TC PipeLines, LP (NYSE:TCP)
Q3 2013 Earnings Conference Call
October 25, 2013 11:00 AM ET
Rhonda Amundson - IR
Steven Becker - President
Stuart Kampel - VP and General Manager
Sandra Ryan-Robinson - Controller and Principal Financial Officer,
All participants please standby, your conference call is ready to begin. Good day, ladies and gentlemen. Welcome to the TC PipeLines LP 2013 Third Quarter Results. I would now like to turn the meeting over to Ms. Rhonda Amundson. Please go ahead.
Thank you, operator, and good morning, everyone. I would like to welcome you to TC PipeLines third quarter 2013 conference call. I'm joined today by our President, Steve Becker; Principal Financial Officer, Sandra Ryan-Robinson; and Vice President and General Manager, Stuart Kampel. Please note that a slide presentation will accompany their remarks and is available on our website at tcpipelineslp.com, where it can be found in the Investor Center section under the heading Events and Presentations.
Steve will begin today with a review of TC PipeLines' third quarter highlights and results. Stuart will then provide an update on the Partnership's assets, and Sandra will follow with a more detailed review of our financial results for the third quarter. Steve will return and wrap up our remarks with a brief discussion of our sponsors’ 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 and the 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 2012 10-K, as well as our subsequent filings with the Securities and Exchange Commission. If one or more of these risks and uncertainties materialize or if the underlying assumptions prove incorrect, actual results may differ materially from those described in the forward-looking statements.
Please also note that we use the non-GAAP financial measure partnership cash flows during our presentation to provide a measure of the cash generated during the period to evaluate our cash distribution capability. This is provided as a supplement to GAAP financial results and we provide a reconciliation to the most closely related GAAP measure in our SEC filings.
With that, I'll now turn the call over to Steve.
Thanks Rhonda. Good morning everyone and thanks for joining us today. As outlined this morning in our news release and shown on slide number 4, TC PipeLines had another solid quarter. First, we closed the acquisition of an additional 45% in each of GTN and Bison pipelines effective July 1st. From this expanded asset base, Partnership generated cash flows of $58 million in the third quarter, and net income attributable to controlling interest of $37 million.
During the quarter we paid our $52 million in cash distributions to our unitholders, which translates to a distribution coverage of approximately 1.1 times. Partnership also today announced the third quarter cash distribution in the amount of $0.81 per common unit.
I will now turn the call over to Stuart, to discuss some of our key [asset] developments.
Thank you very much Steve and good morning everyone. Moving on to slide 5 of the slide presentation. Here, we outline our investment portfolio, which includes partial and full interest in six natural gas pipelines, serving the key markets in the Western and Midwestern United States. The percentage ownerships shown on the slide include the increased ownership interest in each of the GTN and Bison pipelines, where they are now at 70% ownership.
Moving on to slide 6, I will provide a brief update on our assets. Northern Border continued to show strong performance. As reported last quarter, Northern Border’s long haul capacity is substantially contracted through March of 2015. Market spreads between Chicago and Alberta have continued to be strong, and the pipeline has had recent success with higher sales on its Chicago segment.
In addition, there has been continued growth out of the Bakken basin, resulting in flows on Northern Border. This strong supply was evident during a planned outage of a very [northerly] segment of Northern Border, earlier this month. Despite a full curtailment of flows from Canada, Northern Border was able to flow almost 1 BCF per day during this outage. That gas came from the Bakken Region, as well as to flows on our Bison pipeline. This provides an excellent example of the robust nature of Northern Border supply position.
Strong volume flows and contracted sales have slightly offset the expected reduction in revenues related to the rate settlements, which went into effect on January 1 of this year. So the impact of these two factors resulted in very positive financial results in the third quarter.
In the West, the GTN pipeline also had a solid third quarter. Cash price spreads between Canada and California were wider in the quarter. These spreads, along with continued strong gas demand within California, resulted in higher revenues through short term capacity sales. Our other three assets, Bison, North Baja and Tuscarora performed as expected, and once again contributed consistent results.
With respect to our Great Lakes asset on slide 7, as we have outlined on previous quarterly calls, Great Lakes continued to operate as a regional storage focus pipeline, supporting primarily the short term, short haul contracts for gas moving both westwards and eastwards on its system. Results in the third quarter were lower than second quarter results, by approximately $2 million. Capacity sales and volume flows during the quarter, were impacted by slower than normal summer storage [resale], with revenues lower than expected.
Additionally, TransCanada’s mainline rates continue to exhibit variability, largely related to it’s market based short term and interruptible rates, which resulted in continued uncertainty and a lack of clarity for Great Lakes shippers.
Of significant importance, Great Lakes reached a rate settlement with the shippers, which, when approved by (inaudible), will go into effect on November 1. Settlement will allow Great Lakes to increase its recourse rates by 21%. There will be a 17-month moratorium through March 31, 2015, during which time, Great Lakes cannot seek further changes to its rates. Great Lakes will be required to file for new rates by January 1, 2018.
The financial impact in this settlement is not certain at this point, as revenues will continue to depend on broader market factors, which will affect future flows and capacity sales. However, with the higher rates, Great Lakes will have an improved opportunity to realize better results, when market conditions allow.
That concludes my prepared remarks. I will now turn the call over to Sandra, who will review our third quarter financial results in more detail.
Thank you, Stuart, and good day everyone. My remarks follow the presentation material starting on slide 8. As Steve mentioned earlier, we increased our ownership interest in each of GTN and Bison this quarter to 70% from our previous ownership interest of 25%. We have therefore consolidated the results of both pipelines in our third quarter financial statements. In addition, 2012 results were recasted to allow for comparability.
We now consolidate four of our pipelines, GTN, Bison, Tuscarora and North Baja. We continue to account for both Great Lakes and Northern Border on an equity basis. Partnership cash flows were $58 million in the third quarter of 2013. The $10 million increase from the same quarter in 2012 was primarily due to increased cash distributions from GTN and Bison beginning in the third quarter, as a result of our larger ownership interest in each pipeline.
The increase was partially offset by lower cash distribution from Great Lakes compared to the same quarter in 2012. The Partnership paid cash distributions of $52 million in the third quarter, a $9 million increase compared to the same period in 2012. This is due to a $0.03 per common unit increase in the quarterly distribution, along with an increase in the outstanding common units resulting from our equity offering in May. The Partnership’s net income attributable to controlling interest was $37 million or $0.58 per common unit in the third quarter.
Turning to slide 9, as mentioned, all financial information for previous periods presented has been recasted for comparability, according to Generally Accepted Accounting Principles. Given our 70% ownership interest in GTN and Bison, we now reflect a net income for non-controlling and controlling interest.
Looking at our financial results, with the exception of Great Lakes, all of our pipelines performed in line with last year’s results. When compared to the recasted results of 2012, the Partnership’s net income attributable to controlling interest decreased by $11 million to $37 million in the third quarter. The decrease was due primarily to lower equity earnings from Great Lakes and increased Partnership expenses, slightly offset by higher earnings at GTN.
Great Lakes had an equity loss of $2 million during the third quarter. The $8 million quarter-over-quarter decrease is largely due to capacity being sold at lower rates and volumes, than in the comparable quarter of 2012. When compared to the second quarter however, equity earnings at Great Lakes were $2 million lower.
Partnership expenses increased by $3 million in Q3 of 2013 compared to Q2 of 2012, due to interest charges on the new $500 million term loan obtained to finance the acquisition of the additional interest in GTN and Bison.
Moving now to our financial position on slide 10, the Partnership’s liquidity position remains solid. As of September 30, the Partnership had $150 million of undrawn and available borrowing capacity under its senior credit facility. The average interest rates on this facility was 1.44% for the quarter September 30, 2013. The Partnership will continue to maintain a prudent approach to managing its financial position. Our conservative capital structure at approximately 45% debt, and our investment grade credit ratings reflect our solid financial condition and provide us with financial flexibility for future growth.
That concludes my prepared remarks on the third quarter financial results. I will now turn the call back over to Steve.
Thanks Sandra. I will now refer to slide 11. TransCanada is the owner of TC PipeLines GP and owns 29% of the Partnership’s common units. TransCanada is a major infrastructure company, with an enterprise value of approximately $58 billion. [Its assets] are three major business lines; natural gas pipelines, crude oil pipelines, and energy or power generation.
TransCanada is currently engaged in a major capital program, having commercially secured $38 billion in a variety of major projects, expected to be completed by the end of the decade. These projects are underpinned by long term contracts or cost of service arrangements from major energy players, and are in various stages of regulatory approval or construction. Projects are across all lines of business, with $13 billion in natural gas pipelines, $23 billion in crude oil and $2 billion in power projects. These numbers include the recently announced $12 billion Energy East oil pipeline project in Canada.
Clearly, assuming approvals are obtained for these projects, TransCanada is expected to require a significant level of financing through to the end of the decade. TC PipeLines is an attractive source of capital for TransCanada. Our recent acquisition of 45% of each of GTN and Bison pipelines this quarter was part of TransCanada’s finance plans.
And moving on to slide 12, I’d like to conclude with some key takeaways; TC PipeLines has a portfolio of six natural gas pipelines. They deliver stable long term results to shipper pay contracts with investment grade counterparties.
TransCanada owns the General Partner and 29% of the Partnership’s common units. They’re currently engaged in a large capital program with $38 billion of commercially secured projects. TC PipeLines is well positioned to assist in this financing, this program, through dropdowns from TransCanada.
Finally, TC PipeLines’ investment metrics are solid. A consistent, long term track record of making distributions and attractive yields of approximately 6.4% and a 4% compound annual growth rate in distributions since our inception back in 1999.
With that, I will now turn the call back over to Rhonda.
Thanks Steve. I’d like to open the call up for questions. Operator, please go ahead.
Thank you, Ms. Amundson. Questions will now be taken from the telephone lines. (Operator Instructions). There are no questions registered on the telephone lines at this time.
Okay. 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.
Thank you. The conference call has now ended. Please disconnect your lines at this time. Thank you for your participation.
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