News Column

TC PIPELINES LP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

April 29, 2014

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes included in Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2013.

RECENT BUSINESS DEVELOPMENTS

Cash Distributions - On April 25, 2014, the board of directors of our General Partner declared the Partnership's first quarter 2014 cash distribution in the amount of $0.81 per common unit, payable on May 15, 2014 to unitholders of record as of May 5, 2014.

Outlook of Our Business



In 2014, the Partnership's portfolio of six FERC-regulated interstate natural gas pipelines, five of which are backed by long-term, ship-or-pay contracts, is expected to deliver higher Partnership Cash flows as compared to 2013 primarily due to the increased membership interests in GTN and Bison. Great Lakes is expected to continue to contract largely on a short-term, short-haul basis; however, the higher recourse rates resulting from its recent settlement with shippers provide it with a greater opportunity to generate additional revenues as market conditions allow. Due to the effects of extended cold weather in the winter of 2013/14, management expects transportation revenues from our current pipeline systems to be modestly higher in 2014 when compared to 2013.

HOW WE EVALUATE OUR OPERATIONS

We evaluate our business primarily on the basis of the underlying operating results for each of our pipeline systems along with a measure of Partnership cash flows. This measure does not have a standardized meaning prescribed by GAAP. It is, therefore, considered to be a non-GAAP measure and is unlikely to be comparable to similar measures presented by other entities. Refer to Partnership Cash Flows for additional information.

RESULTS OF OPERATIONS



Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions, which cannot be known with certainty, that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ. There were no significant changes to the Partnership's critical accounting policies and estimates during the three months ended March 31, 2014.

Information about our critical accounting policies and estimates is included under Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2013.

Net Income Attributable to Controlling Interests

To supplement our financial statements, we have presented a comparison of the earnings contribution components from each of our investments. We have presented net income attributable to controlling interests in this format to enhance investors' understanding of the way management analyzes our financial performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

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Table of Contents Three months ended (unaudited) March 31, (millions of dollars) 2014 2013(a) Net income: GTN 22 21 Bison 12 11 North Baja 6 6 Tuscarora 4 4 Equity earnings: Northern Border 23 16 Great Lakes 10 2 Partnership expenses (10) (7) Net income 67 53 Net income attributable to non-controlling interests 10 10 Net income attributable to controlling interests 57 43



(a) Financial information was recast to consolidate GTN and Bison for the period presented.

First Quarter 2014 Compared with First Quarter 2013

For the three months ended March 31, 2014, net income attributable to controlling interests increased by $14 million to $57 million compared to $43 million in the first quarter of 2013. This increase was primarily due to higher equity earnings from Northern Border and Great Lakes partially offset by higher Partnership expenses.

Equity earnings from Northern Border were $23 million in the first quarter of 2014, an increase of $7 million compared to the same quarter in 2013. The increase was primarily due to Northern Border selling short-term services to its customers during the coldest periods this quarter.

Equity earnings from Great Lakes were $10 million in the first quarter of 2014, an increase of $8 million compared to the same period in 2013. The increase was primarily due to Great Lakes' sales of daily capacity during the winter peaks, plus sales of some one year capacity. Additionally, Great Lakes had lower operation and maintenance expenses and property taxes in the first quarter of 2014 compared to the same period in 2013.

Partnership expenses were $10 million in the first quarter of 2014, an increase of $3 million compared to the same period in 2013. The increase was primarily due to interest expense incurred in relation to the $500 million term loan obtained to finance a portion of the 2013 Acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of liquidity include distributions received from our investments in partially owned affiliates, operating cash flows from our subsidiaries, public offerings of debt and equity, term loans and our bank credit facility. The Partnership funds its operating expenses, debt service and cash distributions primarily with operating cash flow. Long-term capital needs may be met through the issuance of long-term debt and/or equity.

Our pipeline systems' principal sources of liquidity are cash generated from operating activities, long-term debt offerings, bank credit facilities and equity contributions from their owners. Our pipeline systems have historically funded operating expenses, debt service and cash distributions to their owners primarily with operating cash flow. However, since the fourth quarter of 2010, Great Lakes has funded its debt repayments with cash calls to its owners. Northern Border also funded $62 million of debt repayment in 2013 with a cash call to its owners.

Capital expenditures are funded by a variety of sources, including cash generated from operating activities, borrowings under bank credit facilities, issuance of senior unsecured notes or equity contributions from our pipeline systems' owners. The ability of our pipeline systems to access the debt capital markets under reasonable terms depends on their financial position and general market conditions.

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The Partnership's pipeline systems monitor the creditworthiness of their customers and have credit provisions included in their tariffs which, although limited by FERC, allow them to request credit support as circumstances dictate.

Our cash flow is based on the distributions from our portfolio of six pipelines. Overall, we believe that our pipeline systems' ability to obtain financing at reasonable rates, together with a history of consistent cash flow from operating activities, provide a solid foundation to meet future liquidity and capital requirements. We expect to be able to fund our liquidity requirements, including our distributions, at the Partnership level over the next 12 months utilizing our cash flow and our existing Senior Credit Facility if required.

Partnership Cash Flows



The Partnership uses the non-GAAP financial measures "Partnership cash flows" and "Partnership cash flows before General Partner distributions" as they provide a measure of cash generated during the period to evaluate our cash distribution capability. As well, management uses these measures as a basis for recommendations to our General Partner's board of directors regarding the distribution amount to be declared each quarter. Partnership cash flow information is presented to enhance investors' understanding of the way that management analyzes the Partnership's financial performance.

Partnership cash flows include net income attributable to controlling interests, less net income attributed to GTN's and Bison's former parent, plus operating cash flows from North Baja and Tuscarora, and cash distributions received from GTN, Northern Border, Bison and Great Lakes, less equity earnings from unconsolidated affiliates and Other Pipes' net income as previously reported, plus net income attributable to non-controlling interests from consolidated subsidiaries after the 2013 Acquisition, and net of distributions declared to the General Partner. Partnership cash flows before General Partner distributions represent Partnership cash flows prior to distributions paid to the General Partner.

Partnership cash flows and Partnership cash flows before General Partner distributions are provided as a supplement to GAAP financial results and are not meant to be considered in isolation or as substitutes for financial results prepared in accordance with GAAP.

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Table of Contents Non-GAAP Measures Reconciliations of Net Income Attributable to Controlling Interests to Partnership Cash Flows Three months ended (unaudited) March 31, (millions of dollars except per common unit amounts) 2014 2013 Net income attributable to controlling interests (a) 57 43



Less net income attributed to GTN's and Bison's former parent (a)

- (14) Net income as previously reported 57 29



Add:

Cash distributions from GTN (b) 20 6 Cash distributions from Northern Border (b) 21 22 Cash distributions from Bison (b) 12 4 Cash distributions from Great Lakes (b) 5 6



Cash flows provided by North Baja's and Tuscarora's operating activities

13 13 71 51



Less:

Equity earnings as previously reported: GTN - (5) Northern Border (23) (16) Bison - (3) Great Lakes (10) (2) (33) (26) Less: Other Pipes' net income as previously reported (c) GTN (22) - Bison (12) - North Baja (6) (6) Tuscarora (4) (4) (44) (10) Add:



Net income attributable to non-controlling interests after the 2013 Acquisition

10 - Partnership cash flows before General Partner distributions 61 44 General Partner distributions (d) (1) (1) Partnership cash flows 60 43 Cash distributions declared (52) (43) Cash distributions declared per common unit (e) $0.81$0.78 Cash distributions paid (52) (43) Cash distributions paid per common unit (e) $0.81$0.78



(a) Financial information for the three months ended March 31, 2013 was recast to consolidate GTN and Bison. Prior to the 2013 Acquisition, our net income was $29 million for the three months ended March 31, 2013, reflecting our 25 percent ownership in each of GTN and Bison at that time. As a result of the recast, net income attributable to controlling interests is $43 million for the three months ended March 31, 2013, as if we owned 70 percent in each of GTN and Bison. Net income attributed to GTN's and Bison's former parent of $14 million, reflecting the acquired ownership interests not then owned by the Partnership, reconciles the net income as previously reported and net income attributable to controlling interests.

(b) In accordance with the cash distribution policies of the respective entities, cash distributions from GTN, Northern Border, Bison and Great Lakes, are based on their respective prior quarter financial results. Distributions from GTN and Bison are based on 70 percent ownership starting from July 1, 2013.

(c) "Other Pipes" includes the results of North Baja and Tuscarora and, after July 1, 2013, also includes GTN and Bison.

(d) General Partner distributions represent the cash distributions paid to the General Partner with respect to its two percent interest plus an amount equal to incentive distributions. Incentive distributions in the first quarter of 2014 and 2013 were nil.

(e) Cash distributions declared per common unit and cash distributions paid per common unit are computed by dividing cash distributions, after the deduction of the General Partner's allocation, by the number of common units outstanding. The General Partner's allocation is computed based upon the General Partner's two percent interest plus an amount equal to incentive distributions.

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First Quarter 2014 Compared with First Quarter 2013

Partnership cash flows increased $17 million to $60 million for the three months ended March 31, 2014 compared to $43 million in the first quarter of 2013. This increase was primarily due to increased cash distributions from GTN and Bison of $22 million as a result of the 2013 Acquisition.

The Partnership paid distributions of $52 million in the first quarter of 2014, an increase of $9 million compared to the same period in 2013. This increase was due to a $0.03 increase in the distribution per common unit in July 2013, as well as an increase in the number of common units outstanding resulting from the equity issuance in May 2013.

Other Cash Flows

In the first quarter of 2014, the Partnership made an equity contribution of $4 million to Great Lakes which was used to fund debt repayments.

Contractual Obligations The Partnership's contractual obligations related to debt as of March 31, 2014 included the following: Payments Due by Period (millions of dollars) Total Less than 1 Year Long-term Portion Senior Credit Facility due 2017 370 - 370 Term Loan Facility due 2018 500 - 500 4.65% Senior Notes due 2021 349 - 349 5.09% Senior Notes due 2015 75 - 75 5.29% Senior Notes due 2020 100 - 100 5.69% Senior Notes due 2035 150 - 150 3.82% Series D Notes due 2017 24 3 21 1,568 3 1,565



The Partnership's Senior Credit Facility consists of a $500 million senior revolving credit facility with a banking syndicate, maturing November 20, 2017, under which $370 million was outstanding at March 31, 2014 (December 31, 2013 - $380 million).

The LIBOR-based interest rate on the Senior Credit Facility averaged 1.42 percent for the three months ended March 31, 2014 (2013 - 1.46 percent).

The LIBOR-based interest rate on the Term Loan Facility averaged 1.42 percent for the three months ended March 31, 2014. After hedging activity, the interest rate incurred on the Term Loan Facility averaged 1.83 percent for the three months ended March 31, 2014.

GTN's Senior Notes provisions contain a covenant that limits total debt to no greater than 70 percent of total capitalization.

Series D Senior Notes are secured by Tuscarora's transportation contracts, supporting agreements and substantially all of Tuscarora's property. The note purchase agreements contain certain provisions that include, among other items, limitations on additional indebtedness and distributions to partners.

At March 31, 2014, the Partnership was in compliance with its financial covenants, in addition to the other covenants which include restrictions on entering into mergers, consolidations and sales of assets, granting liens, material amendments to the Partnership Agreement, incurring additional debt and distributions to unitholders.

The Partnership's long-term debt results in exposures to changing interest rates. The Partnership uses derivatives to assist in managing its exposure to interest rate risk. Refer to Market Risk for additional information regarding the derivatives.

The fair value of the Partnership's long-term debt is estimated by discounting the future cash flows of each instrument at estimated current borrowing rates. The estimated fair value of the Partnership's long-term debt at March 31, 2014 was $1,617 million.

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Northern Border's contractual obligations related to debt as of March 31, 2014 included the following: Payments Due by Period (millions of dollars) Total Less than 1 Year Long-term Portion 6.24% Senior Notes due 2016 100 - 100 7.50% Senior Notes due 2021 250 - 250 $200 million Credit Agreement due 2016 62 - 62 412 - 412



As of March 31, 2014, $62 million was outstanding under its $200 million revolving credit agreement, leaving $138 million available for future borrowings. The interest rate related to the borrowings on the credit agreement was 1.37 percent as of March 31, 2014 (December 31, 2013 - 1.37). At March 31, 2014, Northern Border was in compliance with all of its financial covenants.

Northern Border has commitments of $5 million as of March 31, 2014 in connection with various capital overhaul and other capital projects.

Great Lakes' contractual obligations related to debt as of March 31, 2014 included the following: Payments Due by Period (millions of dollars) Total Less than 1 Year Long-term Portion 6.73% series Senior Notes due 2015 to 2018 36 9 27 9.09% series Senior Notes due 2014 and 2021 80 10 70 6.95% series Senior Notes due 2019 and 2028 110 - 110 8.08% series Senior Notes due 2021 and 2030 100 - 100 326 19 307



Great Lakes is required to comply with certain financial, operational and legal covenants. Under the most restrictive covenants in the senior note agreements, approximately $176 million of Great Lakes' partners' capital was restricted as to distributions as of March 31, 2014 (December 31, 2013 - $180 million). Great Lakes was in compliance with all of its financial covenants at March 31, 2014.

Capital Requirements

The Partnership made an equity contribution to Great Lakes of $4 million in the first quarter of 2014. This amount represents the Partnership's 46.45 percent share of a $9 million cash call from Great Lakes to make a scheduled debt repayment. The Partnership expects to make an additional $5 million equity contribution to Great Lakes in the fourth quarter of 2014 to further fund debt repayments.

GTN will spend approximately $54 million to build the Carty Lateral which is expected to be in-service in the fourth quarter of 2015. The Partnership's share is 70 percent or $38 million.

2014 First Quarter Cash Distribution

On April 25, 2014, the board of directors of our General Partner declared the Partnership's first quarter 2014 cash distribution in the amount of $0.81 per common unit payable on May 15, 2014 to unitholders of record as of May 5, 2014.

RELATED PARTY TRANSACTIONS



Please read Note 8 within Item 1. "Financial Statements" for information regarding related party transactions.


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Source: Edgar Glimpses