TC PipeLines LP's CEO Discusses Q1 2014 Results - Earnings Call

Apr.28.14 | About: TC PipeLines, (TCP)

TC PipeLines LP (NYSE:TCP)

Q1 2014 Results Earnings Conference Call

April 28, 2014 / 11:00 A.M. E.T.

Executives

Rhonda AmundsonIR

Steve BeckerChairman, President

Stuart KampelVP and General Manager

Analysts

Matt NiblakHITE Hedge Asset Management

Chris HaberlinAgincourt Capital Management

Shneur GershuniUBS

Operator

Good day, ladies and gentlemen, and welcome to the TC PipeLines, LP 2014 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 2014 conference call. I'm joined today by our President, Steve Becker; and our 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' first-quarter highlights and results. Stuart will then provide an update on the Partnership's assets, as well as a more detailed review of our financial results for the first quarter. Steve will return and wrap up our remarks with a brief discussion of our sponsor's 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 information currently available to us. The 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 2013 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.

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 reconciliation to the most closely related GAAP measure in our SEC filings.

With that, I will 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 a very good quarter. The Partnership generated cash flows of $60 million in the first quarter, and net income of $57 million. These results reflect the strong performance of our portfolio of pipeline assets. This year's very cold winter resulted in strong demand for our pipeline services, and highlights their importance and value to the North American economy.

During the quarter, we paid out $52 million in cash distributions to our unitholders. The Partnership also announced its first-quarter cash distribution in the amount of $0.81 per common unit, marking the 60th consecutive quarter paying a distribution to our investors.

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

Stuart Kampel

Thank you, Steve, and good morning, everyone. Referring to slide 5, I will provide a brief discussion and update on our assets. In the first quarter, all of our assets met our operating expectations during what was a very long and very cold winter. The value to our customers of signing long-term contracts was highlighted this winter, with the capacity that they paid for on a long-term basis is highly utilized during periods of high demand. The value of these long-term contracts is ultimately passed on to our investors in the form of stable, long-term distributions.

On an asset-specific basis, Northern Border's financial results were higher than anticipated, and reflected the weather conditions in the region, where Northern Border was able to sell additional short-term services to its customers. As we highlighted previously, Northern Border's long-haul capacity is substantially contracted through June of 2015, with a number of contracts extending through to the end of the decade.

Great Lakes performed well during the quarter, and continued to serve its customers with uninterrupted critical service, so that they, in turn, could meet their peak heating requirements. This was exemplified when temperatures in January hit record lows, and when US natural gas demand hit a peak of 123 Bcf per day, almost twice the annual average. During the quarter, Great Lakes was able to sell daily and short-term capacity across its system. Furthermore, and as we have discussed in previous calls, the higher rates on Great Lakes' system meant that Great Lakes was able to achieve higher revenues on those high gas demand days than previously would have been the case.

Our other assets – GTN, Bison, North Baja, and Tuscarora – performed as expected, and once again contributed consistent results. Storage inventories across North America exited the withdrawal season well below recent years' levels. Over the coming months, and as storage inventories are rebuilt, we may see varying utilization on our pipeline systems. The variation will be driven by relative regional gas prices across the continent, demand for power generation during the summer months, contract levels on other pipelines, and changes in natural gas production.

However, due to the highly contracted status on the majority of our pipelines, we do not expect to see significant variation in financial results from seasonal patterns in previous years.

Moving to slide 6, I will review the Partnership's first-quarter 2014 results. Partnership cash flows were $60 million in the first quarter of 2014. The $17 million increase from the same quarter in 2013 was primarily due to increased distributions for GTN and Bison as a result of the 2013 acquisition. The Partnership paid distributions of $52 million in the first quarter, a $9 million increase compared to the same period in 2013, due to a $0.03 per common unit increase in the distribution, together with an increase in outstanding common units resulting from our equity offering in May of 2013.

The Partnership's net income attributable to controlling interests was $57 million, or $0.90 per common unit in the first quarter. As mentioned, the increase was primarily due to higher equity earnings from Northern Border and Great Lakes, as a result of increased short-term services sold during the coldest periods of the winter.

Turning to slide 7, I will first remind you that all our financial information for previous quarters presented has been recast to reflect of the consolidation of GTN and Bison, which allows for comparability according to Generally Accepted Accounting Principles. Looking at our financial results, revenues from our consolidated pipelines were comparable to last year. The major driver this quarter for the $14 million increase in net income was the higher equity earnings from Northern Border and Great Lakes. Those higher earnings were partially offset by higher financial charges, which increased by $3 million in Q1 2014 compared to the same quarter in 2013, due to interest charges on the $500 million term loan obtained to partially finance the acquisition of the additional interests in GTN and Bison.

Moving now to our financial position shown on slide 8, the Partnership's liquidity position remains solid. As of March 31, the Partnership had $130 million of undrawn and available borrowing capacity under its senior credit facility. The average interest rate on the facility was 1.42% in the quarter. The Partnership continues to maintain a prudent approach to managing its financial position. Our conservative capital structure, at approximately 47% debt, along with our investment grade credit ratings, reflects our solid financial condition, which provides us with financial flexibility for future growth.

That concludes my remarks on the first-quarter financial results. I will now turn the call back over to Steve.

Steve Becker

Thanks, Stuart. I will now refer to slide 9. 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, 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 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.

As these projects proceed, TransCanada will require significant financing. Management at TransCanada has stated that they expect to drop down the remainder of their US 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.

Moving on to slide 10, I'd like to conclude with some key takeaways. TC PipeLines has a strong asset portfolio, delivering stable, long-term results. Unitholders benefit from our strong relationship with TransCanada, particularly as they progress through their capital program. And, finally, TC PipeLines has demonstrated a consistent track record of solid performance since our inception in 1999.

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

Rhonda Amundson

Thanks, Steve. I would now like to open the call up for 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 Derek Walker from Merrill Lynch Bank of America. Please go ahead. Mr. Walker, your line is now open. (Operator Instructions). Having no response, we will proceed through the next question. The next question is from Matt Niblack from HITE. Please go ahead.

Matt Niblak – HITE

Congratulations on the strong quarter. I think, like a lot of folks on the line, we're very curious about the outlook for these dropdowns you're talking more aggressively about since last quarter. Could you provide any color on the timing, and whether you expect that they will coincide with an increase in your distribution growth rate, or just a building of coverage? What further color can you provide us there?

Steve Becker

Well, I think, Matt, I think our – thank you for commenting on our strong quarter. I think in terms of the dropdowns, TransCanada expects to drop the remainder of the US assets over the next 3 to 4 years. So in terms of timing, there's an opportunity to double the size of the Partnership in terms of assets. Judging from our past track record, most of those transactions have been accretive in nature, so it gives an opportunity to increase the distribution. But the size and the timing is usually – increasing the distribution is usually done looking at the longer-term portfolio, the longer-term nature of our business, and the long-term outlook and the mix of the whole portfolio.

So I think where we are right now is, in spite of the Keystone XL changes that have happened during the past quarter, there's still a substantial program of over $33 billion of the $38 billion still planned to go ahead. And in conjunction with that, we expect to see dropdowns over the next few years, and substantial growth in the size and mix of our portfolio.

Matt Niblak – HITE

Okay. Is it safe to say that the distribution in the course of that should accelerate to some number greater than a 4% annual increase?

Steve Becker

I'm not sure that I can really state that at this time. I think that what we've done is grown a partnership from 1999 until now, and we've had a track record of being able to deliver a return of 6.5% to 7%, and a 3% to 4% distribution growth. And that tends to be – we stand on our track record. There may be an opportunity to do better, but at this stage we'll just have to wait and see what happens.

Matt Niblak – HITE

Okay. And any thought on when – how soon we could see the first dropdown? It's a good load of assets, so – over the next couple of years?

Steve Becker

Well, what's happened is, we – I think as we start to move into the program, there's a higher cash need. So there is an expectation that we'll see some, but we don't really give guidance as to which quarter they're coming up. And so that's a little bit more open-ended at this time. What we do we expect, if you talk about it in the next few years, that we will see some dropdowns in that next timeframe.

Matt Niblak – HITE

Okay. Thank you.

Operator

Thank you. (Operator Instructions). The next question is from Chris Haberlin from Agincourt Capital. Please go ahead.

Chris Haberlin – Agincourt Capital Management

Hi. Thanks for taking my call. I just wanted to see if you could give us any color around your financing plans for the dropdowns, as they come from TransCanada.

Steve Becker

Well, I think that in terms of the actual financing plans, it depends somewhat on the size of the transaction. So, at this stage, I think TransCanada stated that they prefer to raise capital, as opposed to take back a number of units. And so, then, as we go forward, depending on the size of the transaction, we would finance it with a mixture of debt and equity. Our intent would be to have a debt level that allows us to maintain our investment grade credit ratings. And so from that, you can back into the equity amounts that we would likely raise.

And so we expect to be doing a relatively large-sized transaction, somewhat like the one we did last year, but in that order of magnitude, as opposed to a major drop of all the assets at once with the taking back units, as the contrast. So, just to summarize, reasonable-sized transactions; a mixture of debt and equity; and intend to keep going with our investment grade debt credit rating.

Chris Haberlin – Agincourt Capital Management

And given the size of the transactions, would you be looking to finance the debt portion of those using your existing credit facilities? Or would you expect to have to tap the bond markets here over the next – whether it's the next year, two years, three years?

Steve Becker

The size of the transactions is larger than our credit facility, so we would expect to be going to the bond market. And that could be either in a public debt holding or in a bank lender facility, and we have those options open to us. But we would expect to be raising fairly substantial amounts of debt in the credit market in the next coming years.

Chris Haberlin – Agincourt Capital Management

And then just the last question, and just want to see if you can give me any color around here. You still have a couple assets where TransCanada holds an equity interest in them or a controlling interest in them. Do you know the cadence of the asset dropdowns? Would they get you to 100% ownership on your existing assets before dropping any new assets down? Or is their preference to drop new assets and continue to hold interest in some of the existing assets?

Steve Becker

That's an excellent question. And I think TransCanada, in looking at the portfolio, the tendency has been to continue to drop in a series of assets. And so with the GTN and Bison ownership being up at the level it is, it's likely that would be the next stage. But there could be of mix of assets, depending on the nature of the transactions.

The other assets that would be then added after that are the remaining interest in Great Lakes. ANR is by far the biggest of the transactions. And then there's ownership interests in the Iroquois Pipeline that goes into New York City, and the Portland Pipeline that goes into New England.

So there's quite a portfolio to pick from, and there's no real requirement to do in one order or the other. But our past practice has been – pick a couple, and work all the way through until you get to 100%.

Chris Haberlin – Agincourt Capital Management

Okay. And then just last question, can you give any color around Keystone? Will that eventually be something that would potentially be dropped down to you all? Or is that something that TransCanada wants to maintain full ownership of?

Steve Becker

Well, I think in terms of that possibility, they have so many strong, good, solid natural gas assets that would fit into the portfolio, that those are the ones that will be worked on over the next 3 to 4 years. And so that's a decision that would be made probably in a 4- or 5-year time frame, so it's pretty hard to speculate what their intent is. They would prefer just to keep all of their options open, at this time.

Chris Haberlin – Agincourt Capital Management

Okay. So it's all natural-gas-focused, over the next 3 to 4 years?

Steve Becker

Yes, that's right.

Chris Haberlin – Agincourt Capital Management

Thanks very much for taking my questions.

Operator

Thank you. The next question is from Shneur Gershuni from UBS. Please go ahead.

Shneur Gershuni – UBS

Hi. Good morning, guys. Just a couple of follow-up questions, and not to beat a dead horse with dropdowns. Given the fact that a sizable portion of TRP's projects are going to be in Canadian dollars, and the drops raise US dollars, is it fair to assume that this wouldn't be an impediment to anything that TRP wants to do, versus trying to fund US projects with US dollars, and vice versa?

Steve Becker

No, I don't think that's an impediment at all. I think just the size of the program is so large that TransCanada would prefer to go into a variety of markets. And so this gives them a broader breadth of markets to go in, in addition to that Canadian assets.

And then in terms of financing Canadian assets with US dollars, or that mix, it's done in a broader portfolio, and there's ability to do some foreign exchange hedging, if required, to balance that out. But within the breadth of the program and the size, I think that's not a difficulty at all, to be financing in US dollars, including raising money from dropdowns.

Shneur Gershuni – UBS

So, just to paraphrase your first comment, if basically the US market offers more liquidity, so that's something that would be attractive also, just as an opportunity – a way to tap that?

Steve Becker

Yes, that's right. Just within the size of issuing this amount in a Canadian market is a very large amount in that Canadian market. And so the US market adds added depth and liquidity, and so TransCanada would be balancing both, and looking for the lowest-cost financing it could obtain across the whole spectrum. And I think that's the pattern that they've had for a number of years. I think they've been doing it that way for the last 20 years, operated in that fashion. So I don't see any need to change.

Shneur Gershuni – UBS

Okay. And if we can just talk about ANR for a second. You just brought that up in the last response. There is certainly a lot of talk about reversing pipelines, and so forth. I think it has been mentioned in the past; there has been some active discussions and so forth. Do you have some sort of an update as to how we should be thinking about the opportunity, and how you are competitively positioned against some of the other companies that are talking about starting to move gas from north to south?

Steve Becker

Yes. ANR, in a TransCanada press release within the last month and a half, recently signed contracts for 2 billion cubic feet a day, for an average term of 23 years. And that was individual companies that had large positions in Marcellus Utica area and wanted to ship gas south to the Gulf Coast and north into the Midwest market, in Chicago and Michigan and Wisconsin, and also have availability for storage in the summer.

So the ANR system, on the Southeast leg, is now fully contracted, and will be capable of flowing gas both north and south. And the Southwest leg is very well contracted, and so the bulk of the system is – the market zone is in Michigan, and the Chicago area, and Wisconsin. And so that's a very strong market zone in terms of just natural footprint of the pipeline. So it's an excellent asset. And I think that its overall contract mix, particularly with this new mix of contracts, will be very suitable for the TC PipeLines strategy and long-term contract portfolio approach.

Shneur Gershuni – UBS

Okay. And one final question, if I may. Given the type of quarter that we just had – and I, granted, weather was clearly a part of it – but it shows some of the weakness in the overall system, and so forth. While I recognize you don't have any major contract issues at this point right now, but do you feel that rates, if you were to mark-to-market today versus marking-to-market, let's say, a quarter ago, would have improved and there's more interest in firm capacity on a go-forward basis? Just wondering If you could give a little bit of market color and dynamics. That would be great.

Stuart Kampel

Sure. Shneur, This is Stuart. I'll take a shot at that question here for you. I think basically what we're seeing here is a rebound out of this winter. And it was a very interesting winter, is the term I guess I can use for this one, given the severity of the cold and the duration of the cold. I think a lot of market players were reacting in various ways. I think what we ultimately saw here was the robustness of the natural gas delivery system. So I think all the markets were served to meet those peak days.

I think pricing changed in respect to the market conditions. I think on a going-forward basis here, I think we're seeing a little bit more interest by utilities, LDCs, and some of those kind of players, to firm up for long-term transportation on pipelines to ensure that their demand-centered load on their systems is satisfied. So we have seen some reaction that way. I think there's a lot of wait-and-see attitude here with respect to future gas pricing. So even though that we came through the winter here and ended up with storage levels quite below the five-year average, and very empty in certain regions, there's still some confusion, I think, in the market here about forward pricing, and how storage plays into that forward pricing.

So I think that needs to be worked out here over the next few months. And I think we'll start seeing some reaction here, over the summer months, with different market players stepping up. So I think it's kind of early to say, at least for our pipelines – particularly the Great Lakes – about what's going to happen, going forward here. So, I think a lot of it's going to really depend on the summer weather that we're going to see, the power generation load that we see across the system, how natural gas competes with coal on the margin here over the next few months, and what the prospects are for gas production here at the end of the year.

So I think there's a number of variables that are in play here, so it's really hard to actually draw a line of sight to what's going to happen on capacity on various pipelines, including our own. So it will be an interesting summer. And I think, in the next quarter, we'll probably have more to say as we start moving through it.

Shneur Gershuni – UBS

Cool. Thank you very much, guys. Really appreciate it.

Operator

Thank you. We have a follow-up from Matt Niblak from HITE. Please go ahead.

Matt Niblak – HITE

My questions actually were answered. Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn it back 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 with you again soon. Thank you.

Operator

Thank you. The conference call has now ended, and please disconnect your lines at this time. We thank you for your participation.

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TC PipeLines (TCP): Q1 EPS of $0.90 beats by $0.30.