TC PipeLines Q4 2008 Earnings Call Transcript

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TC PipeLines LP (TCLP) Q4 2008 Earnings Call February 20, 2009 12:00 PM ET

Executives

Terry Hook - Investor Relations

Russell K. Girling - Chairman and Chief Executive Officer

Mark Zimmerman - President

Amy Leong - Controller

Analysts

Gabe Moreen - Banc of America

Kent Green - Boston American Asset Management

Tom Lamb - Weybosset Research

David Labonte - Kayne Anderson Capital Advisors

Rob Chisholm - Center Coast Capital

Operator

Good day, ladies and gentlemen. Welcome to the TC PipeLines LP 2008 Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Terry Hook, Manager of Investor Relations. Please go ahead, Mr. Hook.

Terry Hook

Thank you, operator. Good morning everyone and welcome to our fourth quarter 2008 conference call. We are pleased to provide you with an opportunity to discuss our achievements for the quarter, the full year and other general issues concerning TC PipeLines LP.

With me here this morning are Mr. Russ Girling, Chief Executive Officer, Mr. Mark Zimmerman, President, and Ms. Amy Leong, Controller.

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 information currently available to us. These statements reflect our current views with respect to future event and are subject to various risks, uncertainties and assumptions as discussed in our detailed 2007 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 proving correct, actual results may differ materially from those described in the forward-looking statements.

Russ will begin today with the review of TC PipeLines LP's strong 2008 results. The recent cash distribution announcement and an update on the activities concerning the Partnership and its general partner, TransCanada.

Following that, Mark will provide some further details regarding our investments during fourth quarter. And finally, Amy will review our fourth quarter financial results. After that, we will be pleased to take your questions.

I'll now turn the call over to our Chairman and CEO, Russ Girling.

Russell K. Girling

Thanks, Terry. And good morning everyone, and thank you very much for joining us today. To start, I am very pleased to say TC PipeLines delivered strong financial results for the share holders in 2008. The increase in net income, Partnership cash flow and cash distributions in 2008 was due to improved financial results from each of the Partnership's pipeline systems.

At the Partnership level, cost continued to decline, primarily due to lower interest cost and overall debt levels. As outlined in today's news release, net income for the year ended December 31st was $107.7 million, an increase of $18.7 million or 21% compared to 2007.

Net income per common unit for 2008 was $2.75, an increase of $0.24 or 10% compared to 2007.

Partnership cash flows for 2008 increased to $156.2 million, that is a $23.8 million or 18% increase over the same period of last year.

Cash distributions declared in 2008 increased 7% to $2.82 per common unit compared to 2007. On January 20, 2009, we announced our quarterly cash distribution of $70.5 per unit equivalent to the third quarter of 2008 and a 6% increase over the fourth quarter of 2007. This is the 39th consecutive quarterly distribution paid by our Partnership.

Despite the current economic uncertain times, the Partnership believes is well positioned to continue to deliver that kind of solid financial results in the future.

Ongoing solid cash flows from quality assets, our strong balance sheet combined with the strong liquidity position give us the capacity to continue to grow in a sustained and disciplined manner.

Our focus is unchanged for 2009, and we'll continue to look for growth opportunities that provide long-term benefit to our unit holders. We also continue to look for opportunities to maximize the value of our existing assets, and Mark will talk about some of those opportunities in detail in a few moments. But I'd like to take a few minutes to talk about some of the opportunities currently being pursued by our sponsor TransCanada that will have a positive impact on the cash flows and earnings as a partnership going forward.

Firstly, as discussed in our third quarter conference call, Northern Border sold its wholly-owned subsidiary Bison Pipeline LLC to TransCanada for $20 million. The sale included a commitment by TransCanada to continue to advance the Bison project, which when completed will diversify the natural gas supply options from Northern Border and strengthen its contract portfolio.

The assets and obligations of Bison LLC included executive precedence agreements with potential shippers as well as regulatory environmental and engineering activities completed to date on the Bison project.

TransCanada continues to work with shippers to finalize the size and design of the Bison project and target to interstate of the fourth quarter of 2010. Northern Border has executed downstream contracts with shippers full capacity from Porto Morgan, Montana to Ventura, Iowa, on the Northern Border system that are contingent on the completion of either the Bison Pipeline or the proposed Pathfinder project. These contracts are subject to obtaining upstream capacity on those systems, The Bison Pipeline or the Pathfinder Pipeline for approximately 400 million cubic feet a day.

The completion of Bison, and its potential completion of Pathfinder will diversify Northern Borders natural gas supply and provide another basin solution, or transportation solution, for shippers to export natural gas from the Rockies basin.

That supply diversification is noteworthy because the primary source of natural gas supply transported by all of our pipeline systems in the Western Canadian sedimentary basin.

Overall flow is out of the Western Canadian sedimentary basin are expected to be lower in 2009 compared to last year. Due mainly to decline in production and decrease drilling activity. While this trend is expected to be continue for the short-term, factors may mitigate declines in production in the future. These factors include announcements regarding potential natural gas supply discoveries associated with shale price in North East British Colombia.

TransCanada recently concluded a binding open season for gas translation service from our Montney ground Birch area located in North East British Columbia. Shippers have committed to firm gas transportation contracts and loans associated with these commitments that are expected to reach 1.1 billion cubic feet a day by 2014.

The proposed pipeline is expected to commence service in the fourth quarter of 2010, subject to the receipt of the necessary regulatory approvals.

In addition, TransCanada is finalizing details associated with a binding open season and pipeline extension project to service a second major shale play, the Horn River shale play also in our North Eastern BC. The Horn River project is expected to commence operation in 2011.

These activities will grow the long-term natural gas supply from Western Canada, and for TC PipeLine assets. Looking out to the future, those supplies would be augmented with gas from Northern Frontiers such as Alaska and Mackenzie.

Combining this with the Bison Pipeline project and other Rockies pipeline proposals that TransCanada is pursuing. We believe the Partnership assets are very well positioned to move this new natural gas supply through our existing premium North American markets.

I'll now turn the call over to Mark for a review of our fourth quarter 2008 activities.

Mark Zimmerman

Thanks Russ, and good morning everyone. First half, I'd like to echo Russ's comments that we are very pleased with the operational performance of the Partnerships investments in 2008. For my part, I would like to take few minutes to discuss with you some highlights from the performance of our assets for the fourth quarter and our thoughts on potential go-forward opportunities for the Partnership.

With respect to Great Lakes, the operations for the fourth quarter remain solid. Average contracted capacity for the fourth quarter and for the full year was 106% of its designed capacity, as well as sales of short-term and interruptible capacity continuing to be strong.

Also in the fourth quarter of 2008, Great Lakes negotiated a three year extension of it's 360 million cubic feet per day of long haul transportation by others contract with TransCanada that was set to expire in November 1, 2009.

Extensions were also negotiated with various others shippers for an additional approximate 127 million cubic feet per day of additional long haul firm capacity.

As of January 31, 2009, Great Lakes has firm transportation contracts for 88% of its available capacity. We are encouraged by the continued demand for our services on the Great Lakes system and expect continued stable cash flows.

With respect to Northern Border, performance was also strong which is attributed to their continued ability to fully contract available capacity on a short-term basis for both November and December at maximum rates.

Although firm long-term demand volumes and revenues were lower. We have seen an increase in demand in the fourth quarter for other short-term transportation services.

As previously shared with you, shipper demand for transportation on Northern Border has been negatively impacted by the commencement of the Western segment of the Rockies Express Pipeline or REX, which allows volumes to flow out of the Rockies Basin eastward, creating a supply alternative for some of Northern Border shippers.

The final Eastern segment of REX went fully placed in service by the fall of 2009 is expected to transport natural gas further eastward thereby potentially mitigating some of the excess supply in the Mid-Continent market served by the Northern Border.

For the full year 2008, Northern Border's average contracted capacity was 90% compared to its design capacity.

And finally, Tuscarora delivered another great quarter of higher earnings. The increase was primarily due to the incremental transmission revenue associated with the new long-term firm transportation contract that support the likely compressor station expansion that went into service in April 2008.

Because of its long-term contracts and its unique location, Tuscarora is generally unaffected by shifting natural gas market fundamentals in the short-term. We expect Tuscarora will continue to generate stable and sustained earnings and cash flow for the Partnership.

As such the Partnership had an overall stable and solid quarter with net income in the fourth quarter 2008 approximately equal to the fourth quarter 2007. Partnership cash flows were somewhat lower in the fourth quarter 2008, but remained well above the prior year on a full year basis.

While we do remain attentive to the unfolding market dynamics, we believe we are well positioned to weather these current unstable financial markets, take advantage of appropriate opportunities should they arise and continue our focus on growing in a sustained and disciplined manner.

In addition as Russ mentioned, we have a solid liquidity position available to us to help mitigate any difficulties should they arise during these challenging economic times. Between our strong coverage ratio and available undrawn credit facility, we are confident and our stability going forward.

Accordingly, we are increasingly encouraged for the potential in late 2009 and beyond. As Russ mentioned, there were several development projects that bode well for new supply to be transported on our systems in the near and mid-term, including the already discussed Bison project and shale gas discoveries in Northeast we've seen.

One further example is the construction of the North Border Des Plaines Project which is substantially complete. The $18 million interconnecting compressor facilities are fully subscribed under long-term contract. The new facilities will be priced in service by the end of February or early March of this year.

Finally, as we have discussed with you on previous calls, our corporate sponsored TransCanada has a large portfolio of organic growth projects underway in both the pipeline and energy businesses to finance its continued organic growth, TransCanada has a number of options available to it, including portfolio management.

Portfolio management could include the sell down of the U.S. pipeline asset to their Partnership which would provide us with an opportunity to grow and still allow TransCanada to maintain the strategic interest in the asset.

That concludes my prepared comments and I would now like to turn the call over to Amy Leong for a detailed discussion on our financial results for the fourth quarter.

Amy Leong

Thanks Mark. Net income for the fourth quarter 2008, was $26.6 million or $0.67 per common unit. A decrease of $0.1 million compared to 26.7 million or $0.70 per common units for the same period last year.

A slight decrease was primarily due to a decreased equity income from Great Lakes partially offset by a combination of higher equity income from Northern Border increased Tuscarora transmission revenue and lower cost at the Partnership level.

Equity income from Northern Border was $17.2 million in the fourth quarter of 2008, an increase of 0.3 million or 2% compared to $16.9 million in the same period last year. This was primarily due to decreased operating expenses partially offset by lower transmission revenue. As Mark mentioned earlier, the decrease in firm demand transportation revenues for Northern Borders were partially offset by an increase in other transportation service revenues resulting from changes in the market.

Tuscarora net income was $3.6 million in the fourth quarter of 2008, an increase of $0.5 million or 16% compared to $3.1 million in the same period last year. This increase is primarily due to incremental transmission revenues associated with a new long-term firm transportation contracts that supported the likely compression station expansion that went into further in April 2002.

Cost at the Partnership level were $7.1 million in the fourth quarter of 2008, a decrease $0.9 million or 11% compared to $8 million in the same period last year. This favorable decrease relates primarily to a decrease in financial charges resulting from the lower interest rates and lower average debt outstanding partially offset by a losses on interest rate derivatives.

Equity income from Great Lakes were $12.9 million in the fourth quarter of 2008, a decrease of $1.8 million or 12% compared to $14.7 million by the same period last year. The decrease in equity income was primarily due to increased operating expenses and Michigan business tax, a Partnership level tax that was instituted in 2008.

Turning to cash flow. In the fourth quarter, Partnership cash flows were $34.7 million, a decrease of $5.5 million or 14% compared to $40.2 million in the fourth quarter of last year. The decrease was primarily due to lower cash distributions received from Great Lakes and Northern Border, partially offset by lower cost at the Partnership level.

Cash distributions from Great Lakes and Northern Border decreased by $6.5 million in total for fourth quarter 2008, compared with the same period last year.

Distributions paid by Northern Border were lower, primarily due to lower firm demand transportation revenues mentioned earlier.

Cost at the Partnership level decreased by $0.9 million for the quarter ended December 31, 2008, compared with the same period last year primarily due to lower financial charges as previously mentioned.

In comparison to the $34.7 million of Partnership cash flow generated, the Partnership paid $27.8 million or $17.50 per common unit of cash distribution to unit holders and its general partner related to the fourth quarter of 2008.

Our solid financial performance in fourth quarter and throughout 2008 continues to provide strong support for our cash distributions through unit holders.

As of December 31, 2008, the Partnership has no outstanding borrowings under the $250 million revolving portion of its credit and term loan agreement and was in compliance with the covenants of the agreement. The interest rate incurred on the credit facility average 5.15% for the year ended December 31, 2008 after accounting for hedging activity.

In 2008 the partnership renewed its $250 million debt in equity shale perspective.

The Partnership viewed its core banking group is solid, particularly in light of the current markets conditions and has established a strong relationship with these institutions. We continued to maintain a prudent approach to cash flow management, directing our free cash flow and maintaining appropriate debt levels, investing in ongoing operations and growing distributions to unit holders.

That concludes my comments on the fourth quarter 2008 financial results. I will now turn the call back to Terry.

Terry Hook

Thanks, Amy. Now at this time, we'll open the call for questions. Operator, go ahead.

Question-and-Answer Session

Operator

Thank your, Mr. Hook. (Operator Instructions). Our first question is from Gabe Moreen from Banc of America. Please go ahead.

Gabe Moreen - Banc of America

Good morning, everyone.

Russell Girling

Good morning Gale.

Gabe Moreen - Banc of America

Question on Bison, so is that definitively a go at this point and is the timing for 4Q 2010 still appropriate there?

Gabe Moreen - Banc of America

It's Russ, Gabe. Its a go, subject to regulatory approval obviously. And we believe that we're still be able to hit the later part of 2010 for any service.

Russell Girling

Okay, great. And then in terms for REX East coming online and hopefully alleviating some of the glut in Chicago markets. Any indication in terms of your contracting or activity around the Northern Border that you've seen for let say late next year going into 2010 that that actually maybe the case in terms of shipper signing out for more capacity on the pipeline.

So nothing that we've seen thus far, but I would observe that we are actually seeing a lot of shippers waiting until quite late to secure capacity for themselves on Northern Border. So, I don't really see them thinking that part of this juncture. And we're getting a sense that more of that maybe with respect to liquidity on their own positions and not wanting to commit their balance sheets too far out. So, we remain hopeful but we're not seeing anything in the behavior at this point.

Gabe Moreen - Banc of America

Okay, great. Thanks everyone.

Russell Girling

Thank you.

Operator

Thank you. Our next question is from Kent Green from Boston American Asset Management. Please go ahead.

Kent Green - Boston American Asset Management

Yes, sir. As you mentioned about acquisitions. What do you see it on the acquisition front as far as pricing is reflecting to higher cost of capital that most of these people have, and also the lower price of commodities which are prospects of midstream assets poor cyclical?

Russell Girling

Very interesting question, I think the expectations is that you are going see both of those presumptions start to appear. With that being said, we have not ourselves seen a lot of acquisition or announcements over the last three months since the height of kind of this dislocation if you will. So it's difficult to say whether or not we're seeing deals coming through reflecting those sort of presumptions and I think we would agreed if you around the expectations, but haven't seen evidence of it yet.

Kent Green - Boston American Asset Management

Thank you.

Russell Girling

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from Tom Lamb - Weybosset Research. Please go ahead.

Tom Lamb - Weybosset Research

Good morning or good afternoon everybody.

Russell Girling

Good afternoon.

Tom Lamb - Weybosset Research

Just a question, that you mentioned your capacity at Great Lakes was booked to 106% of the pipeline’s capacity. And then I believe you said that current booking suggest that 88% of available capacity has been booked. Firstly, am I correct in interpreting those that way? And secondly, could you give us similar figures for Tuscarora and Northern Border?

Russell Girling

So first I'll answer the first two questions with respect to Great Lakes. When I refer to 106% of design capacity that was in relation to the volumes we've seen in transport on Great Lakes during the 2008 timeframe, and that design capacity usually is determined at a certain temperature say more spring, summer conditions. When you get into the winter timeframe and that's colder, we get more ambient capacity available to (inaudible) systems.

When I refer to the 87% contract that's more referring to as we go into 2009 forward and really its more of an indication at this point how much is contracted, recognizing there, tends to be a short-term sales and other unprofitable sales that occur that bridge that 87% up to the historical 106 that we have seen. So, one kind of historical, the other one is more of a perspective.

As it relates to Tuscarora and Northern Border, I believe Northern Border at this juncture -- the Northern Border, the average contracted capacity was 90% and Tuscarora was 98% for 2008.

Tom Lamb - Weybosset Research

Okay. Could you give us a similar number relative to what has been contracted for '09, for those two pipelines?

Russell Girling

So I think at this juncture Northern Border is in a similar state, we'll have to verify that and Terry can we verify that and get back to these guys, in terms of Northern Border.

Terry Hook

But I think at this juncture it is very similar and Tuscarora of course is under a very long-term contracts to 2017. So you're going to see that contract capacity remain relatively constant going forward.

Tom Lamb - Weybosset Research

Okay, great. I can give you a call on offline to get the Northern Border number or you're saying its similar to the Great Lakes number?

Terry Hook

It's similar to what we've seen in 2008. But we should verify that.

Tom Lamb - Weybosset Research

Okay, great. All right thank you very much.

Russell Girling

Thank you.

Operator

Thank you. Our next question from David Labonte from Kayne Anderson Capital Advisors. Please go ahead.

David Labonte - Kayne Anderson Capital Advisors

Hi, good morning. Did you say that you were selling transport capacity at max rate in November and December?

Russell Girling

Yes, we did see that occurring in Northern Border. One of the interesting dynamics with Northern Border is very active Chicago venture market these days. But we also did see weather come into our favor in those months. And we were in a position at the market differentials were supporting the maximum rates.

David Labonte - Kayne Anderson Capital Advisors

Okay. One another things just looking at the numbers, I understand why transportation revenues were down quarter-over-quarter, but it looks like the distribution that you actually received from Northern Border was off roughly 21% or so. Why was the distribution off so much relative to what you're seeing from both the revenue and earning standpoint?

Amy Leong

Yeah, so this is Amy Leong. I think at a high-level, when we're commenting on distributions, you'll recall that our distribution is on a quarter life. So we're actually looking at the 12 months ended September year-over-year. Having said that, the cyclical nature of the revenue pattern and the drop in the revenue in the main driver behind the drop in the distributions from Northern Border?

David Labonte - Kayne Anderson Capital Advisors

So would it be fair to say Amy that the third quarter of 2008 results relative to '07, is where you see the reason that the third quarter 2008 being lower than '07, the distributions having a one quarter like.

Amy Leong

That's right mark.

David Labonte - Kayne Anderson Capital Advisors

All right, that's helpful. Thank you very much.

Terry Hook

Thank you.

Operator

Thank you. Our next question is from Rob Chisholm - Center Coast Capital. Please go ahead.

Rob Chisholm - Center Coast Capital

Yes, not to help on the Northern Border but if the 90%, this firm capacity still under contract. What percentage of that comes of in '09, is there contract expiring?

Mark Zimmerman

There is and really as you've seen in prior years, our weighted-average contract likes in Northern Border, it's just around two years. I think it was 1.9 last year or probably about 2.1 this year. There is a constant cycling of contracts that will expire and be renewed for anyway from one year to two years to three years. In addition we're also seeing an increase in contracts for shorter-term capacity.

Rob Chisholm - Center Coast Capital

Thank you very much.

Terry Hook

Thank you.

Operator

Thank you. We have no further questions registered at this time. I would like to turn the meeting over back to Mr. Hook.

Terry Hook

Thank you, operator. I'd like to thank all of you for taking the time today to listen into this call. We appreciate your interest in TC PipeLines LP. We look forward to talk with you soon. Bye for now.

Operator

Thank you Mr. Hooks. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.

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