Letter to Unitholders
Since the inception of TC PipeLines in 1998, we have focused on delivering to our unitholders very stable and growing cash flows. We have accomplished this by ensuring the assets that the Partnership invests in are long-life, critical gas pipeline infrastructure.The recent decline in energy commodity markets and the global liquidity crisis have had a minimal impact on customer volumes flowing through our pipelines and a minimal impact on our earnings and our cash flows. This is not by accident. Our discipline and low-risk strategy deliberately minimizes unitholder exposure to excess financial leverage or commodity volatility. This focus will not change in the future. There are a number of opportunities available in the market today and we will select only those that provide the ability to grow earnings, cash flows and distributions in a stable low-risk manner.
The Partnership earned $108 million or $2.75 per common unit in 2008, compared to $89 million or $2.51 per common unit in 2007, an increase of ten per cent on a per common unit basis. Partnership cash flows increased $24 million to $156 million.
As a result of our success, cash distributions paid to our unitholders in 2008 were raised to $109 million compared to $87 million in 2007. Cash distributions paid in the fourth quarter, on an annualized basis, were $2.82 per common unit compared to $2.66 when we began the year. This represents a six per cent increase on a per common unit basis. And while we have increased our distribution to unitholders, our Partnership cash flows and distribution coverage ratio remain robust. Our pipeline investments achieved strong results in 2008 with the second half of the year as stable and solid as the first half. Great Lakes, with its competitive market position, continues to deliver solid results. With long-term contracts for most of its capacity, Tuscarora provides consistent and predictable earnings. While Northern Border has seen an increase in the level of competition in the markets it serves, it was able to optimize revenues with its seasonal rate structure and still deliver results comparable to 2007.
Key events and accomplishments of 2008 that continue to strengthen the Partnership include:
Northern Border filed with the FERC in February 2008 to construct, own and operate interconnect facilities, including a 1,600 horsepower compressor facility near Joliet, Illinois. Construction began in September 2008 and the facilities became operational in early March 2009. The $18 million project, which is fully subscribed under an eighteen year long-term contract, is estimated to generate revenues of approximately $3 million per year.
In August 2008, Northern Border sold its wholly-owned subsidiary, Bison Pipeline LLC, to TransCanada Corporation (TransCanada), for $20 million and recognized a gain on sale of $16 million. The Partnership received a special distribution of $8 million in the third quarter of 2008 related to this sale. As part of the transaction, TransCanada assumed the assets and obligations of Northern Border related to the development of the proposed Bison pipeline system (Bison Project), and continues to work with the Bison Project shippers to finalize the size and design of this project.
The Bison Project will ship natural gas from the Powder River Basin in Wyoming to an interconnection point with the Northern Border system in Morton County, North Dakota. The project has shipping commitments for approximately 407 million cubic feet per day and is projected to be in service in late 2010. Shippers on the Bison Project have signed contracts for the same capacity on the Northern Border system from Port of Morgan, Montana to Ventura, Iowa, which take effect when the pipeline becomes operational. The completion of the Bison Project will diversify Northern Border's gas supply source and provide another transportation solution for shippers to export natural gas from the Rockies basin.
Tuscarora's compressor station expansion project, designed to support the Sierra Pacific Power Company's Tracy Power Plant expansion, went into service on April 1, 2008. The approximately $20 million project was completed on budget, with costs set to be recovered under a 22.5 year long-term transportation service agreement. The contract is expected to generate yearly revenues of approximately $6 million.
Great Lakes experienced a strong year in 2008. Increased sales of short-term firm transportation services at higher average rates, as well as increased use of interruptible transportation services and storage-related services, contributed to higher revenues and system utilization in 2008. Great Lakes had firm transportation contracts for 88 per cent of its available capacity as of January 31, 2009. We are encouraged by the continued demand for services on Great Lakes and expect continued stable cash flows.
While our portfolio of assets continue to perform well and we pursue opportunities to maximize their value, a number of opportunities exist at TransCanada that will have a positive impact on the earnings and cash flows of the Partnership going forward. In addition to the Bison Project, TransCanada has firm commitments to connect approximately 1.5 billion cubic feet per day of natural gas under development in the Montney and Horn River shale plays in northeastern British Columbia. This new supply will connect to TransCanada's existing Alberta pipeline system. The Partnership's assets are very well positioned to move this new natural gas supply to premium markets in North America. In the longer term, TransCanada's efforts to bring Mackenzie and Alaska gas to market could provide further supply diversification to our pipeline systems.
TransCanada is also in the midst of executing a very large organic growth program and one of its options to finance a portion of this growth could include the sale of U.S. pipeline assets to the Partnership. This would provide the Partnership an opportunity to grow and still allow TransCanada to maintain a strategic interest in the assets.
We consider our affiliation with TransCanada one of our most valued competitive strengths. Today, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas pipelines, power generation, gas storage facilities, and projects related to oil pipelines. TransCanada provides access to a significant pool of management talent, strong relationships throughout the energy industry and, as operator of our pipeline systems, trusted and experienced operations staff.
In summary, we believe we are well positioned to continue to grow through these uncertain economic times. Ongoing reliable cash flows from our quality investments, and a strong balance sheet combined with financial liquidity, provide us with the capacity to pursue new opportunities. In addition, the pool of management talent dedicated to the success of the Partnership places us in a unique position to continue the success we have achieved over the years. I am confident the Partnership will continue to deliver stable, sustainable cash distributions in 2009 and beyond.
On behalf of TC PipeLines, LP
Russ Girling
Chairman and Chief Executive Officer
TC PipeLines GP, Inc.
