Letter to Unitholders
TC PipeLines celebrated its 10 year anniversary in 2009. Over the course of the past decade, the Partnership has maintained its focus on delivering stable and growing cash distributions to unitholders. Our discipline and low-risk strategy has built an impressive track record of success.62% Growth in Annual Cash Distributions Paid per Common Unit Since Inception
* Prorated for full year
** Fourth quarter distribution on an annualized basis
Since 1999, the Partnership has grown its annualized cash distribution to unitholders by 62 per cent from $1.80 to $2.92 per common unit. While we have consistently increased our distribution, the Partnership's strong distribution coverage ratio has never been compromised. We have grown through disciplined acquisitions and expansions and have deliberately avoided excess financial leverage and commodity volatility. Today we have interests in almost 3,700 miles of interstate natural gas pipelines which are an essential part of the North American natural gas transportation infrastructure. These pipelines transport six per cent of the total natural gas consumed in the United States and deliver to several key, large markets. The relationship with our sponsor and general partner, TransCanada, has been key to our success as TransCanada operates our pipelines and provides access to a significant pool of management talent.
In a year of challenges in the North American economy, which included reduced demand for all energy commodities, TC PipeLines performed exceptionally well. A number of key events contributed to the Partnership's continued growth in 2009:
Key events and accomplishments of 2008 that continue to strengthen the Partnership include:
- Acquired North Baja pipeline from TransCanada for $270 million
- Amended and reset the general partner incentive distribution rights which repositioned TC PipeLines with a lower cost of capital to continue to grow
- Increased cash distributions paid to unitholders by 7.7 per cent, 3.5 per cent on a per unit basis
- Completed a $190 million equity offering
- Continued to generate strong earnings and cash flow despite increased competition and lower natural gas volumes available for transport
Partnership cash flows for the year ended December 31, 2009, increased $7 million to $150 million. Cash distributions paid to unitholders increased $8 million to a total of $117 million. On a per common unit basis, distributions paid increased to $2.87 in 2009 from $2.775 in 2008.
Cash distributions paid in the fourth quarter, on an annualized basis, were $2.92 per common unit. This represents an increase of approximately 3.5 per cent compared to $2.82 at the outset of the year. While we have increased the distribution to unitholders, our Partnership distribution coverage ratio remains strong.
Net income earned by the Partnership in 2009 was $98 million ($2.34 per common unit) compared to $108 million ($2.73 per common unit) in 2008. The decrease was primarily due to lower transmission revenues earned by the Northern Border pipeline system. Earnings from Tuscarora and Great Lakes were strong and similar to 2008 while the incremental earnings from the mid-year acquisition of North Baja somewhat offset the current declines on Northern Border.
On July 1, 2009, the Partnership acquired the North Baja natural gas pipeline from our sponsor, TransCanada, and amended the general partner's incentive distribution rights (IDRs). We were very pleased with this development as it adds a new source of cash flow and places the Partnership in a stronger competitive position to grow. The aggregate consideration provided to TransCanada included a combination of cash and common units valued at approximately $395 million.
North Baja is a high quality asset offering supply diversity and security of cash flows through long-term contracts extending out to 2026. Built in 2002, North Baja enhances the geographic diversity of the Partnership and is essential infrastructure in the region it serves.
The amendment of the general partner IDRs reduces the Partnership's cost of capital, competitively positions us for further growth and increases cash available for distribution to common unit holders. Specifically, the general partner IDRs were reset to two per cent, down from the previous 50 per cent and going forward the maximum is capped at a new lower level of 25 per cent. The general partner, through these amendments, has one of the lowest IDRs compared to many master limited partnerships.
Operationally, Great Lakes experienced another consistent and solid year in 2009. Total net revenues earned were similar to those in 2008. While overall throughput volumes were lower, the related reduction in revenues was offset by short-term revenues. Longer term, Great Lakes expects the trend towards shorter term contracts to continue as long-term contracts expire.
On November 19, 2009, the Federal Energy Regulatory Commission (FERC) issued an order instituting an investigation into the rates charged by Great Lakes. On February 4, 2010, Great Lakes filed with the FERC a cost and revenue study which fully support Great Lakes' current rates. Great Lakes will continue to work towards a settlement and is confident that a reasonable outcome can be achieved.
As in previous years, Tuscarora performed very well and delivered stable earnings and cash flow for the Partnership. Because of its unique location and the profile of its long-term contracts, Tuscarora is generally unaffected by shifting natural gas market fundamentals. During 2009, Tuscarora had 99 per cent of its design capacity fully contracted. Looking forward, 97 per cent of its design capacity was contracted for on a long-term basis for a remaining period of 11 years.
Our Northern Border investment was challenged in 2009 by the decline in gas flows out of the Western Canadian Sedimentary Basin (WCSB) and a temporary gas oversupply situation in the markets it serves. Natural gas flows out of the WCSB, on average, were 1.1 billion cubic feet per day (bcf/d) lower in the 2009 compared to 2008, due to a number of factors including the reduction in natural gas exploration and development activity, caused by weak demand and weak prices, and the reduced availability of capital.
Incremental volumes are expected to be transported on Northern Border starting in late 2010 with the completion and placing into service of TransCanada's Bison natural gas pipeline. The project is in the final stages of the regulatory process and construction is expected to commence in May 2010. Bison will interconnect with Northern Border and have an initial contract capacity of 407 million cubic feet per day (mmcf/d), with a potential expandability of up to 1.0 bcf/d. Northern Border has executed downstream contracts with Bison shippers for approximately 400 mmcf/d for 10 years from Port of Morgan, Montana to Ventura, Iowa. The Bison pipeline will diversify Northern Border's gas supply, strengthen its contract portfolio, and provide another transportation solution for shippers exporting natural gas supply from the Rockies basin.
We expect volumes produced in the WCSB will stabilize in the near term and start to increase over time as the Horn River and the Montney shale plays in northeastern British Columbia are developed and brought on stream. From a geologic perspective, there is every indication that the Canadian shale plays will grow and perform at least as well as their U.S. counterparts.
Shale gas plays have received considerable attention this past year. TransCanada has two projects under development, the Groundbirch and Horn River pipelines, which are expected to connect approximately 1.6 bcf/d of new shale gas under development in northeast British Columbia starting in late 2010. These facilities are short extensions of TransCanada's Alberta system and designed to capture further growth up to almost 3.0 bcf/d. The Groundbirch pipeline is expected to connect natural gas supply primarily from the Montney shale gas region. Subject to regulatory approvals, construction is expected to begin in July of 2010, with final completion anticipated in November of 2010. The project has secured firm transportation agreements that are expected to reach 1.1 bcf/d by 2014. The Horn River pipeline will service the Horn River shale gas region. TransCanada's secured transportation agreements were recently increased to 503 mmcf/d by 2014. Subject to regulatory approvals, the Horn River pipeline is expected to be in service in second quarter 2012.
Over the longer term, TransCanada's involvement and efforts to connect Alaska and Mackenzie Delta gas would provide further supply diversification for natural gas volumes aggregated at the Alberta hub.
Our affiliation with our sponsor, TransCanada, is one of our principle strengths. With approximately $45 billion in assets, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas and oil pipelines, power generation and natural gas storage facilities.
In 2009, TransCanada increased its ownership in TC PipeLines from 32.1 per cent at the beginning of the year to 38.2 per cent at year end while the Partnership increased the common units outstanding from 34.9 million to 46.2 million.
TransCanada is in the middle of building and financing a large C$22 billion multi-year capital program. As evidenced by the dropdown of the North Baja pipeline to the Partnership and the restructuring of IDRs, TC PipeLines can potentially play an important role in the financing of TransCanada's capital program in years to come.
Our strong financial position, including available unused capacity on our credit facility, provides the ability to pursue opportunities to continue to grow in a sustained and disciplined manner for the long-term benefit of our unitholders.
I am confident that the demand for natural gas will continue to grow, especially in a less carbon intensive energy future. The discovery and application of new technologies has significantly increased the supply potential from all over North America, including the supply from Western Canada. As these new supplies come on stream, the Partnership's pipelines are well positioned to move that gas to growing markets for decades to come.
On behalf of TC PipeLines, LP
Russ Girling
Chairman and Chief Executive Officer
TC PipeLines GP, Inc.
