TC Pipelines Earnings Call NUGGETS: Distribution Rates, General Partners’ Great Lakes POV
On Wednesday, TC Pipelines LP (TCP) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Ted Durbin – Goldman Sachs: Just talking – looking at the distribution rates here, I’m just wondering if you can talk about – a little bit more about the coverage ratio you want to run here, you’re raising the distribution even though you don’t really have a lot of new projects that I can tell that are going to be increasing cash flows, are you just feeling better about your contractual positions, or you’re feeling better that you can raise the distribution, maybe you want that a little bit more?
Steven D. Becker – President and Director: Sure, Ted. I think, when we look at the distribution and the various increases, we tend to be less one-off event driven and more looking at the overall portfolio over the longer term, and so within that we are in a spot, where we’ve 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: Do you have a sort of target coverage that you’re moving towards over time or can you talk a little bit about that?
Steven D. Becker – President and Director: Sure. We are less trying to meet an actual end 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’ve tended to be a little bit more conservative and ensure that we’re well covered and the numeric sort of follow from just our judgment of where we are as we go through the sort-of longer-term cycles, so there is no targeted number. It’s just to say let’s have reasonable strong coverage.
Ted Durbin – Goldman Sachs: Okay. Then just shifting over to the new Northern Border contracts, can you talk a little bit about – I think, you mentioned it, but just go over again the pricing rates that you’re getting there relative to what you had before, maybe talk about are these ship-or-pay contracts or is there any kind of volume sensitivity there?
Steven D. Becker – President and Director: They are ship-or-pay contracts and they tend to be fairly close to the full tariff rate that is charged. There’s slight differences in – there’s a mixture of contracts, so it’s hard to give a specific one-off answer. There’s 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’ve often just seen annual extensions, and in this case, with Northern Border people have chosen to extend the moat. Within that whole mix of contracts, the average is around three years. There’s some a little shorter and some that are a little longer, but as a result of the contracts that have come up for renewal we received a lot of average 3 year renewals, and so that’s where we feel that Northern Border is well-positioned and soon 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 the market conditions at that time. But generally, I think, it’s given Northern Border a fairly reasonable position in the industry in terms of just where it is and it is ship-or-pay contracts as I mentioned earlier.
Ted Durbin – Goldman Sachs: Then how does the – how do the contracts that you just signed play into the potential rate case for the settlement or whatnot, I mean, do you feel like these contracts are struck at a level where if you come to a settlement at this pricing level?
Steven D. Becker – President and Director: Well, generally, when we get into the settlement discussion there is a whole variety of items besides the contracts, it’s what’s the revenue requirement and all the normal things that would normally go into a rate case, and so within that 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 – FERC 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.
General Partners’ Great Lakes POV
John Tysseland – Citigroup: 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 comes up for contract renewal in the fourth quarter, and of that TransCanada makes up a pretty big chunk of that. Any visibility for the – for what the general partners kind of view is of Great Lakes and whether they would be willing to resign that contract?
Steven D. Becker – President and Director: 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 volumes as opposed to TransCanada specifically is that, in all the years that TransCanada and Great Lakes have operated together, there’s a substantial amount of storage that’s located in Michigan that the Great Lakes Pipeline serves of 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 was such a warm winter last year is the storage didn’t get emptied out as much as it has in the past, and so within the contracting where people are looking at it this winter, if it’s colder and 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, it was a very, very warm winter last year, and 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, so where I’m trying to go on this is that what our expectations are in a full year are normally the summer is fairly fully contracted, the winter people depends on the weather and the optionality in that. What we anticipate is some of the people may wait a lot closer to the time of renewal in order to sign up and now have a different view of what the market is. Great Lakes is also impacted because to get on that path you have to go on the Canadian system to get to the Manitoba, Minnesota border, and the rates are currently being reviewed in that, and the major National Energy Board hearing. When that hearing finishes and there’s some further clarity on those rates that would impact people’s contracting processes. So, all of those factors sort of come into where we see Great Lakes, when we look at it and look out on a longer term basis, and put it in on a 5 to 10 year outlook, we think that Great Lakes is a very strong pipeline, and it will continue to serve in the manner that it has albeit slightly shifting of some spots of the load, but in the short run for this winter, we don’t have the contracts 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 just become a little bit more seasonal rather than steady state contract business, is that fair?
Steven D. Becker – President and Director: Yes. That’s exactly right, and there’s 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 is over time it will become a bit more seasonal and a little bit more shorter term contract.
John Tysseland – Citigroup: Then lastly from a strategic perspective, when you look at the assets at the parent versus third-party acquisitions, right now, the Partnership is predominantly exposed to or I guess levered to Canadian production coming down in 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 in the active bidding process for third-party assets, and if so, where would you be looking to acquire or what areas do you think fit your portfolio of assets best?
Steven D. Becker – President and Director: 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 as natural gas pipelines, but we have looked at pipelines in other commodities. What normally happens in that process, when we go through different bidding situations, most of those are handled because of the confidentiality agreements that there’s very little that we can 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 have a fair amount of discipline of saying to those fit our business model and fit the profile that we have, so that’s the approach that we use, and we go across all geographies and in not only natural gas pipelines, but other pipelines could be oil pipelines or refined products pipelines. So, within that activity that’s been ongoing and has been that way for a number of years, so we are a fairly reasonable player in that deal space.
John Tysseland – Citigroup: Would TCP look at doing organic growth projects at the Partnership level, or would that be done at the parent and then drop down at a later time, has that changed at all?
Steven D. Becker – President and Director: It hasn’t changed. The Partnership tends to do very small projects that are on the (Alliance), 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 a 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 done at the parent, and that makes TC PipeLines from our view less risky than other portfolios in terms of just getting caught in terms of cost overruns or other items like that.