TC Pipeline LP (TCLP) Q1 2010 Earnings Call April 28, 2010 12:00 PM ET
Terry Hook - Manager of IR
Mark Zimmerman - President
Rob Jacobucci - Controller
Sean Brett - VP, Commercial Operations
Michael Cerasoli - Goldman Sachs
Bradley Olson - Eagle Global Advisors
Ron Londe - Wells Fargo
Jeremy Tonet - UBS Securities
Good day ladies and gentlemen, welcome to the TC Pipeline’s LP 2010 First quarter results conference call. I will now turn it over to Mr. Terry Hook, Manager of Investor Relations. Please go ahead, Mr. Hook.
Thank you operator and good day everyone. I would like to welcome you to TC Pipeline’s first quarter 2010 conference call. With me today are Mr. Mark Zimmerman, President; Mr. Rob Jacobucci, Controller; and Mr. Sean Brett, Vice President, Commercial Operations. We are pleased to provide you with an opportunity to discuss our first quarter results and other general developments regarding the partnership.
Before we begin I would like to remind you that certain statements made during this conference call will balance sheet forward-looking regarding future events and our future financial performance. Our forward-looking statements are based on our beliefs, as all other 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 2009, 10-K as well as our subsequent filings with the Securities and Exchange Commission. If one or more of these risks and uncertainties materialize or if the underlying assumptions prove incorrect actual results may differ materially from those described in the forward-looking statements.
Mark will begin today with the review of TC Pipeline’s achievements in the quarter, the recent cash distribution announcement and an update on the activities concerning our partnership and its general partner TransCanada Corporation. Rob will then review in detail the first quarter results. Following the prepared remarks we will ask the conference operator to coordinate your questions.
I will now turn the call over to our President Mark Zimmerman.
Thanks Terry and good morning everyone and thanks for joining us today. As outlined in today’s news release TC Pipeline has reported a $3.5 million in the first quarter partnership cash flows to $36.8 million compared to $33.3 million for the same quarter last year. Net income for the first quarter 2010 was 33.7 million, an increase of $1.9 million. Earlier this month we announced our first quarter cash distribution of $0.73 for common unit or $2.92 on an annualized basis.
This quarterly cash distribution is equal to the fourth quarter 2009 distribution and represent the 3.5% from the first quarter 2009 distribution of 70.5 cents. This is the 44th consecutive quarterly distribution paid by the partnership. Looking forward TC Pipeline’s believes that is well positioned to continue deliver stable and growing cash distributions to our unit holders. Our growth in earnings and cash flow this quarter was primarily due to lower financing costs and the positive impact of the acquisition of the North Baja Pipeline.
Since this acquisition back on July 1st, 2009 North Baja has not only enhanced and diversified the partnership to earnings and cash flow but the pipeline has performed and contributed at the top end of our expectations. Similar to North Baja, Tuscarora had an excellent quarter. Both North Baja and Tuscarora are situated in unique geographic locations and the profile of their long-term contracts provide securities consistent earnings and cash flow from quarter-to-quarter and this quarter is no different. As such these two pipelines are generally unaffected by the shifting natural gas supply and demand fundamentals. At the end other end of this spectrum are other two long-haul pipes, Great Lakes and Northern Border. While we have been challenged over the last few quarters by the current North American gas picture we remain optimistic on their long-term potential.
Northern Border experienced similar volumes in the first quarter of 2010 compared to the same period in 2009 at approximately 2.1 Bcf per day. Although overall volumes were consistent, revenues were lower as a result of the discounting rates in 2010 and utilization of shorter path segments. Those lower revenues were somewhat offset by a reduction in financing cost at the Northern Border level.
Turning to Great Lakes, revenues decreased 12% in the first quarter 2010 compared to the same period in 2009 as demand for its short-term services did not develop with the on set of a relatively warm winter, high gas storage inventory level and generally lower demand for natural gas. Lower operating expenses to some extent partially offset this reduction in revenues.
With respect to these systems the trend is continuing towards shorter term contracting. With our legacy contracts rolling off and sufficient transportation into the market demand centers there is less of an incentive for customers to lock up back to these transportation comps. However given that the rates charged in our systems relative to the cards to build infrastructure at low, we believe this systems will remain at cost effective alternative for shippers to transport natural gas for consumption in the markets they serve. While it does create some uncertainty for the cash flow and earning streams we believe that demand for gas and demand for services on both Northern Border and Great Lakes will remain.
The current downward pressure on revenues at Great Lakes and Northern Border caused by the current capital over supply situation is expected to be temporary and not indicative of the long-term value of these systems. With that said we are not resting on our laurels and we continue to do what we can to optimize the revenues from the pipeline and I am sure they are meeting the needs of their customers. In summary we believe our pipelines are critical North American infrastructure in the markets that they serve and we’ll continue to represent solid investments for TC PipeLines.
I would now like to turn to some of the other developments in this quarter. We are encouraged by the significant progress made by Great Lakes for its staff and shippers on a proposed settlement of the Section 5 rate proceeding initiated by FERC last November. More specifically on April 16th, 2010 Great Lakes filed a motion to suspend the procedural schedule in its Great Lakes rate proceeding indicating an agreement and principal have been reached among Great Lakes active participants and the FERC trial staff.
The request for a temporary suspension was granted by the Chief Administrative Law Judge on the same day permitting all parties to proceed with the drafting of the stipulation agreement. The parties are memorializing the settlement terms and anticipate filing and binding within stipulation agreement embodying the settlement terms in mid-May 2010 for subsequent approval by the Administrative Law Judge and the FERC. Until the filing and the written stipulation agreement in the terms of the proposed settlement will remain confidential. However given these events we are optimistic that settlements will be finalized.
Moving to North Baja, at the time of the partnerships July 1st, 2009 acquisition from TransCanada, TransCanada have begun an expansion project of the North Baja Pipeline from the Mexico, Arizona border to Yuma. Yuma, Arizona called the Yuma Lateral. As previously contemplated on March 5th, 2010 the partnership acquired those expansion facilities and the contracts in place at that time for a purchase price of $7.6 million.
The Yuma Lateral was placed into service on March 13th, 2010 and pursuing to our acquisition agreement an additional payment of up to $2.4 million will be made to TransCanada in the event that additional contacts or services are on the Yuma Lateral are entered into before June 30th, 2010. The Yuma Lateral fell to deliver natural gas to Yuma area of southwestern Arizona where it will supply the gas for an expansion of the power generation facility.
Last week on April 22nd, the partner also filed an automatic universal shelf registration statement with the Securities and Exchange Commission which replaces the $250 million registration filed in December 2008. Approximately $190 million of equity securities was issued under the previous shelf last November. This new shelf will allow the partnership to issue an in-determined amount of securities of the partnership including both senior and subordinated debt securities and or common units representing limited partnership interests in the partnership. This shelf was effective immediately upon filing and expires on April 22nd, 2013.
I would now like to a take a few minutes to update you on some of the broader strategic developments and opportunities at the TransCanada sponsorship level that may have a positive impact on the volume throughput cash flows, earnings and growth prospects for the partnership going forward.
As mentioned in previous calls TransCanada continues to develop an advanced pipeline projects to connect new unconventional natural gas supplies to its expense of networks of pipelines in North America to offset the decline in conventional production in the WCSB. Our importance to TC PipeLines is the construction of the 30 inch Bison pipeline out of the US Rockies and secondly, the extension of TransCanada’s Alberta system into two major shale plays Horn River and Montney in Northeast British Columbia. Development of the Bison natural gas pipeline continues on schedule for the fourth quarter 2010 in service date. Construction planning is underway on the $600 million, 300 mile natural gas pipeline that will bring gas from the Powder River Basin in Wyoming and interconnect with Northern Border.
With an initial contract to capacity of approximately 400 million cubic feet a day, Bison does have the potential to expand capacity up to and approximately 1 billion cubic feet per day. Northern Border has executed 10 year downstream contract on the Northern Border system with Bison shippers for approximately 400 million cubic feet per day from the port of Morgan, Montana to Ventura Iowa point.
These contracts will strengthen Northern Borders contract portfolio diversifying its natural gas supply and provide another transportation solution for shippers exporting natural gas supply from the US Rockies, Bison. In addition to the Bison project TransCanada continues to advance two significant pipelines in Canada in Northeast British Columbia which are expected to connect approximately 1.6 billion cubic feet a day of new shale gas under development in the Montney and Horn River shale plays.
In addition to the 1.6 billion cubic feet per day of committed volumes received today, TransCanada has expressions of interest from producers for another 1 billion cubic feet per day of transportation services from these developing shale plays. In March 2010, TransCanada received approvals from the National Energy board to construct and operate the ground birch pipeline. It will be a 48 mile natural gas pipeline that will extend TransCanada’s Alberta system connecting to natural gas supplies in the Montney shale gas formation.
Construction of the ground birch pipeline is expected to begin in July of 2010 and should be completed by November 2010. The approximately $200 million project has firm transportation contract that will reach 1.1 billion cubic feet per day by 2014. TransCanada’s Horn River project had commitments for contracted gas increase from 378 million cubic feet a day to just over a 500 million cubic feet per day. Thanks to our recently announced natural gas processing facility.
This pipeline will also bring Canadian shale gas from Northeastern British Columbia to market through TransCanada’s Alberta system. The Horn River project includes 45 miles of new pipes and 52 miles of purchase pipeline.
In February 2010, TransCanada filed an application with the national energy board for approvals to construct and operate the Horn River project including the purchase pipeline. The Horn River project is expected to be operational in the second quarter of 2012. We remain optimistic volumes produced and exported out WSCB will stabilize in the near-term and started to increase overtime as a potentials of Horn River and Montney Shale plays are developed and brought stream.
From geological perspective, there is very indication that the Canadian shale plays can grow and perform at least as well as any other in North America. As I close off this morning, I would like to reiterate the partnership remains well positioned for growth. We look forward to the remainder of 2010 as we have a strong balance sheet and the liquidity to pursue growth opportunities for the long-term benefit of our unit holders.
In addition to the evolving acquisition market, such growth opportunities may also include an acquisition from response TransCanada who is in the midst of financing a large $22 billion capital program. That concludes my prepared remarks and I will now like to turn the call over to Rob Jacobucci who will provide a more detailed discussion on our first quarter financial results.
Thanks, Mark and good day everyone. As Mark mentioned, earlier today we released our first quarter 2010 results. Partnership cash flows increased $3.5 million to $36.8 million for first quarter 2010 compared to $33.3 million for the same period last year. This increase was due to cash flows provided by North Baja’s operating activities of $4.7 million in the first quarter of 2010. Increased distributions from Great Lakes of $3.2 million, a decrease of $2.7 million in general partner distributions resulting from the restructuring of incentive distribution rights in 2009 and reduced partnership financial charges due to lower effective interest rates.
These increases were partially offset by reduced distributions from Northern Border of $7.8 million. The partnership and distributions of $34.4 million in first quarter 2010, an increase of $6.7 million compared to the same period in the prior year due to an increase in quarterly per common unit distribution amounts and an increase in the number of common units outstanding following last November’s common equity issue.
While we have increased our distributions to unit holders. Our partnership cash flows to distribution covered ratio remains solid. As you know, on July 1, 2009 the partnership acquired North Baja from a wholly owned subsidiary of TransCanada Corporation. The acquisition of North Baja from TransCanada was accounted for as a transaction under common control similar to a pooling of interests. Whereby the partnership historical financial information was recast to include the net income of North Baja for all periods presented which included income that do not accrued of the partnerships general partner interest or to the partnerships common units but rather accrued to North Baja former parent.
As a result, the partnership uses the non-GAAP financial measure, net income prior to recast as a financial performance measure. Net income prior to recast excludes North Baja’s income for periods prior to date on which the partnership acquired North Baja. The partnerships net income prior to recast increased by $1.9 million to $33.7 million in first quarter 2010 compared to the same period in 2009.
The increase was primarily due to a $5.4 million contribution to net income for North Baja in first quarter of 2010 and lower partnership financial charges partially offset by lower equity income from Great Lakes and Northern Border.
I will now turn to a discussion on net income for each of our pipeline investments. Equity income from Great Lakes decreased $3.2 million to $16.3 million in the first quarter of 2010 compared to the same period last year. At the Great Lake’s level net income decreased $6.9 million mainly due to a decrease in transmission revenues resulting from a decrease in demand for short-term transportation services to partially offsetting the lower revenues or lower pipeline maintenance and overhaul cost and lower property taxes.
Equity income from Northern Border decreased $1 million to $14.6 million in first quarter of 2010 compared to the same period in 2009. The decrease was primarily due to lower transmission revenues resulting from a combination of increased discounting rates on transported volumes and shorter transportation path. This was partially offset by lower financial charges resulting from lower effective interest rates and lower average debt outstanding.
Net income prior to recast from other pipes which includes results from North Baja and Tuscarora increased $5.2 million to $9.3 million in first quarter 2010 compared to the same period in 2009. This increase was primarily due to the acquisition of North Baja in July 2009 which contributed $5.4 million to net income in first quarter of 2010. Costs at the partnership level decreased $0.9 million to $6.5 million compared to first quarter 2009 due to lower financial charges resulting from lower effective interest rates.
Turning now to our liquidity and capital resources, as you know last November the partnership completed a public offering of 5 million common units at $38 per common unit for gross proceeds of $190 million. The net proceeds were used to repay long-term bail of standing on the partnerships revolving credit facility. Our March 31st, 2010 the outstanding balance on that revolving credit facility was $16 million with $234 million available for future borrowings.
The average interest rate on a credit facility was 4.3% for the three months ended March 31st, 2010 including the impact of interest rate hedging activity. Mark mentioned earlier in the call that on April 22nd, 2010 the partnership filed an automatic and universal shelf registration statement with the SEC which replaces the universal shelf registration filed in December 2008. A new shelf will allow the partner shelf to issue an in-determinant amount of securities of the partnership, including both senior and subordinated debt securities and/or common units representing limited partnership interests in the partnership.
The new shelf was effective immediately up on filing and will expire on April 22nd, 2013. TC PipeLines will continue to maintain a prudent approach to cash flow management to reckon our free cash flow to maintaining appropriate debt levels, investing an ongoing operations, growing distributions to unit holders and positioning for fairly growth opportunities. That concludes my prepared remarks on the first quarter 2010 financial results.
I will now turn the call back to Terry.
Thanks Rob. Now at this time we’d like to open the call to any questions you may have. Operator, could you please go ahead?
Thank you. Now I will take questions from the telephone lines. If you have a question and you are using a speaker phone, please mute the handset before making your selection. (Operator Instructions). Our first question is from Michael Cerasoli from Goldman Sachs. Please go ahead.
Michael Cerasoli - Goldman Sachs
Thanks. In regards to the potential settlement, is there an expectation that’s going to be monetary or a change to the tariff or something else?
I would love to get into details but Michael unfortunately much of the terms remain confidential until we do ultimately file the situation agreement. But I think as you can imagine when you look at the Section 5 case that was filed by FERC itself in November and counter to that, that we filed in February. I think that’s a good illustration of our number of the different facts that are up for discussion right now and what we are negotiating on.
And then just to prefer to (leave) it at that we are hoping that we can have an accelerated documentation to be completed in new filing of this settlement in the near-term here and of course when that happens we will be filing 8-K and making that public at that time.
Michael Cerasoli - Goldman Sachs
Okay. And switching, some of your volumes are still pretty challenging. Is there any costs that you can take, any variable costs you can take out of the system right now or is it mostly representing fixed costs?
Very good question. The bulk of the price line operations tend to be fixed cost just given the nature of the operation itself where there is variable cost that open to us and efficiencies can be gained, the management is absolutely looking to optimize on those and then I think you have seen some of that planning to come through in the fourth quarter last year first quarter this year. In terms of the volumes itself I would observe the first quarter, we really didn’t have the winter that we are expecting here and I think the difference was we are just not supportive of transportation on some of our systems. I would observe here as we’ve gotten into April it seems that that has really started to turn around for us and we are starting to see more constructive differentials if you will out there. So we are hoping that things will start to turn around for us but cost efficiency is absolutely a focus of ours and we will continue to do that.
Michael Cerasoli - Goldman Sachs
That’s actually a good segue going to my next question which is going to be, if you are seeing any trend in and any trend pick up in your scheduled volumes. When you talk about things are getting a little better are you saying that the utilization of scheduled volumes is growing higher or your scheduled volumes are going up?
I guess what our reserve is; one of the biggest drivers for us is that when we look at the differential between Ayco and Ventura in Chicago for Northern Border and Ayco versus Dawn for Great Lakes. When we are in March there we have seen that the differentials between those hubs were actually quite low relative to the max tariff rate and as a result there was less economics there for shippers to utilize our system without us having to make an adjustment to the rate to encourage that. As we said here to Dan, we look at those same differentials. It is supportive of our rates and we are just trying to see some better activity in terms of the scheduled volumes that we are transporting. Of course we are running a very fluid situation here, so we do have to very actively manage the marketing of that available capacity and the market conditions as they exist.
Our next question is from Bradley Olson from Eagle Global Advisors.
Bradley Olson - Eagle Global Advisors
One quick question just about the presentation in the press release. It looks like the methodology for presenting throughput has changed a little bit. If you would just explain to me kind of what this represents. Is it a combination of reserve capacity and interruptible volumes? And is there a reason why the volumes aren't just broken out as kind of reservation charges, and then maybe another line for interruptible volume, just so we get a feel for what is kind of recurring and what might not be?
Very good suggestion, Bradley. Perhaps what we’ll do is first review what comps are desired to change that metric from what we have historically. What we are attempting to do is communicate all the factors that drive the revenue on our business if you will and what we did start to notice more and more over the last period here is our traditional measure intended to be much more of a Point A to Point B long haul sort of volume presentation. What we started to see is actually in the first quarter here is less of that long haul transportation relative to a max rate but increasing revenue being generated from other segments of our piping utilized and increased receipt and delivery in points being factored into derivation of our revenue. That being said it was our intent to try and give more of a total volumetric metric, if you will in this presentation to try and put some context around that. We of course this is our first shot at doing that and we continue to evaluate the effectiveness of it and to the extend there can be a better presentation; we will be working towards that as we go down the road here. I don’t know if you would like to add to that at all.
I think Mark, that’s a good characterization. We do believe that this is a good indicator of not only usage on the system but also what is driving revenues as Mark indicated. So, we will continue to resist whether this is the most effective measure. At this point we do believe that it is representative and indicative of what drives our revenues for these systems.
I mean perhaps what I will do is if I think about the old measure in the long haul volumes relative to the revenue that came out; it may have given a bit of misguided picture in that we also started to see much more substantial revenue being generated by some of the shorter term path. So, hence that’s what draws us to the change in methodology.
Bradley Olson - Eagle Global Advisors
Just one follow-up, I noticed that there was a bit of an increase in growth spending on the North Baja system, and I was just curious, are those growth expenditures, are they all kind of cash to TC PipeLines, or are they just because of the way you account for buying the Yuma Lateral, were they forced kind of be consolidated on your cash flow statement?
So, I will give layman’s shot at this and then Rob perhaps will correct me from the accounting side. From a layman’s perspective all the growth capital that would spend on the Yuma Lateral held by TransCanada and then we turned around and purchased based upon the formula contained in the purchase and sale agreement that system once it was essentially complete. So, I think some of the growth capital you see is indeed from the accounting treatment to presentation because of its recast convention that we find ourselves having to adhere to.
That’s right, Mark. And even perhaps more of a layman explanation is that almost all of that capital expenditure is really related to that Yuma Lateral acquisition. So, that’s both I guess in the accounting and layman explanation.
I think your question is from Ron Londe from Wells Fargo. Please go ahead.
Ron Londe - Wells Fargo
I have a question on Northern Border. Volumes were up a little bit and you talked about rates being down and more short paths. Can you give us more insight into that, because that is kind of a critical pipeline for you?
Yes, absolutely. I think it’s really a combination of two events, Ron. In terms of the differentials say Ayco to Ventura, Ayco to Chicago and that’s really the long haul path. But differentials were not supportive especially in the March sort of timeframe. We found ourselves having to provide some discounts on those rates to encourage the shipping of those volumes.
But in addition, we had also seen an increase in some of the shorter path. The Ventura to Chicago path, Harper to Chicago and as you can imagine it’s a large volume in those transactions because of the very active marketing we are undertaking and so it was really those two components that gave rise here to the overall volumes.
I would observe that on the comparative basis relative to ’09 you see the volumes are off slightly the reason for that is really much higher utilization on the short term path.
Ron Londe - Wells Fargo
Okay. Is that something that's going to be fluid going forward, or are you looking for that to correct itself?
I think it will remain little fluid while we have the pricing environment that we do and the more active marketing around some of the shorter term path to optimize revenues if you will. Longer term as we expect more of the recovery in the WCSB volumes likely more utilization of the full long haul path. And with the volumes and volumes coming on as well and utilization of that full path, I would expect to that juncture there would be less absolute volume available for some of the short-term services. And so I think our expectation is over a period of time we will revert back to more a traditional sort of operation that we had in the past.
(Operator Instructions). Our next question is from Jeremy Tonet from UBS Securities. Please go ahead.
Jeremy Tonet - UBS Securities
Sorry, if I missed this earlier, but could you guys provide the percent contracted and average contract duration for each of the pipelines? Would that be possible?
By all means and it is contained in the Q. And our Q filed on Friday. So, you will get the detail of that more specifically. At a high level the amount of capacity that contracted as of April 1 for Northern Border is 75% and it’s going to have a weighted remaining life at about 2.4 years. For Great Lakes as of April 1, 2010, the contracted capacity is 87%, weighted average remain contract life is 1.9 years.
North Baja I think is similar to what we have in previous years that’s a 79% contracted southbound, 64% northbound with a remaining life 16.5 years. Tuscarora is at 97% contracted with the remaining license of 10.4 years.
Thank you. (Operator Instructions). We have no further questions. I am now turning back over to Mr. Hook. Please go ahead.
Great, thank you. I would like to thank everyone for taking the time today to listen into our call and we appreciate your interest TC PipeLines LP and look forward to talking to you in the near future.
Thank you. The conference now ends. Please disconnect your lines at this time. We thank you for your participation.
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