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TC Pipelines, LP (NYSE:TCP)

Q4 2013 Earnings Call

February 7, 2014 11:00 AM ET

Executives

Rhonda Amundson - IR

Steve Becker - President and Director

Stuart Kampel - VP and GM

Sandra Ryan-Robinson - Controller and Principal Financial Officer

Analyst

Ted Durbin - Goldman Sachs

Tom Lamb - Weybosset Research & Management

Matt Niblack - HITE Hedge Asset Management

Mia Gordon - Sun News Network

Operator

Good day, ladies and gentlemen. Welcome to the TC PipeLines LP 2013 Fourth Quarter Results. I would 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’ fourth 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 & Presentations.

Steve will begin today with a review of TC PipeLines' fourth 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 fourth 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 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.

Steve Becker

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. The Partnership generated cash flows of 53 million in the fourth quarter, and net income of 41 million.

During the quarter we paid out 52 million in cash distributions to our unitholders. These results once again exemplify the value we receive from our GTN and Bison acquisitions last year together with the ongoing performance of our asset portfolio. The Partnership also announced its fourth quarter cash distribution in the amount of $0.81 per common unit, marking the 59th consecutive quarter of paying a distribution to our investors.

In November of 2013, the FERC approved Great Lakes’ rate case settlement with shippers which was effective November 1, 2013. I mean, that is another organic growth project as GTN executed firm transportation agreements with Portland General Electric regarding its Carty Lateral pipeline project which is expected to be in service in late 2015.

I’ll now turn the call over to Stuart to discuss some of our key asset developments.

Stuart Kampel

Thanks Steve and good morning everyone, moving to Slide 5 of the presentation. Here we outline our investment portfolio, which includes partial and full interests in six natural gas pipelines, serving key markets in the Western and Midwestern United States. On this map, we now highlight the location of the Carty Lateral, about midway along the GTN mainline in Oregon.

As Steve indicated, GTN executed firm transportation service agreements with Portland General Electric which paves the way for GTN to build $54 million Carty Lateral. The impact of this agreement is two-fold. First, Portland General Electric will hold the entire capacity of the Carty Lateral under a negotiated rate, ship-or-pay contract for a term of 30 years upon in-service. And second, Portland General also signed a 20 year contract for Firm Transportation Service on the GTN mainline, at GTN’s recourse rates commencing in 2016.

Therefore, this project further strengthens GTN’s market connections and when completed we’ll further enhance the Partnership’s portfolio of long-term contracted capacity.

Moving on to Slide 6, I will provide a brief discussion and update on our assets. In the fourth quarter, all of our assets meet or exceed our operating expectations during what is turning out to be a very cold winter. This highlights the value to our customers of signing long-term contracts where there are guaranteed capacity, when that capacity is in high demand. This value is further passed on to our investors through long-term capacity payments and our distributions.

On an asset specific basis, our GTN pipeline had a solid fourth quarter. Gas price spreads between Canada and California were again wide in the quarter. These spreads along with continued strong gas demands in California and the Pacific Northwest resulted in higher revenues through short-term capacity sales.

Moving Eastward, Northern Border’s long-haul capacity is now substantially contracted through June of 2015, slightly longer than we reported in the last quarter. Financial results in the quarter were higher than anticipated and reflect the weather conditions in the region where Northern Border was able to sale additional services to its customers.

Great Lakes performed as expected during the quarter and continues to serve its local utility customers and provide peak heating requirements, especially during the recent cold winter weather. As noted previously, this illustrates the critical nature of this infrastructure and the value to our customers of having this transportation option. I will remind you that Great Lakes’ rate settlement went into effect on November the 1st. The 21% increase in Great Lakes’ recourse rates will provide improved opportunities to realize better results as market conditions allow.

Our three other assets Bison, North Baja and Tuscarora performed as expect and once again contributed consistent results.

That concludes my prepared remarks. I will turn the call over to Sandra who will review our fourth quarter financial results.

Sandra Ryan-Robinson

Thank you, Stuart and good day everyone. My remarks will follow the presentation material starting on Slide 7. Partnership cash flows were $53 million in the fourth quarter of 2013. The $2 million increase from the same quarter in 2012 was primarily due to increased cash distributions from GTN and Bison, partially offset by lower cash distributions from Northern Border and Great Lakes. The Partnership paid cash distributions of $52 million in the fourth quarter, a $9 million increase compared to the same period in 2012 due to a $0.03 per common unit increase in the quarterly distribution together with the increase in outstanding common units resulting from our equity offering in May.

The Partnership’s net income attributable to controlling interest was $41 million or $0.63 per common unit in the fourth quarter.

Turning to Slide 8, all financial information for previous quarters presented has been recast for comparability according to GAAP. Given our 70% ownership interest in GTN and Bison, we also now reflect a net income for non-controlling and controlling interests.

Looking at our financial results, all of our pipelines performed in line with last year’s results and generally improved from those of third quarter of 2013. When compared to recast fourth quarter results in 2012, the Partnership’s net income attributable to controlling interests decreased by $3 million to $41 million.

The decrease was due primarily to higher financial charges during fourth quarter 2013. Financial charges increased by 3 million in the fourth quarter 2013 compared to the same quarter in 2012 due to interest charges on the $500 million term loan obtained to finance a portion of the purchase price of the acquisition of additional interests in GTN and Bison.

Moving now to our financial position on Slide 9, the Partnership’s liquidity position remains solid. As of December 31st, the Partnership had $120 million of undrawn and available borrowing capacity under its senior credit facility. The average interest rate on the facility was 1.43% for the quarter ended December 31, 2013. The Partnership will continue to maintain a prudent approach to managing its financial position. Our conservative capital structure at approximately 48% debt and our investment grade credit ratings reflect our solid financial condition and provide us with financial flexibility for future growth.

That concludes my remarks on the fourth quarter financial results. I’ll now turn the back to Steve.

Steve Becker

Thanks, Sandra. I’ll now refer to Slide 10. TransCanada is the owner of our General Partner and holds a 29% interest in the Partnership. TransCanada is a major infrastructure company with an enterprise value of approximately $60 billion and assets in three major business lines, natural gas pipelines, crude oil pipelines and 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 include 12 billion for a variety of small to medium sized projects across all of TransCanada’s business lines and 26 billion on large scale oil and natural gas projects.

The latter includes approximately 5.4 billion on Keystone XL, 12 billion on Energy East, a crude pipeline all across Canada and another 9 billion on natural gas pipelines to service potential Canadian West Coast LNG projects. These projects are underpinned by long-term contracts, across the service arrangements for major energy players and are in various stages of regulatory approval or construction.

Assuming approvals are obtained for these projects, TransCanada will require significant financing through to the end of the decade. And it’s important to note that management of TransCanada has stated that they expect to dropdown the remainder of their U.S. natural gas pipeline assets into our Partnership to assist in funding this substantial capital program. TC Pipelines remains an attractive source of capital for TransCanada and our 2013 acquisition of 45% of each of GTN and Bison pipelines reflects our value to TransCanada in this regard.

On Slide 11, I’d just like to conclude with some key takeaways. TC Pipelines is a portfolio of six natural gas pipelines. They deliver stable, long-term results through ship-or-pay contracts with investment grade counterparties. TransCanada owns our General Partner and holds 29% ownership in the Partnership, are engaged in a large capital program of 38 billion and TC Pipelines is well positioned to assist in financing this program through dropdowns from TransCanada.

And finally TC Pipelines’ investment metrics are solid. A consistent long-term track-record of making distributions, an attractive yield of approximately 7% 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.

Rhonda Amundson

Thanks Steve. I’d now like to open the call up for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question is from Ted Durbin from Goldman Sachs. Please go ahead.

Ted Durbin - Goldman Sachs

Thank you. Good morning. I just want to ask that you’ve been very explosive here around all of the U.S. assets coming down from TransCanada. I guess, can you give us a little of more sense of the timing there, should we think that’s sort of a pro rata approach as TransCanada needs capital through the end of the decade that they would then finance portions of that capital overtime through you or would there be sort of bigger chunk of your assets that might come down at a given time?

Steve Becker

Good morning Ted, this is Steve Becker. Yes, I think within the nature of the program there, the program does have several major lumps in it because of the size of the projects. So, we would expect that they would be doing this program over a series of years. And so where that gets us for the LP is that, we expect to be able to by getting the rest of the U.S. pipelines, we expect that allow us to double the size of TC Pipelines over the next five to six years.

And many of those assets that are in the portfolio that they plan to dropdown are very similar in terms of contract profile as we currently have. So, I think that the size and the timing sort of would appeal to someone who is a patient investor and who can say, gee I am getting a 7% yield and I’ll get this opportunity to see distributions grow as these dropdowns occur. They are a little bit lumpy in their timing, but if you have that four to five year portfolio, there is a tremendous number of excellent assets that would become part of the portfolio.

Ted Durbin - Goldman Sachs

Understood. And then just in terms of the assets themselves. How do you think about the multiple that TC Pipelines would be willing to pay for them, given there have been a few of the assets that have had some challenges, obviously A&R you’ve had some EBITDA declines there over the last few years. I guess I’m wondering how you’re thinking about the long-term outlook for some of the remained TRP assets?

Steve Becker

Well, actually none of them actually are very well situated and have long-term contracts. I think A&R has an opportunity to improve as gas is developed in the Marcellus and Utica, it’s now finding its way to further markets. And the challenge that they have as much as the utilization is great in the winter then that Marcellus and Utica gas needs a summer home and that tends to be on A&R going up into Great Lakes Area storage or down to industrial usage in Houston.

So we expect that A&R will improve results into the future. And so the actual timing of the dropdowns and the actual financial aspects and forecast will sort of dictate what the dropdown mathematics will be. And so, we’ll sort of take each asset as it comes at the time it is in the sequence of the dropdown.

Ted Durbin - Goldman Sachs

Understood. And then last one for me is just again a little macro, but thinking about the potential reversal of Rockies Express and how that might impact some of your assets, if at all?

Steve Becker

Well, I think that the reversal of the Rockies Express will allow Marcellus and Utica gas to get to further markets. And so, the REX pipeline has either connects with a number of pipelines including A&R and the A&R connect is just outside the City of Indianapolis. And so, that would allow more of that gas to flow again either north into storage or south to in air conditioning markets in the summer.

Sometimes the challenge that we get is people sort of feel that the market will go back to Chicago and that would be the major market that’s in Marcellus gas. Our Northern Border pipeline goes into the Chicago market, but the strength of Northern Border is that it has -- it’s probably one of the best pipelines in a relative competiveness out of Western Canada and it has associated gas that’s being developed with the Bakken crude oil formations.

And so that particular gas has oil economics, not liquid economics. And is therefore -- the gas is almost like a byproduct and is very competitive. They’re currently flaring a lot of the gas until they can build midstream infrastructure. So that those shippers would like to go on Northern Border and we feel that that gas because of its relative competitiveness, because of its associated gas nature, will be very competitive in the Chicago market.

There still will be challenges in the pricing sense, but we still think we’ll be very competitive compared to other pipelines. So, where we see the -- the summary is the REX reversal will head volumes onto A&R that may make it sway onto Great Lakes eventually and the Chicago volumes will be challenged but will be very competitive.

Ted Durbin - Goldman Sachs

Great. I appreciate it. That’s all my questions.

Steve Becker

Thank you.

Operator

Thank you. Your next question is from Tom Lamb from Weybosset Research. Please go ahead.

Tom Lamb - Weybosset Research & Management

If you could describe the Great Lakes rate settlement and how it may impact the performance of the pipeline over the next say months or years?

Stuart Kampel

Sure Tom, this is Stuart. I’ll answer that question for you. So, the Great Lakes basically with Great Lakes last year they went through a rate settlement process with its shippers and filed the application with FERC. FERC approved that near the end of the last quarter with rates going into effect on November 1, 2013. Basically what the settlement’s affords is an increase in Great Lakes’ recourse rate to the maximum allowable rate the Great Lakes can charge across each of its zones increasing by 21%.

So, what that means to Great Lakes is that with the improved rates and the higher rates as volumes ebb and flow on the system coming either out of the A&R system in Michigan as Steve was discussing possibly relative to Utica and Marcellus gas coming up into that market area or gas coming down from Canada off the TransCanada system to serve the Wisconsin, Minnesota and Michigan markets. What Great Lakes will have as a net effect will be an improved opportunity for increasing revenues when the volumes come available.

One of the key things that we noted in previous calls was that the market value in Michigan, particularly for Great Lakes, have exceeded Great Lakes’ capacity to, or ability to charge its full market value in that zone. So, with the 21% increase in the rates on the Great Lakes system, Great Lakes will have that opportunity now to have some slight improvement on the revenue side. The fundamental thing for Great Lakes here going forward is going to be on sort of the impacts of the winter that we’re currently experiencing right now. Storage levels have been drawn down quite dramatically in Ontario and Michigan and the broader U.S. market. What we have seen is improved flows from Michigan back into Wisconsin and Minnesota on the Great Lakes system, which is very positive for our utility customers in those areas as they continue to serve their utility loads. So, we have seen some opportunities for Great Lakes to pick-up some additional revenue also related with the higher rates, so it’s been a good news story here in the last few weeks on the Great Lakes system.

And then going into the summer months here, depending on how the rest of the winter unfolds here with the continue drawdown in storage and depending on how the weather goes, what we’ll see going into the summer months is some decisions by the utilities on their natural gas portfolio going into the next winter on how much storage they’re going to demand and how much pipeline capacity that they’ll be looking to take. Because as with the high prices that we’ve seen in system-wide across North America here lately, the value of having natural gas transportation in your portfolio is becoming more evident.

So net-net with the rate case on Great Lakes and kind of the weather that we’ve been having lately and the reutilization of the whole system as a whole, I think Great Lakes has got some good potential opportunity here.

Tom Lamb - Weybosset Research & Management

Terrific, thank you very much. I appreciate that.

Operator

Thank you. The next question is from Matt Niblack from HITE. Please go ahead.

Matt Niblack - HITE Hedge Asset Management

Thank you. Just a couple of questions on the dropdown, does this represent a change in tone from the TransCanada management to be little more and more aggressive or is this just in line with the sort of a overall plan that they’ve had all along? And then secondly I understand it’s going to be lumpy but do you have any specific guidance on the timing of the next dropdown?

Steve Becker

Well, on the first question I think some might describe it as that, because I think we’ve never actually said that we would drop all of the U.S. natural gas pipeline assets into the LP. And I think that the reason for that is just the size of the program and the nature of the financing and the more assuredness that a number of the projects are going ahead, would indicate that I think a few years back people might have related this all just to Keystone XL. And the Southern Lake has already gone into service, the other lake is sort of, and it’s publicly is very well known, it just had a final environmental impact statement.

But more importantly there is a variety of other projects that are there and coming on the horizon. And we expect those have very high chances of being approved and being expedited. So that when you then look and say what is the timing? I think what we’re trying to communicate is that the projects are coming and TransCanada has the choice of the timing. And so at this stage I can’t really give you anything further than to say that there is an expectation that those would go forward some of the signposts of some of these key assets you may be able to follow to get an indication of timing. But at this stage we don’t have any actual deals to announce.

And in terms of -- could you just repeat your second question again? Okay.

Matt Niblack - HITE Hedge Asset Management

The timing of the next dropdown and what I heard was that there is no deals to announce, it sounds like that will correspond with TransCanada moving forward on a next major capital project. So you’re saying watch that, it should correspond to that?

Steve Becker

Yes, that’s correct.

Matt Niblack - HITE Hedge Asset Management

Okay. Thank you, very helpful.

Steve Becker

Thank you.

Operator

Thank you. (Operator Instructions) And the next question is from Mia Gordon from Sun News Network. Please go ahead.

Mia Gordon - Sun News Network

Hi. So, I was just wondering what your thoughts were if it was premature impact perhaps irresponsible for the Pembina Institute to put out a report on the greenhouse gas emission output of the Energy East pipeline before an application for the project has even been sold out?

Steve Becker

Mia, thank you for your question, but I am only speaking on behalf of TC Pipelines, which owns U.S. pipeline assets. So, I think you’ll have to direct that to TransCanada that has the Energy East project and direct that on their call. So, I am not really authorized to speak on behalf of that.

Mia Gordon - Sun News Network

Okay. And then say would you at all be authorized to speak on what the government would like to see made in regards to environmental charities and the sort of political influences they have?

Steve Becker

No, I am not in that area. I think the TC Pipelines are natural gas and they’ve been operating for quite a while and so that’s in a different scope. And so again that’s directed to TransCanada’s call.

Mia Gordon - Sun News Network

Alright.

Steve Becker

I hear that’s on February 20th so you could perhaps look at that and for asking it at that level.

Mia Gordon - Sun News Network

Thank you.

Steve Becker

Thank you.

Operator

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

Rhonda Amundson

Thank you, operator and 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 has now ended. Please disconnect your lines at time. And thank you for your participation.

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