TC PipeLines' CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: TC PipeLines, (TCP)

TC PipeLines, LP. (NYSE:TCP)

Q2 2012 Earnings Call

July 25, 2012 11:00 am ET


Lee Evans - Manager, IR

Steve Becker - President

Sandra Ryan-Robinson - Principal Financial Officer

Stuart Kampel - VP and GM


Ted Durbin - Goldman Sachs

John Tysseland - Citigroup

Winfried Fruehauf - W. Fruehauf Consultants


Good day, ladies and gentlemen, and welcome to the TC PipeLines, LP 2012 Second 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 second 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, 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 second quarter results and provide an update on the various developments concerning the partnership. Sandra 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’ll now turn the call over to Steve.

Steve Becker

Good morning, everyone. As highlighted in our press release this morning, I'm pleased to announce that TC PipeLines has increased its quarterly cash distribution by $0.01 to $0.78 per common unit payable on August 14, 2012. this represents a 1.3% increase compared to both the first quarter 2012 and second quarter 2011 distribution of $0.77 per common unit. This marks the Partnership's 53 consecutive quarterly distribution and also the 13th consecutive year since our inception back in 1999 that we've raised distribution at least once annually. The increase in the quarterly cash distribution reflects our conservative investment approach and the benefit of the Partnership's overall portfolio of essential energy infrastructure.

Turning to our second quarter financial results, the Partnership generated cash flows of $52 million in the second quarter, an increase of $4 million compared to the second quarter of 2011. During the quarter we paid over $42 million in cash distributions to our unitholders.

The high storage levels and low natural gas prices impacted Great Lakes transmission revenues during the quarter. The acquisition of interest in both GTN and Bison in 2011 has continued to help diversify the Partnership's earnings and cash flow which is very transparent in our results this quarter.

Net income in the second quarter was $33 million compared to $36 million in the second quarter last year. The second quarter 2012 net income is equivalent to $0.60 per common unit.

I'd now like to take a few moments to highlight some of our Partnership's business developments that occurred during the quarter. These are shown on slide six.

Great Lakes volumes were down in the second quarter compared to last year. With long haul summer capacity being fully contracted in the quarter at a lower rate versus last year the high storage levels in Michigan and Eastern Canada has meant there has been less need to utilize Great Lakes contracted capacity. Great Lakes remained substantially contracted through the rest of the summer and through the end of October albeit at rates lower than last year. As we look forward to our third quarter results, we anticipate the Great Lakes net income will be down roughly the same amount as it was in the second quarter when you compare it to the corresponding quarter in 2011.

Looking out beyond October 2012, Great Lakes remained 22% contracted. As we’ve highlighted before, Great Lakes ability to sell it’s future available capacity will depend on a number of factors which include the weather, levels of natural gas storage, price of natural gas liquids, and the associated impact to natural gas production in North America, and as well the outcome of TransCanada’s mainline toll bearing.

Still believe that Great Lakes is fundamental to the market that it serves. Great Lakes has traditionally being a storage refill pipeline in the summer and a peak, which are demand pipeline and believe that it will serve this need in the future. We anticipate that the demand for transportation services on Great Lakes will return once the current market conditions correct itself.

In terms of Northern Border, it had another excellent quarter. While the second quarter is typically a shoulder season Northern Border it operated at full capacity. As the pipeline has been running full out for quick sometime, we anticipate we will need to perform some maintenance activities in the second half of the year. Northern Border remains substantially contracted for all of its capacity through March 2013, and continues to experience strong demand for transportation services. For Border’s contracts that recently came up the renewal in the last quarter, the majority of which were renewed for terms of three years or longer resulting in Border now being approximately 67% sold through to the end of 2014.

As a part of normal course business similar to all regulated pipeline assets, Border is required to file a rate case at the end of 2012 as its current settlement expires at the end of the year. Despite the normal course of these rates, the typical path is to try and reach a settlement with shippers to reach a mutually agreeable outcome for mitigating the expense in time and proceeding through a full rate case. As you will recall, with our GTN and Tuscarora assets, our preferred group would be to reach a settlement with our shippers rather than having to proceed through a full rate case with the FERC.

In terms of our other four pipeline assets, GTN, Bison, Tuscarora, and North Baja, all operate under the long-term ship or pay contracts and as such performed as expected in the second quarter and delivered the solid and consistent cash flows that we expected.

That concludes this session of my prepared remarks. I would now like to turn the call over to Sandra who will review with you our second quarter financial results in more detail.

Sandra Ryan-Robinson

Thank you, Steve. My remarks follow the presentation note starting on slide seven. Partnership cash flows continue to provide strong support for our cash distribution to unit holders. Cash flow increased to $52 million in the second quarter of 2012 compared to $48 million in the same period of 2011. The $4 million increase was primarily due to the cash distributions from GTN and Bison, but was partially offset by lower distributions from Great Lakes.

The Partnership paid cash distributions of $42 million in the second 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 beginning in the third quarter of 2011.

Turning to slide eight, the Partnership’s net income increased by $3 million to $33 million or $0.60 per common unit in the quarter compared to $36 million or $0.69 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 first quarter of equity earnings from GTN and Bison and lower Partnership expenses.

Equity income from Great Lakes was $8 million in the second quarter of 2012, down $9 million compared to the second quarter of 2011. This decrease was primarily due to $7 million in lower transportation revenues from capacities sold at lower rates.

Earnings from Great Lakes was also lower quarter-over-quarter due to a $2 million accumulative one-time adjustment for Michigan business taxes, which was a benefit in the second quarter of last year.

As Steve highlighted earlier, we anticipate that Great Lakes results in the upcoming third quarter will experience similar quarter-over-quarter reductions in earnings, as a result of capacity recontracted at lower rates.

Cost at the partnership level were $7 million in the second quarter of 2012, a decrease of $5 million compared to $12 million in the second quarter of 2011. This decrease was primarily due to GTN and Bison acquisition costs that were incurred last year.

Turning now to our liquidity and capital resources on slide 9. As of June 30th, $321 million on the partnership senior credit facility; the average interest rate on the facility was 1.62% for the three months ended June 30th, 2012. The partnership continues to maintain imprudent approach to cash flow management, directing our free cash flow to maintaining appropriate debt levels, investing in ongoing operations, growing distributions to unitholders, and provision for further growth opportunities.

With today's announced quarterly increase in cash distribution, we still remain well positioned for future growth given our conservative capital structure, investment grade credit ratings, and cash flow being generated from long-term contracts in five of our six pipeline assets, which should enable us to maintain our sold cash distribution coverage.

That concludes my prepared remarks on the second quarter financial results. I'll now turn the call back over to Steve.

Steve Becker

Thanks Sandra. I would like to conclude my prepared remarks today by leaving everyone with some key takeaways shown on the next couple of slides. TC PipeLines has investments in the strong portfolio of key natural gas infrastructure assets. These assets collect the majority of their cash flows to long-term ship or pay contracts with utilities major energy companies.

The partnership's second quarter results from five of the six pipelines in our portfolio were relatively consistent year-over-year and reflect their long-term contracted status. Ongoing market conditions impacted our results from Great Lakes and this will continue through the third quarter of this year and potentially beyond depending on market conditions.

Our latest quarterly cash distribution increase, reflects the relative strength of our overall pipeline portfolio and highlights the long-term investment approach that we take to delivering stable and growing cash distributions. This investment approach has served our unitholders as well as we continue building on our track record of steadily raising cash distributions with our latest increase, a 13-year track record since our inception back in 1999.

We believe our pipelines are critical North American infrastructure in the markets that they serve and they will continue to represent good investments as they're considered low risk energy infrastructures underpin with ship or pay contracts. The partnership results on a solid financial position and is supported by a strong balance sheet, a high covered ratio, ample amount of liquidity, and our investment grade credit ratings.

We are supported by a large industry sponsor in TransCanada Corporation, our general partner who continues to have a large capital program underway, and continues to announce additional growth projects, as an industry leader in developing North American energy infrastructure. Should TransCanada need incremental capital to finance their future growth plans, TC PipeLines is well positioned to be able to capture future growth opportunities, should the opportunity arise.

Finally, the partnership also remains active in pursuing other third party acquisitions, and we continue looking for organic growth opportunities on our existing assets to potentially connect new gas-fired electricity generation.

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

Lee Evans

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

Question-and-Answer Session


Thank you. We will now take questions from the telephone line. (Operator Instructions) The first question is from Ted Durbin from Goldman Sachs. Please go ahead.

Ted Durbin - Goldman Sachs

Thanks. Just talking, looking at the distribution raise here. I'm just wondering if you can talk about a little bit more about the coverage ratio you went around here your in a raising distribution even though you don't really have a lot of new projects that I can tell that are going to be increasing cash flow. You're just feeling a better about your cash flow positions. You're feeling better that you can raise the distribution may be given a little bit more?

Steve Becker

Sure Ted. I think when we look at the distribution and the various increases, as we tend to be less one off event driven, and we're looking at the overall portfolio over the longer-term. And so, within that we are in a spot where we had fairly good success in Northern Border in renewing longer-term contracts. And so, when we looked at the overall portfolio, we think that we're in good position and based on that portfolio approach we've chosen to increase the distribution at this time.

Ted Durbin - Goldman Sachs

Okay. And do you have a sort of target cover that you're moving towards overtime or can you talk a little bit about that?

Steve Becker

Sure. We're less trying to meet an actual in coverage ratio where we do have a specific target. We've never actually operated in that way of trying to actually hit a specific target coverage. We tended to be a little bit more conservative and ensure that we're well covered and that the merits sort of follow from just our judgment of where we're as we go through the certain longer-term cycles. So there's no targeted number it's just to say let's have reasonable strong coverage.

Ted Durbin - Goldman Sachs

Okay. And then just shifting over to the new Northern Border contract, can you talk a little bit about I think you mentioned a bit but just go over again the pricing rates that you're getting there relative to what you had before, may be talk about are these shipper pay contracts or is there any kind of volume sensitivity there?

Steve Becker

They are shipper pay contracts and they tend to be fairly close to the full terra freight that is charged. There are slight differences in the vision. There is a mixture of contracts. So it's hard to give a specific one-off answer. There is a number of shippers. And so, in this particular case, some of the shippers when they have their contracts come up for renewal, have the first right to extend them. And in the past we would often just see manual extensions and in this case with Northern Border people have chosen to extend them out.

Within that whole mix of contracts the average is around three years. There's some little shorter and some that are little longer. But as a result of the contracts that have come up for renewal, we received a lot of average three-year renewals. And so that's where we feel that Northern Border is well positioned and so when it has other contracts that come up for renewal in 2013 that we're hoping that that similar trend will continue, but that's really the shipper's choice and we'll have to see in 2013 when we get there.

They'll be judging at the market conditions at that time. But generally I think it's given Northern Border fairly reasonable position in the industry in terms of just where it is and it is a shipper pay contract as I mentioned earlier.

Ted Durbin - Goldman Sachs

Yeah. And then how do the contracts that you just signed play into the potential rate case or the settlement or what not, I mean do you feel like the contracts are struck at a level where you could come to a settlement at this pricing level?

Steve Becker

Generally when getting to the settlement discussion, there is a whole variety of items besides the contracts it's what the -- what's the revenue requirement, and all the normal things that would normally go into a rate case. And so, within that it's, it's more complex and it gets into a settlement discussions with a whole variety of the shippers including, some that had existing contracts that didn't happen to come up for renewal. So, that process is, as we say, we -- that we're in the regulated, TARC regulated pipelines and that's the kind of a normal ongoing business process. So we're approaching that in the same way.

As we suggested we would like to reach a settlement rather than having to go into a full rate case at the end of the year, but that's still to be arrived at, and people are in the middle of discussing things, but there is nothing that I can report to you at this time.


Thank you. The next question is from John Tysseland from Citigroup. Please go ahead.

John Tysseland - Citigroup

Hello and good morning. Steve I just wanted to clarify a statement that you made in your prepared remarks. I believe you said that 22% of Great Lakes is contracted beyond 2012. I think there is about 1.3, 1.4 Bcf that comes up for a contract renewal in the fourth quarter and of that TransCanada makes up a pretty big chunk of that. Any visibility for what the general partner is kind of view as of Great Lakes and whether they would be willing to resign that contract?

Steve Becker

I can only speak on behalf of the general partner not on behalf of what TransCanada's intentions would be in that regard. And I think that what currently, where we would see the overall package of the volume as opposed to TransCanada specifically, is that in all the years that TransCanada and Great Lakes have operated together is a substantial amount of storage that's located in Michigan that's Great Lakes pipeline serves a refilling the storage in the summer and then taking that storage back out into winter peaking markets in the U.S. and even back into Canada.

In this past year what has happened with such a warm winter last year is the storage didn't get empty though as much as it has in the past. And so, within the contracting where people are looking at this winter, if it's colder in the longer it is the more Great Lakes runs full. So, where we see ourselves in the longer-term is if our storage levels and pricing get a bit back to normal wherever people would say normal is, but I think most people would agree was a very, very warm winter last year.

In that normal situation you would be seeing some of the people contract through the winter for the optionality to serve markets where there is flows that go towards cities such as Green Bay and Minneapolis. And within that sort of context where I'm trying to go this is that what our expectations are in a full year are normally the summer is fairly fully contracted. The winter people depend on the weather and the optionality in that. What we anticipate is some of the people may awake a lot closer to the time of renewal in order to sign up and they'll have a different view of what the market is.

Great Lakes is also impacted because to get on that path you've to go on the Canadian system to get to the Manitoba Minnesota Border and the rates are currently being reviewed in that in the major National Energy Board hearing. When that hearing finishes and there is some further clarity on those rates that would impact people's contracting process.

So all of those factors sort of come into where we see Great Lakes. When we look at it and look out on the longer-term basis and put it in on a 5 to 10 year outlook, we think that Great Lakes is very strong pipeline and will continue to serve in the manner that it has albeit slightly shifting of some spots, the load but in the short run for this winter we don't have the contract and that's created more short-term uncertainty through this winter. And we don't really have anything that we could further report on that other than to say it's uncertain and we'll have to see what ends up happening.

John Tysseland - Citigroup

But even if those contracts are not renewed, I mean there's still going to be demand on that pipeline, correct. I mean it's just becoming a little bit more seasonal rather than steady state contractors, is that fair?

Steve Becker

Yes, that's exactly right and there is a tremendous amount of gas in storage that comes out in the winter. So normally in all those areas the loads are light in the summer but there is a fairly high peaking winter load and often that gas comes from storage and goes on Great Lakes through different segments of the pipeline. So it's sometimes not always the full long haul, it’s shorter distance hauls. And so just what you had stated as overtime it will become a bit more seasonal and a little bit more shorter-term contract.

John Tysseland - Citigroup

And then lastly from a strategic perspective when you look at the assets as a parent versus third party acquisitions, right now the partnership is predominantly exposed to or I guess lever to Canadian production coming down against the U.S. with the exception of the Baja Asset. Do you look at third party asset acquisitions at TCP and actively kind of -- are any active bidding process for third-party assets. And if so where would you be looking to acquire or what areas do you think fits your portfolio of assets thus?

Steve Becker

When we look at the different assets, we basically look within the -- our geography would be all of the U.S. assets and the assets that would qualify under the master limited partnership. So there is not a geographical restriction. We actively look at a variety of different projects and we also look not just at natural gas pipelines, but we have looked at pipelines in other commodities. What normally happens in that process when you go through different bidding situations, most of those are handled because of confidentiality agreements that, it's very little that we could say about what our actual activity that's ongoing until we actually have something to announce.

So, we're active throughout the year looking at very different things. We often state that we're opportunistic and disciplined and what we mean by that is some of the sales don't always come along exactly when it meets our needs, but we tend to look at most of them and then we've a fair amount of discipline of saying those fit our business model and fit the profile that we have. And so that's the approach that we use and we go across all geographies and not only natural gas pipelines, but other pipelines could be oil pipelines or fine product pipelines.

And so within that activity that's being ongoing and has been that way for a number of years. So, we're fairly reasonable player in that deal space.

John Tysseland - Citigroup

With TCP look at doing organic growth projects at the partnership level or would that be done at the parent and jobs they're done in the later time, is that changed though?

Steve Becker

It hasn't changed; the partnership tends to do very small projects that are on the line such as the Princeton Lateral that was added on to the Northern Border system last year. If there is a major construction project that has a fairly major long-term -- fairly large dollars, and a fairly large timing difference between signing the contracts and the construction involving those tremendous amount of construction risk that tends to be done at the parent. So as a result, TC PipeLines has very little construction risk and financing risk way out into the future if you actually have obligations. And as a result that tends to be down at the parent that makes TC PipeLines from our view less risky than other portfolios in terms of just getting cost in terms of cost overruns or other items like that.


Thank you. (Operator Instructions) The next question is from Winfried Fruehauf from W. Fruehauf Consultants. Please go ahead.

Winfried Fruehauf - W. Fruehauf Consultants

Thank you. On the table that reconciles net income to partnership cash flows stats and item, cash flows provided by other pipes operating activities. What is included in there and what is the outlook for the third quarter?

Lee Evans

Hi, Winfred it's Lee here. The net income that you're referring to there is the results from Tuscarora and North Baja. And I guess considering those assets are primarily contracted on long-term basis, you'll see pretty good consistency quarter-over-quarter year-over-year for the asset albeit the Tuscarora pipeline that makes up part of that that results had a rate case reduction here in terms of it's cash flows in revenues that has impacted the partnership here starting in 2012. So there is that impact that we discussed. So that's a $6 million cash impact on an annual basis and a $3 million net income impact to the partnership on a annual basis but that's -- that's essentially what's in that that line item.

Winfried Fruehauf - W. Fruehauf Consultants

Okay. Thank you. And I have one more if I may. Regarding Great Lakes there was a fairly large drop off in cash distribution from the second quarter last year to this second quarter. Do you expect a similar reduction in the third quarter?

Sandra Ryan-Robinson

I would say we do. As we explained in -- as we talked about in the call, we're expecting our Q3 -- our Q2 earnings are down relative to last quarter. And so that drives the distribution for the next quarter. Therefore, really expect a reduction in our distribution for the next quarter.

Lee Evans

And Winfred, I highlight with our equity investment, investment pipelines. There is a quarterly one quarter lag in terms of the earnings results versus when the cash distribution comes in. So our Q2 results will show up in the Q3 cash distribution from the outset.

Winfried Fruehauf - W. Fruehauf Consultants

Regarding Great Lakes, how do you avoid, what is referred to sometime as a death spiral?

Steve Becker

Well, I think that when people use that term meant where they may be do not see the ongoing fundamentals that underpin the assets. So one of our key things that we've emphasized quite a bit in this is that we've longer-term contracts. Normally, you don't get longer-term contracts unless you have fairly solid fundamentals. When some of those contracts expire, sometimes the time for renewing those gets impacted by other factors and that -- our short-term factors not long-term factors. So, people sometimes misread the different short-term, long-term issues. So, within Great Lakes, the two short-term issues that really impacted that recently were the pipeline flows on the mainline were impacted by a major rate case. So, it meant that asset flows would normally happen, but people just uncertain is to what the rates were and what the outcome will be from a Canadian mainline. So, because they have less certainty on what might happen with the decision on the mainline, they have a harder time contracting over the next year because they're all uncertain what that outcome will be. After that outcome, there tends to be a period of more rate certainty and that tends to help people in longer term contracting patterns.

The second thing that happened is normally the contracting is on an annual basis and with last year’s really warm winter, it changed in the nature of sort of the flows and sort of one in 20 year, very warm winter that impacted Great Lakes just as it was trying to renew its contracts. So, I think what we are trying to communicate as we better know what’s happening upstream of Great Lakes and if there is a more of a return to away from warmer weather to a normal winter and there is no real normal, I can be higher or lower that will impact people, and so another year or two out in the cycle, we think that it will be a fairly strong pipeline. What its fundamentals are that as a little bit counter intuitive at some people is that that’s actually full more in the summer because people are shipping gas to refill the storage. It then has more sporadic volumes in the winter.

So that part where the storage is the fact that normally gets cold in Michigan and was constant in Minnesota and Eastern Canada is usually where when we look at those broad fundamentals, we feel that it is a fairly strong reasonable asset. It does have some short-term problems, uncertainty on the mainline rate case and the weather that’s impacted it and that will be continuing through this winter. And that’s I think where we see it there is a sort of a short-term answer of uncertainty and a longer term answer of being a very strong solid asset.

So that’s probably the best way that we could portray it, and we don’t think that in that sense when you said is a despair, well that that’s not in this asset whatsoever. And so I think that’s going down different track and we don’t see that at all in the case.

Winfried Fruehauf - W. Fruehauf Consultants

Okay, thank you. If I understand you correct and as to summarize as to weather seems to be the big factor deciding re-contracting and filler rates and what not?

Steve Becker

That just a correct year or just to -- sure, that would be the question over the winter. But next summer, we expected to be fairly fully contracted as people refill. So that’s the answer for sort of a November to March, whereas if you start to get into the second and third quarters next year, we expect to see something similar to what we see this year where we’ve had fairly reasonable results in that -- in these quarters.

Winfried Fruehauf - W. Fruehauf Consultants

What about the potential erosion of markets as a result of shale gas in especially Marcellus and other areas?

Steve Becker

Well, I think that when you look Great Lakes services a much broader area and while there is a growth in the Marcellus that’s probably impacting a different region in the country, and so there is an impact on that. It’s not as much as you would realize. Most of the shale gas is going into the New York, Washington DC area, and this tends to serve more in the Eastern Canada and Michigan, Wisconsin, and Minnesota. So, it’s a different geographical area. It does have an impact, but not to the extent that some people would be anticipating.


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

Lee Evans

All right, thanks everyone for your participation here today. We appreciate your interest in TC PipeLines and we look forward to speaking again soon. Bye for now.


Thank you. The conference call has now concluded. Please disconnect your lines this time and we thank you for your participation.

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