Letter to Unitholders
2010 marked a very successful year for TC PipeLines. Our strategy has been to invest in low risk, fee-based assets supported by strong fundamentals. These types of assets provide earnings and cash flow certainty due to their regulated nature. This strategy has served us well. Over the past ten years, we've outperformed the Alerian MLP Total Return Index. An original investment back in 2001 provided you, our unitholder, a total return of 475 per cent which was 40 per cent higher than the index. This impressive track record of delivering value stems from our long history of providing stable and growing distributions in a conservative and disciplined manner.
Year in Review
The North American economy is starting to show signs of a sustained recovery and appears to be slowly improving. Within this environment, TC PipeLines had a very successful year attributed to the strong financial results from all four of our pipeline assets, in particular, Northern Border. Several key events and accomplishments contributed to this success:- Increased cash distributions paid on a per unit basis by 2.4 per cent
- Reached a negotiated settlement on the Great Lakes Section 5 rate proceeding
- Placed North Baja's Yuma lateral into service on March 13, 2010
- Received Federal Energy Regulatory Commission (FERC) approval on November 22, 2010 for construction of the $18 million Northern Border Princeton lateral
- In January 2011, Northern Border started moving U.S. Rockies gas via the interconnection with TransCanada's Bison pipeline.
As we move forward into 2011, we look to build on our successes in 2010 as we continue to execute our business strategy.
Stable Cash Flows and Growing Distributions
Our Partnership experienced a strong year in terms of financial performance. Partnership cash flows increased $30 million to $180 million. Cash distributions paid to unitholders increased $22 million to $139 million. Despite the increase in distributions paid to unitholders, we continue to maintain a solid distribution coverage ratio ending with 1.30 times coverage.
67% Growth in Annual Cash Distributions Paid per Common Unit Since Inception
*Prorated for full year**Fourth quarter distribution on an annualized basis
For the year, Partnership net income increased $31 million to $137 million, or $2.91 per common unit. This increase of 29 per cent came primarily from the strong performance of Northern Border.
Essential Infrastructure
With interests in over 3,900 miles of interstate natural gas pipelines and a combined total deliverable capacity of 5.6 billion cubic feet per day (bcf/d), our assets are essential infrastructure that supply approximately five per cent of the United States daily gas volumes and are well interconnected to the key markets that they serve. During the course of year, our assets performed exceptionally well, demonstrating the strong fundamentals that support our business.
On July 15, 2010, the FERC approved our settlement resulting from the Great Lakes Section 5 rate proceeding. Under the terms of the settlement, maximum reservation rates on Great Lakes were reduced by eight per cent. This rate reduction should help ensure that Great Lakes' remains competitive as a key pipeline serving midwest markets. Our team did an outstanding job working with the FERC and our shippers on a settlement which provides us with greater certainty on future tolls.
Northern Border's strong year can be attributed to the increased demand for its transportation services as the temporary gas oversupply situation faced in 2009 corrected itself in 2010. As reduced supplies from other pipelines which now are serving other markets, volumes rebounded in 2010 as it experienced strong demand for its services and favorable basis differentials. In addition, Northern Border received approval to construct the $18 million Princeton lateral which is supported by a 10 year firm-service contract that will connect to a power generation facility.
Both North Baja and Tuscarora are situated in unique geographic locations and the profile of their long term contracts provide stable earnings and cash flows from year to year. As such, these two pipelines are generally unaffected by shifting natural gas supply and demand fundamentals and provide good diversification to our portfolio of pipeline assets. North Baja expanded its reach as it placed the Yuma lateral in south west Arizona into service in March 2010 to serve an expansion of a power generation facility which is expected online in early 2011.
In a year that saw two major tragic pipeline incidents, operator safety and maintenance practices have been called into question. TC PipeLines is proud to be supported by a strong sponsor in TransCanada. As our general partner and the operator of our assets, TransCanada operates North America's largest natural gas pipeline network and is proud of its operating history and maintenance practices. While it is too early to tell what the potential impact of the various proposed industry regulations, we will continue to monitor the situation closely. We remain confident our pipeline assets are essential North American infrastructure for the markets that they serve and will continue to represent solid investments for TC PipeLines.
Accessing New Gas Supply
Strong support from our sponsor, TransCanada, is one of our core strengths. TransCanada is in the midst of developing its large multi-year capital program. As part of this program, several developments are expected to have a positive impact on TC PipeLines.Construction began on the Bison natural gas pipeline in July 2010 and became operational in January 2011. The Bison pipeline will bring gas from the Powder River Basin in Wyoming and interconnect with the Northern Border pipeline in North Dakota. Bison shippers have executed 10 year downstream contracts on Northern Border for 407 million cubic feet per day (mmcf/d) from the Port of Morgan, Montana, to Ventura, Iowa. These contracts will not only strengthen Northern Border's contract portfolio, but also help to diversify its natural gas supply. The pipeline also has the potential for expansion through additional compression.
In November 2010, TransCanada began moving gas from the Montney shale gas formation in northeastern British Columbia on its newly constructed Groundbirch pipeline into the Alberta System. The project has firm transportation contracts that will reach 1.24 bcf/d by 2014. TransCanada's other shale gas pipeline project will connect Horn River gas. The Horn River pipeline has contract commitments that will reach 634 mmcf/d by 2014 and is expected to be operational in the second quarter 2012. These two projects will bring approximately 1.9 bcf/d of new shale gas volumes onto TransCanada's Alberta System that will be ultimately be available for consumption and export to downstream markets.
In addition to the committed volumes received to date, TransCanada also has received expressions of interest from producers for an additional 2.3 bcf/d of transportation services from these developing shale plays. The continued interest from natural gas producers to develop shale gas plays within the Western Canadian Sedimentary Basin (WCSB) leads us to remain optimistic that volumes produced and exported out of the WCSB will stabilize in the near term and will start to increase over time as the potential of the Horn River and Montney shale plays are developed and brought on stream. Both Northern Border and Great Lakes are well positioned to play an integral role in this regard as producers require major reliable pipelines to move this gas to market.
Looking beyond the growth in Canadian shale gas plays, our long haul pipelines are uniquely positioned to capture volumes from other U.S. shale gas sources. The emerging Bakken shale play in Montana and North Dakota along with the Collingwood shale play in Michigan are future sources of gas supply that Northern Border and Great Lakes could potentially capture and move to market given their footprint.
Positioned for Growth
Our conservative and strong balance sheet which includes a largely undrawn credit facility and a low general partner cash take that is amongst the lowest in the industry, provides us with the financial flexibility and liquidity to pursue growth opportunities in a disciplined manner that will benefit our unitholders over the long term.Growth opportunities have the potential to come from several sources. With TransCanada now close to half way through its C$20 billion multi-year capital program, TC PipeLines could potentially play a key role in its financing needs to complete this program. While we wait for an opportunity to assist TransCanada with its capital needs, we continue to explore opportunities to acquire third party assets that would complement our existing asset base. As we evaluate these opportunities, rest assured that we will remain disciplined in our investment approach, only selecting those that provide the ability to grow earnings, cash flows and distributions in a stable low-risk manner.
With access to a large pool of talent for management through our affiliation with TransCanada, the strong fundamentals supporting our existing asset base, a promising long-term outlook for gas with the growth in gas supplies from new shale plays and with a sound financial position, I am confident the Partnership is well positioned to continue delivering value to its unitholders and will provide stable and growing cash distributions well into the future.
On behalf of TC PipeLines, LP
Steve Becker
President and Director, TC PipeLines GP, Inc.
