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TC Pipelines, LP (NYSE:TCP)

Q1 2012 Earnings Call

April 25, 2012 12:00 PM ET

Executives

Lee Evans – Manager, IR

Steven Becker – President and CEO

Sandra Ryan-Robinson – Principal Financial Officer and Controller

Stuart Kampel – VP and General Manager

Analysts

Jeremy Tonet – JP Morgan

Ted Heyn – PointState Capital

Ted Heyn – PointState

Operator

Good day, ladies and gentlemen. Welcome to the TC PipeLines, LP 2012 First Quarter Results.

I would now like to turn the meeting over to Mr. Lee Evans, Manager, Investor Relations. Please go ahead, Mr. Evans.

Lee Evans

Thank you, operator, and good day, everyone. I’d like to welcome you to TC PipeLines first quarter 2012 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 the remarks, which is available on our website at tcpipelineslp.com, where it can be found in the Investor section – Investor Center section, under the heading Events & Presentations.

Steve will begin today with a review of TC PipeLines’ first quarter results and provide an update on the various developments concerning the partnership. Sandra will then review – will then proceed to review in detail our financial results for the first quarter. Steve will then return and wrap up the partnership’s prepared remarks with some key takeaways. Following the prepared remarks, I will ask the conference operator to coordinate your questions.

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 2011 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.

With that, I’d now like to turn the call over to Steve.

Steven Becker

Thanks, Lee, and good day, everyone. If you can reference Slide 4 for the first quarter 2012 financial highlights. For the first quarter of 2012, TC PipeLines generated partnership cash flows of $50 million. During the quarter we paid out $42 million in cash distributions to our unitholders. The partnership’s assets performed reasonably well given the difficult market conditions of unusually warm winter, low gas prices and basis spreads and high storage levels. These conditions impacted Great Lakes results. The other assets in the portfolio continued to perform as expected due to long-term ship or pay contracts on each pipeline system.

Net income in the first quarter was $39 million compared to $42 million in the first quarter last year. The first quarter 2012 net income is equivalent to $0.71 per common unit. The partnership also announced yesterday its first quarter cash distribution in the amount of $0.77 per common unit. This marks the partnership’s 52nd consecutive quarterly distribution paid to our unitholders. The first quarter distribution is in line with our fourth quarter 2011 distribution and represents a 2.7% increase over the same period last year.

Turning to Slide 5, I’d now like to highlight a few of the partnerships business developments that occurred during the winter. Great Lakes volumes were lower in the first quarter compared to last year as its uncontracted capacity wasn’t utilized on a short-term basis to the extent we normally would have expected over the winter months, given all the different challenging market conditions.

Great Lakes was, however, able to re-contract substantially all of its summer capacity at lower rates than those achieved for the same period in 2011. As a result, we expect the Great Lakes net income in the second and third quarter will be down roughly $4 million to $6 million as compared to the same quarters in 2011.

Great Lakes presently is 22% contracted beyond October 2012 and as the summer unfolds, we remain optimistic that a significant amount of its capacity will be re-contracted. Ultimately, Great Lakes’ ability to sell its future available capacity will depend on a number of factors. Some of these factors are weather, levels of natural gas storage, the price of natural gas liquids and the associated impact to natural gas production in North America, and the outcome of TransCanada’s Mainline toll hearing.

Though the present market conditions creates some short-term uncertainty, we still believe in the strong market fundamentals that have typically supported Great Lakes, and as the current market conditions work themselves out, we anticipate the demand for transportation services on Great Lakes will return.

In regards to Northern Border, strong shipper interest continued for its transportation services despite the low gas price environment and overall weak basis spreads across North America. Northern Border remains substantially contracted for all of its capacity through March 2013. For Border’s contracts that recently came up for renewal in the first quarter, the majority of them were renewed for terms of three years or more, demonstrating the strong demand for its transportation services.

In terms of Tuscarora, in March, we received FERC approval on the settlement that was reached at the end of December, pertaining to the Section 5 rate case. The settlement will lower transmission revenues by approximately $6 million on an annual basis, as a result of a lower tariff rate. The tariff rate reduction is offset by a lower composite depreciation rate, which results in a decrease to net income of $3 million per year. As part of the settlement, Tuscarora was able to extend its contracts with its largest shipper for three years, which now means Tuscarora is fully contracted through to the end of 2019.

This concludes this section of my prepared remarks. I would now like to turn the call over to Sandra, who will discuss our first quarter financial results in more detail.

Sandra Ryan-Robinson

Thank you, Steve. My remarks follow the presentation material starting on Slide 7. Partnership cash flows increased $2 million to $50 million in the first quarter of 2012, compared to $48 million in the same period of 2011. This increase was primarily due to the addition of cash distributions from GTN and Bison but was offset by lower distributions from Great Lakes.

The partnership paid cash distributions of $42 million in the first quarter of 2012, an increase of $7 million compared to the same period in 2011, due to an increase in the number of units outstanding and an increase in the quarterly distribution of $0.02 per common unit paid, relative to the first quarter of 2011.

Turning to Slide 8. Partnership net income decreased $3 million to $39 million or $0.71 per common unit in the quarter, compared to $42 million or $0.90 per common unit in the same period in 2011. This decrease was primarily due to lower earnings from Great Lakes, but was partially offset by equity earnings from our ownership interests in GTN and Bison.

Equity income from Great Lakes was $9 million in the first quarter of 2012, down $9 million, compared to the first quarter of 2011. This decrease was due to lower transmission revenues, resulting from uncontracted long-haul capacity, unseasonal weather and high storage levels, which impacted our ability to sell this capacity on a short-term basis. Costs at the partnership level were $8 million in the first quarter of 2012, an increase of $1 million compared to $7 million in the first quarter of 2011. This increase was primarily due to higher financial charges resulting from higher average debt outstanding.

Slide 9, turning now to our liquidity and capital resources. As of March 31, 2012, there was $328 million on the partnership’s senior credit facility. The average interest rate on this facility was 1.6% for the three months ended March 31, 2012. Our conservative capital structure and investment grade credit ratings will allow us to take on additional leverage as we look to grow our asset base.

As always, we will continue to maintain a prudent approach to cash flow management, directing our free cash flow to maintaining appropriate debt levels and investing in ongoing operations. We believe that our financing activities in 2011 have positioned us well for our future growth opportunities.

That concludes my comments on the first quarter financial results. I’ll now turn the call back to Steve.

Steven Becker

Thanks, Sandra. I’d like to wrap up my remarks today by leaving everyone with some key takeaways for the quarter shown on Slide 10. The partnership’s first quarter results from five of our six pipelines in our portfolio were relatively consistent year-over-year and reflect their long-term contract status and recent regulatory settlements. Challenging market conditions did impact results from Great Lakes.

The partnership has a strong balance sheet, an ample amount of liquidity and is further supported by our investment grade credit ratings, which should help us weather the current market conditions impacting Great Lakes.

TransCanada Corporation is the General Partner, operates the assets on behalf of the partnership and owns approximately one-third of the partnership’s units. Asset sales from TransCanada to the partnership remain an option for them to finance their ongoing capital requirements. In addition, the partnership continues to evaluate third-party acquisitions.

With that, I’ll now turn the call back over to Lee.

Lee Evans

Thanks, Steve. I’d 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) There are no questions at this time, I would now like to turn the meeting back over to Mr. Evans. Oh, we do have a question just now. The question is from Jeremy Tonet from JP Morgan. Please go ahead.

Jeremy Tonet – JP Morgan

Hi, good afternoon.

Steven Becker

Hello, Jeremy.

Jeremy Tonet – JP Morgan

I was just curious if you could comment on any of the asset divestures that would be coming from Kinder Morgan, if any of those pipelines would be in interest for the partnership, if any of those could be could fit for what you guys have.

Steven Becker

Well, I think and trying to answer that, Jeremy, is we look at a variety of different acquisitions and at this stage, I can’t really answer your question because it’s – because of the different spots to where we are. So I’m afraid I can’t answer that directly. There are – usually, their assets that they have are in our sort of our deal space and we would be, as in all other cases of an auction, we would actually be looking at those types of assets. So I guess they – as a general comment, they’re attractive, but that’s about as much as I could say at this stage.

Jeremy Tonet – JP Morgan

Okay. Thank you.

Operator

(Operator Instructions) The next question is from Ted Heyn from PointState. Please go ahead.

Ted Heyn – PointState Capital

Good afternoon.

Steven Becker

Hi, Ted.

Ted Heyn – PointState

Quick question on Northern Border, you mentioned that you did see some re-contracting on that line for a term of around three years. Can you give us any flavor on where those contracts were struck out? Are they at a discount to what they were before, given the current environment or kind of how are people viewing your pipeline capacity in this market?

Stuart Kampel

Hi Ted, this is Stuart Kampel, I’ll field that question. Northern Border was able to sell those contracts on the western section coming from Canada down to the Ventura market point. So that – those contracts were sold at rates that reflect the firm maximum contract capacitor rates as approved by FERC on that section. Basically, what we’re seeing here is strong demand coming out of Canada down into the Midwest market for Northern Border’s capacity, and that kind of reflects Northern Border’s competitive situation relative to other pipeline options out of the WCSB. So I think that’s just sort of a normal reflection of the market’s view of the optionality and the relative value of Northern Border across the transportation spectrum into the Midwest.

Ted Heyn – PointState Capital

Okay. That’s helpful. And then in regards to the previous question about the Kinder Morgan assets. You mentioned that you saw – you thought those assets were attractive. How do you think about – if you can get into any color on that, about Rockies Express and the contract, the nature of it, and what you see kind of post those contracts rolling off. Is it still a useful pipeline and how will it serve the needs of people in the future?

Steven Becker

Well, I think if you look at, generally, the TC PipeLines operates in the natural gas pipelines space and FERC-regulated pipelines and we generally have a broad portfolio and tend to have longer term contracted pipelines. Great Lakes is the one where some of the contracts have expired, which creates some uncertainty when you have kind of the confluence of factors of the – such a warm winter.

When you then look and say, would our partnership be interested in other pipelines, there’s REX plus three other assets in the Rockies area, those, geographically, aren’t where we are, so they’re attractive from that point of view, and we’d have to look to see the assessment, so that – the question you’re asking of what would happen after the contracts is a very good one, and that’s what we’d be having to look at, and that’s where each of the bidders will have to decide how they get there. So I think at this stage, we’re – that’s about as much I could say. Thank you.

Ted Heyn – PointState Capital

Okay. Thanks so much. I appreciate it, guys.

Lee Evans

Thanks, Ted.

Operator

Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Evans.

Lee Evans

Well, thanks, everyone, for dialing in and for your participation here today. I’d like to (inaudible) we certainly appreciate your interest in TC PipeLines and we look forward to speaking to you again soon. Bye for now.

Operator

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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