TC PipeLines' Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: TC PipeLines, (TCP)

TC PipeLines, LP (NYSE:TCP)

Q3 2012 Earnings Call

October 26, 2012, 11:00 am ET


Lee Evans - Manager, Investor Relations

Steve Becker - President

Sandra Ryan-Robinson - Principal Financial Officer


Jeremy Tonet - JPMorgan


Good day, ladies and gentlemen, and welcome to the TC PipeLines, LP 2012 Third 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 would like to welcome you to TC PipeLines’ third quarter 2012 conference call. I am 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, and 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’ third 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 third quarter. Steve will then return, and wrap up the conference call with some remarks or with some key takeaways. Following the prepared remarks, I will ask the conference operator to coordinate your questions.

Before we begin, I would like to remind you that certain statements made during this conference call will be forward-looking regarding future events and our future financial performance. All forward-looking statements are based on our beliefs, as well as assumptions made by information currently available to us.

These statements reflect the 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 would now like to turn the call over to Steve.

Steve Becker

Thanks Lee and good morning, everyone. As outlined in our news release this morning and starting on slide number four, TC PipeLines generated Partnership cash flow of $48 million in the third quarter. During the quarter, we paid out $43 million in cash distributions to unit holders.

The Partnership also announced its third quarter cash distribution in the amount of $0.78 per common unit. The third quarter distribution represents a 1.3% increase over the same period last year and marks the Partnership’s 54th consecutive quarterly distribution paid to our unit holders.

In terms of financial performance, five of the Partnership’s six assets generated results very similar to last year in the third quarter, with Great Lakes continuing to experience difficult market conditions due to low gas prices and bases spreads and high natural gas storage levels. These factors resulted in Great Lakes generating lower transmission revenues as a result of selling it's long haul capacity at rates lower than last year.

Overall, our partnership generated net income of 35 million in the third quarter, compared to 41 million in the same period last year. The third quarter 2012 net income is equivalent to $0.64 per common unit. Moving to slide 5, I’d now like to take a moment to discuss the developments of the partnerships, two largest assets.

As we highlighted last quarter, Great Lakes long haul summer capacity was fully contracted in the quarter at lower rates versus last year. With continued record high storage levels in Michigan and Eastern Canada, shippers are not being incentivized to recontract capacity at historical rates. In order to be able to recontract this capacity, Great Lakes had to offer capacity at rates lower than what had been contracted at in the past.

Great Lakes remain substantially contracted through the end of October, and 22% of it's long haul capacity is contracted beyond November 1, through most of the 2013. Going forward, selling capacity this winter season in the fourth quarter of 2012 and the first quarter of 2013 will be primarily dependent on weather-based factors and how much gas is withdrawn from storage. Depending on the level of sales, transmission revenues from the fourth quarter could be significantly lower relative to the same period in 2011.

As we look to storage refill season in 2013, two factors are primarily expected to influence shipper decisions to be contract on Great Lakes. First factor is that the National Energy Board in Canada is not expected to issue its final decision on the Canadian mainline tool application before late first quarter 2013. This decision will provide more tool certainty for the mainline, which is the upstream pipeline from which Great Lakes waves receives Western Canadian gas. The second factor is the weather and overall supply-demand profile as measured by natural gas pricing and storage levels. We remain cautiously optimistic that demand for Great Lakes capacity during the summer storage refill season in 2013 will return with normalized winter weather this season at transportation rates we have realized in the past.

Great Lakes current rate case settlement expires on November 1, 2013 and requires it to file for new rates on or before this date. The partnership along with TransCanada its general partner which owns the majority interest in Great Lakes is continuing to evaluate options that could possibly see changes to tariff rates and overall rate design to better reflect the current use of the system should current market conditions continue to persist.

I would now like to highlight recent developments in our other major asset Northern Border. Northern Border had an excellent quarter and continues to run at full capacity and its financial performance reflects that. Overall financial results this quarter were down slightly versus the same period last year, due to increasing operating costs resulting from planned maintenance that was required as a result of running at such high utilization levels.

Late in September Northern border was successful in reaching a settlement with its shippers on transportation rates and other services. New tariff rates which are subject to FERC approval would be effective January 1, 2013 and would eliminate the need for Northern Border to file a Section 4 rate case. The settlement includes a three year moratorium on filling rates cases and requires Northern Border to re-file for new rates, no later than January 1, 2018.

If approved maximum reservation rates will be reduced by 11%. With the existing contracts in place, the partnership anticipates the directly impact of this settlement would result in approximately a $10 million reduction in both cash distributions and equity earnings in 2013. Annual reductions in partnership cash flows in Northern Border as a result of the settlement are expected to be slightly larger at a $13 million level. But due to the one quarter lag in cash distributions, the partnership will only see a $10 million reduction in cash distributions from Northern Border in 2013.

I told overall results of course will depend on the number of other factors in addition to the impact from rate case settlement. While a settlement will mean a permanent reduction in cash distributions and earnings, we believe the settlement is fair given the various factors that were considered including the size of the current rate base as part of this black box settlement.

Northern Border was able to substantially re-contract for all of its long haul capacity through March 2014 another full year. This is a clear demonstration of strong demand for its transportation services. It’s also particularly well positioned to ship growing Bakken shale gas volumes.

The majority of Borders contracts that recently came up for renewal in the last quarter were renewed for terms of three years and longer. As a result Northern Border is now approximately 74% sold through to the end of 2014. This recontracting creates more certainty and great visibility on future cash distributions and earnings from Northern Border for the next several years. In terms of our other four pipelines, GTN, Bison, Tuscarora and North Baja all operate under long term shipper pay contracts and as such performed as expected in the third quarter and delivered a solid and consistent cash flows that we’ve seen in the past.

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

Sandra Ryan-Robinson

Thank you, Steve. My remarks follow the presentation material starting on slide 6. Partnership cash flow increased to $48 million in the third quarter compared to $43 million in the same period of 2011. The $5 million increase was primarily due to the cash distribution from GTN and Bison, but was partially offset by $7 million of lower distributions from Great Lakes. The partnership paid cash distribution of $43 million in the third quarter, an increase of $1 million compared to the same period in 2011 due to an increase in the quarterly distribution of $0.01 per common unit paid beginning in the third quarter of 2012.

Turning to slide 7, the partnership’s overall net income decreased by $6 million to $35 million or $0.64 per common units in the quarter, compared to $41 million or $0.75 per common unit in the same period in 2011. This decrease was primarily due to lower earnings from Great Lakes that was partially offset by lower financial charges. Equity income from Great Lakes was $6 million in the quarter, down $8 million compared to $14 million in the third quarter of 2011.

This decrease was primarily due to lower transportation revenues from long haul capacity sold at lower rates. Financial charges at the partnership level were $6 million in the quarter, a decrease of $3 million compared to $9 million in the third quarter of 2011. This decrease was primarily due to lower interest charges as a result of carrying floating rate debt versus fixed rate debt last year.

Turning now to our liquidity and capital resources on slide eight, as of September 30, $313 million was drawn on the partnership’s senior credit facility. The average interest rate on the facility was 1.62% for the three months ended September 30, 2012. The partnership will continue to maintain a prudent approach to cash flow management directing our free cash flow to maintaining appropriate debt levels, investing in ongoing operations, growing distributions to unit holders and positioning for further growth opportunities.

That concludes my remarks on the third quarter financial results. I will 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 slide. TC PipeLines has investments in the strong portfolio of key natural gas infrastructure assets which collect the majority of their cash flows through long-term ship-or-pay contracts with utilities and major energy companies. The partnership’s third quarter results from five of our six pipelines on portfolio were relatively consistent year-over-year reflecting their long-term contracted status.

Transmission revenues from Great Lakes in the fourth quarter could be significantly lower than the same period last year and this trend could potentially extend into the 2013 depending on market conditions. The partnership’s strong financial position however enables us to manage through the challenges we are currently experiencing on Great Lakes and the future impact of lower cash distributions and earnings from Northern Border. We're supported by a large sponsor in TransCanada, our general partner which has a large capital program underway and continues to capture additional growth projects as an industry leader in developing North America energy infrastructure. Should TransCanada need incremental capital to finance the future growth plans, TC PipeLines is well positioned for future growth opportunities should the opportunity rise.

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

With that, I would now like to turn the call back over to Lee.

Lee Evans

Thanks, Steve. I would now like to open up the calls for questions. Operator, please go ahead.

Question-and-Answer Session


Thank you. We would now like to take questions from the telephone lines. (Operator Instructions) We do have a question from Jeremy Tonet of JPMorgan. Please go ahead.

Jeremy Tonet - JPMorgan

I was just wondering for Great Lakes. If the winter turns out to be kind of a normal weather patterns, when would you expect to see shipper sign up for capacity in the summer?

Steve Becker

Well, I think what normally would happen in that is, their normal pattern is as they see depending on the pattern as it goes along, they will be influenced in different ways but we would expect them to be signing up more in February or March of that year to start for April. So we are not sure of whether we would be able to indicate that to you in our next results which are usually reported in February. They usually would like to wait a little longer and then if it’s very cold then there is more of a demand for the services that might happen a bit sooner, but our expectation would be late February, early March.

Jeremy Tonet - JPMorgan

And if normal conditions are, if weather conditions are normal for this winter, would you expect Great Lakes results to be closer to what we saw in 2011 or would they be closer to kind of how they are tracking in 2012? If that you have a weather, if you have a normal winter weather pattern as oppose to what we saw last year?

Steve Becker

I think the answer is they likely would be better than the past winter because it was so cold we are not sure that they would reach historical levels of prior years. So it would be somewhere in the middle and when we talk about cold weather, the weather is very regional and so it’s very tough to generalize in that sense because you may have a cold winter but other factors coming into play on other pipelines impacting the flows on Great Lakes. So there is a variety of answers but generally colder weather would be better than last year perhaps not as high as prior years.


Thank you. (Operator Instructions). There are no further questions registered at this time. I will now like to turn meeting back to Mr. Evans.

Lee Evans

Well, thank you 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 ended. Please disconnect your lines at this time and we thank you for your participation.

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