advance pipeline projects to connect new unconventional natural gas supply to its extensive pipeline network. Of importance to TC Pipelines is the construction of the 30-inch Bison Pipeline out of the US Rockies and secondly the extension of TransCanada's Alberta system into two major shale plays, the Horn River play and Motney in Northeast British Columbia.
Construction of the Bison Natural Gas Pipeline continues on schedule for the fourth quarter of 2010. The regulatory approval process and engineering procurement work are progressing as we had planned. As mentioned in previous calls, Bison will interconnect with Northern Border and have an initial contract capacity of 407 million cubic feet per day with a potential expandability of up to 1 billion cubic feet per day.
Northern Border has executed downstream contracts with Bison shippers for capacity from Port of Morgan, Montana to Ventura, Iowa, and the Northern Border systems that are contingent upon the completion of the Bison system.
These are 10 year contracts for approximately 400 million cubic feet per day. TransCanada's Bison Pipeline will diversify Northern Borders gas supply, strengthen its contract portfolio and provide another transportation solution for shippers exporting natural gas supply from the Rockies Basin.
In addition to advancing the project, TransCanada continues to advance the ground birch and Horn River pipelines expected to connect approximately 1.5 billion cubic feet per day of new shale gas under development in Northeast British Columbia starting in the 2010 timeframe. The ground birch pipeline is a 77 kilometer extension of the Alberta System into Northeast British Columbia.
It is expected to connect natural gas supply primarily from the Motney shale gas region into existing infrastructure in Northwest Alberta. The National Energy Board will begin public hearings November 17th subject to regulatory approvals, construction of the ground birch pipeline is expected to begin in July of 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 natural gas pipeline. The Horn River pipeline is also a proposed extension of the TransCanada Alberta system into Northeast British Columbia to service the Horn River shale gas region.
Horn River producers have recently notified that they're extending their construction schedule for upstream production facilities, which will enhance their ability to manage project costs and therefore TransCanada has moved the in service date for the Horn River pipeline from 2011 to 2012.
I would like to reiterate the Partnership remains well positioned for growth. In addition to the previously mentioned supply initiatives, TransCanada continues to progress its $22 billion capital spending program. As evidenced by the recent drop down of the Northern Baja system and the resetting of IDRs, TC Pipelines can play an important role in the financing of TransCanada's capital program in the coming years.
I'll now turn the call over to Mark for review of our third quarter 2009 activities. Mark?
Thanks, Russ, and good day, everyone. First I'd like to echo Russell’s comment that we are very pleased to close the transaction on July 1. To restructure the incentive distribution rights with the general partner and acquire the North Baja Pipeline from TransCanada, to recap beginning in the third quarter the general partner incentive distribution rights were reset to 2%, down from the previous 50% level. Going forward the maximum incentive distribution threshold will be capped at 25%.
The restructuring of the IDRs better positions the Partnership to pursue acquisition and expansion projects by reducing our cost of capital. Eliminating the top tier and resetting and rebasing the distribution levels will also make us more competitive. As for the North Baja acquisition, it is a high quality asset offering geographic and supply diversity, stable earnings and solid cash flow.
To remind you North Baja operates under long term contracts and as of September 30, 2009, in excess of 100% of its physical capacity was contracted on a firm basis for the remainder of the year. Due to North Baja's bidirectional nature, it has the capacity to accept receipts at both ends of its system, as at September 30th, 79% of the design capacity for self-bound receipts and 64% of the design capacity for northbound receipts was contracted on a firm basis for the remainder of the year. The weighted average remaining life of these contracts was 16.5 years.
In the third quarter, North Baja contributed 8.1 million of EBITDA, which was in line with expectations we set out when we announced the acquisition back in May. I will touch on it here briefly, but leave it to Amy to explain later in the call.
North Baja is presented in our financial statements as if it was always owned by TC pipeline or phrased another way, the partnerships historical financial information was recapped to include North Baja's results for all periods presented.
I would now like to take a few moments to highlight the performance of our other pipeline investments and share our thoughts on our potential go forward opportunities for the Partnership. Similar to last quarter, Tuscarora continued to operate as expected and delivered consistent and stable earnings and cash flow for the Partnership.
Because of its unique location and the profile of its long term contracts, Tuscarora is unaffected by shifting natural gas market fundamentals. Tuscarora operates under long terms contracts and had 98% of its design capacity contracted for the third quarter of 2009 consistent with the same period last year.
As at September 30th, 98% of its design capacity was contracted on a firm basis with a weighted average remaining life of 11 years. Our Northern Border and Great Lake investments continue to perform well, especially when considering the decline in gas flows out of the Western Canadian sedimentary Basin, a very cool summer and a gas oversupply situation and high storage levels.
Flows out of the WCSB were 1.2 Bcf a day lower in the third quarter of ’09, compared to the same period in 2008, primarily due to the reduction in exploration and development activity for natural gas and some degree of voluntary production curtailment.
With the current low price environment for natural gas, we do not see this trend reversing in the near term. Great Lakes throughput in the third quarter of 2009 averaged 1,622,000,000 cubic feet a day or approximately half a Bcf lower than the same period last year. Although throughput volumes were down, we are encouraged by the continued demand for short-term firm services on the Great Lakes system.
Revenue from these services increased relative to the prior year. Total revenues in the third quarter 2009 were 2.2 million higher than the third quarter 2008. Great Lakes average contract capacity was 103% of its design capacity for the third quarter of ‘09 compared to 95% in the same period last year.
Great Lakes competitive rate and route allowed it to take advantage of daily sales in the short-term market. As at September 30, 2009, 92% 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 transport contracts is 1.9 years.
Substantially all the firm contracts in place at September 30th will remain in place until October 31, 2010. As we noted in our 8-K filing earlier this week, Great Lakes has approximately 830,000 dekatherms per day of long haul capacity under contract expiring October 31, 2010 with its larger shipper TransCanada.
On November 3, 2009, Great Lakes and TransCanada renewed contracts for one year for 470,000 dekatherms per day of capacity, some at a slight discount and agreed to provide other transportation services. The remaining approximate 360 dekatherms per day of capacity will expire October 31, 2010.
Great Lakes will actively market and post the expiring capacity for shipper interest in early 2010. If this trend to non renewal continues as expected, increased seasonality and volatility of revenues could result for Great Lakes. However, one significant mitigating factor is that Great Lakes remains a very competitive transportation route for WCSB producers to Eastern Canada and to the Northeast US.
Now turning to Northern Border. Prevailing market conditions and competitive factors in North America including the Rockies Express or REX pipeline continue to impact the value of Northern Borders transportation and its ability to market available capacity. We have seen transportation values improve to Ventura with the June 29th in service of REX each, which has eased some of the market oversupply at our Ventura delivery point.
However, the transportation value to Chicago is declining as Rex East now pushes alternative supply into that Chicago market. Looking forward, we understand that the final phase of REX extending further East to Clarington, Ohio is expected to be brought into service some time late November 2009, which may help to mitigate some of the oversupply delivery points downstream of Chicago.
However, as we have mentioned in the past, we have seen some additional gas entering the region from increase in production from Southern US shale plays. While this is also contributed to weakening differentials in the Chicago area, we would expect that with the impact of other new mid-continent pipelines, which are providing additional transportation alternatives for the increasing shale production, that this will also help to mitigate this pricing pressure by continuing to shift supply into other regions and away from the Markets we serve.
Within this competitive environment, Northern Border revenues in the third quarter 2009 were down only 3.7% compared to the same period in 2008. This reflects higher revenue from short-term services, which served to partially offset a reduction in revenues from firm demand contracted services.
We are very pleased with this outcome in the third quarter. Northern Borders average contract capacity was 70% of its design capacity for the third quarter compared to 79% for the same period last year. At September 30th, Northern Border had approximately 47% of its design capacity uncontracted for the remainder of the year. The weighted average remaining life in Northern Borders transportation contracts is two years.
Also with respect to Northern Border, in late August, in a private placement Northern Border issued 100 million of seven year senior notes at 6.24%. The proceeds along with 76 million of equity contribution from its partners and a draw on the short-term credit facility and working capital were used to repay 200 million of 7.75% senior notes due on September 1, 2009.
Following Northern Borders refinancings, ratings previously assigned by S&P and Moody's of A minus and A3 respectively were unchanged. The development projects covered earlier by Russ of the TransCanada level will bode well for new supply requiring transportations on our systems in the near and midterm, and with the 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. The potential to continue to grow the Partnership to further asset drop downs from our corporate sponsor, TransCanada remains, as Russ mentioned TransCanada is in the midst of executing its large capital program in both its pipeline and energy businesses.
To partially finance this growth, 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 the strategic interest in the asset.
That concludes my prepared remarks and I'd now like to turn the call over to Amy Leong for a more detailed discussion of our financial results.
Thanks, Mark. Net income for the third quarter of 2009 was 27.4 million or $0.65 per common unit, a decrease of $0.9 million compared to $28.3 million or $0.72 per common unit prior to recast for the same period last year. The decrease in net income prior to recast was primarily due to a lower contribution from Northern Border as a result of the gain on sale of Bison Pipeline LLC in third quarter of 2008 of which the Partnership share was $8.1 million.
Partially offsetting Northern Borders decrease is the contribution from North Baja, since the acquisition on July 1 of 2009. North Baja contributed 6.2 million to net income or $0.15 per common unit in Third Quarter 2009.
On July 1, 2009, the Partnership acquired North Baja from a wholly owned subsidiary of TransCanada Corporation. The acquisition was accounted for as a transaction between entities under common control, whereby the partnerships historic financial information has been recast to include North Baja's results from all periods presented.
The effects of recasting the partnerships consolidated financial statements to account for the common control transaction, increased the partnerships net income by approximately 4.7 million and 12.8 million for the three and nine months ended September 30, 2008 respectively, from amounts previously reported. In addition, the partnerships net income increased by approximately 8.3 million for the six months ended June 30, 2009, from amounts previously reported.
Partnership cash flows decreased $1.2 million or $40.1 million for third quarter 2009 compared to $41.6 million prior to recast for the same period last year. North Baja provided $8.5 million in cash flow from operating activities since the acquisition, which partially offsets the decreased cash distributions from Northern Border.
In the third quarter 2008, cash distributions from Northern Border included a special one-time distribution for the proceeds received in connection with the sale of Bison. I will now turn to a discussion on net income for each of our pipeline investments.
Equity income from Great Lakes increased $1.2 million to $13.2 million in third quarter of 2009 compared to $12 million for the same period last year. The increase in equity income was primarily due to increased transmission revenues, utilization of long term firm contracts, some of which are priced at lower rates than during the same period last year, decreased significantly in third quarter of 2009, compared to the same period last year.
However, this has had minimal impact on revenues. The sale of short-term services contributed to increased overall transmission revenues of 2.2 million in third quarter of 2009 compared to the same period last year. Equity income from Northern Border was $10.5 million in third quarter of 2009, a decrease of $9.4 million compared to $19.9 million for the same period last year.
The decrease in equity income was primarily due to the gain on sale of Bison in 2008 of which the partnerships share was $8.1 million. Excluding this gain, Northern Borders net income decreased $2.6 million compared to the same period last year due to decreased transmission revenues.
Northern Borders transmission revenues decreased due to reduced system utilization, as Mark had mentioned earlier, Northern Border continues to be impacted by increased supply competition and reduced overall demand for natural gas related to the current economic environment.
Net income prior to recast from other pipes, which includes results from North Baja and Tuscarora increased by $6.4 million or $10.3 million in third quarter 2009. This increase is primarily due to the acquisition of North Baja, which contributed $6.2 million to net income in the third quarter of 2009.
Tuscarora's net income of $4.1 million in the third quarter of ‘09 was comparable to the same period last year. Costs at the Partnership level decreased $0.9 million to $6.6 million in third quarter of ‘09 compared to the same period last year. This decrease is primarily due to decreased financial charges as a result of lower interest rates.
Our solid financial performance in the quarter and conservative coverage ratio continued to provide strong support for our cash distributions to unit holders. The Partnership paid $30.7 million or $0.73 per common unit of cash distributions to unit holders, and its general partner in the third quarter of ‘09.
By comparison, the Partnership generated cash flows of $40.4 million. In the third quarter of 2009, proceeds from equity issuances of $80 million including the general partners contribution to maintain its 2% interest were used to partially fund the acquisition of North Baja, the Partnership funded the balance of the acquisition cost with $170 million draw on its revolving credit facility and cash on hand.
During the third quarter 2009, the Partnership also made an equity contribution of $38 million to Northern Border to partially fund the repayment of its $200 million of debt, which matured on September 1, 2009.
At September 30, 09, the outstanding balance of the partnerships revolving credit facility was $203 million or $47 million available for future borrowings and the Partnership was in compliance with the covenants of the agreement. The interest rate incurred on the credit facility averaged 3.39% for the three months ended September 30, 2009 after accounting for hedging activity.
The Partnership views 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, growing distributions to unit holders and positioning for further growth opportunities.
This concludes my comments on the third quarter 2009 financial results. I'll now turn the call back to Terry.
Thanks, Amy. Now at this time we'll open the call to questions. Operator? If you could please go ahead.
Thank you, Mr. Hook. We'll now take questions from the telephone lines. (Operator Instructions).
Our first question is from [James Campbell from HITE]. Please go ahead.
A question about Great Lakes. How do we think about some of the forces that are impacting Great Lakes vis-à-vis what has happened to Northern Border? Are we going to see sort of the same pattern here as US gas just keeps flooding up into the Northeast?
It's a very interesting question that you pose and I think there's a number of dynamics that are at play here. First off, I’ll observe that what we seen happen in the supply and demand for gas in North America over the last year has been rather dramatic over the last year, between a lot of additional production coming on from the shale plays, a very cool summer, very high levels of storage has all conspired to have an impact on the gas price, a significant decline I think that we've all witnessed in the Summer.
The implications of that decline I think we've all seen manifest in a number of rigs being laid down, production cutbacks, shut ins occurring. For the time being, we're seeing a large chunk of that occurring in the WCSB.
On year-over-year basis, we have seen a 1.2 Bcf a day decline. Now I would observe and we've indicated this in the past that while you see a decline in WCSB export volumes, not all the pipes leaving the export are leaving the Basin share that equally or proportionately. We have seen that much of that impact has actually been felt by the Canadian mainline, as they’ve seen there are volumes flows reduced quite a bit. Indeed, we have seen less than we otherwise would have thought occur on Northern Border.
Now, all that being said, as we think about Great Lakes, while there is excess pipeline or take away capacity coming out of the basin, there is less of an incentive for shippers to renew contracts on a long term basis. They're probably more incented to keep their options open and more flow on a short-term basis.
In the event that that production does not rebound in the mid to long term, we would expect the trend to shorter term contracts to continue and we could very well see the profile of Great Lakes becoming more like the profile in Northern Border. Simplistically, it would translate into probably greater variability between high demand and low demand seasons through the course of the year.
All that being said, I would observe that Great Lakes remains a very cost competitive alternative for transportation of WCSB production into Eastern Canada and the US Northeast relative to many of the other options and as Russ had mentioned, we do see some bright spots on the horizon, as the very robust shale plays that you see developing in the US, we're also seeing develop in the WCSB.
So, as we look out over the next year or two or three in the 2011-2010 timeframe, we would expect to see increasing production. Net-net, the situation we're seeing with Great Lakes, we would expect initially to be short-term in nature. We are looking very carefully at how things are going to unfold here over the next year, and I think many of these economic factors will influence many of the shippers decisions as we go through 2010.
I think I'd just add to what Mark said. The interesting thing about Great Lakes is its position, you just take a look at a map and it's around the Great Lakes. The amount of market that exists around there and the storage that it's attached to, it's also attached to ANR and several other pipelines as well, it's well interconnected and it's a critical route to get gas sort of from the West side of the Great Lakes to the East side of the Great Lakes.
It is probably the most economic route to do that so it is well positioned to move gas in multiple directions at different times of the year in and out of storage. So it is very unique and well positioned pipelines for almost whatever sort of transpires in terms of growth and production in the South.
Moving out that gas has to get to the Northeast likely, a chunk of that gas has got to get to the Northeast. Great Lakes is a route or conduit for making that happen as well, so we continue to be very optimistic about the future of Great Lakes. Obviously, our business is constantly changing and we've got to be on top of it. We'll just move and be adaptable to however the market sort of sorts itself out here, but I guess my view is Great Lakes is well positioned going forward.
If you could give a little more color on TransCanada's decision to shorten up its contract with Great Lakes that maybe that's the way to think about it?
I guess what I would observe because of the significant volume decrease that TransCanada had witnessed on their system, they are regulated under Canadian regulatory regime, which does not expose them to any volume risk. So on an annual basis, they reset their rates relative to their overall revenue requirement.
They have recently come out indicating a significant increase in their rates for 2010 due to the reduced level of volumes and there's been a lot of press around the level of that increase being between the kind of 30-50% increase.
As a result, they felt it was important to address the cost components contained within their overall revenue requirement, a piece of that being the Great Lakes transportation that they had under contract and from that determined that it was prudent at this juncture to only renew 470 million a day of the 830 that was up for renewal.
I should point out that that does not come into effect until November 1 of 2010. We remain contract at the levels we are right now. It's just with the process we have in hand, there's rather a lengthy process for renewal and re-contracting that actually takes you out a year in advance before the contracts are up for renewal.
So net-net I think it was more just a focus on the cost side to try and manage their overall portfolio.
(Operator Instructions). There are no further questions at this time.
Great. Thanks very much. I'd like to thank all of you for taking the time today to listen into our call. I'd like to remind you that on November 19th, we'll be joining TransCanada in New York on their Investor Day. We appreciate your interest in TC Pipelines LP and look forward to talking to you soon. Bye for now.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
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