Add
TCLP to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| TCLP > SEC Filings for TCLP > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
The following discusses the results of operations and liquidity and capital resources of TC PipeLines, along with those of Great Lakes, Northern Border and Tuscarora (together "our pipeline systems") as a result of the Partnership's ownership interests.
The following discussions of the financial condition and results of operations of the Partnership and its pipeline systems should be read in conjunction with the financial statements and notes thereto of the Partnership, Great Lakes Gas Transmission Limited Partnership (Great Lakes) and Northern Border Pipeline Company (Northern Border) included elsewhere in this report. See Item 8. "Financial Statements and Supplementary Data". For more detailed information regarding the basis of presentation for the following financial information, see the notes to the financial statements of the Partnership, Great Lakes and Northern Border. All amounts are stated in United States of America (U.S.) dollars.
PARTNERSHIP OVERVIEW
TC PipeLines was formed in 1998 as a Delaware limited partnership. TC PipeLines was formed by TransCanada PipeLines Limited, a wholly-owned subsidiary of TransCanada Corporation (collectively referred to herein as TransCanada), to acquire, own and participate in the management of energy infrastructure assets in North America. Our strategic focus is on delivering stable, sustainable cash distributions to our unitholders and finding opportunities to increase cash distributions while maintaining a low risk profile.
TC PipeLines, LP and its subsidiaries are collectively referred to herein as "TC PipeLines" or "the Partnership." In
this report, references to "we", "us" or "our" collectively refer to TC PipeLines or the Partnership. The general partner of the Partnership is TC PipeLines GP, Inc., a wholly-owned subsidiary of TransCanada.
We own a 46.45 per cent general partner interest in Great Lakes, which we acquired on February 22, 2007 from El Paso Corporation. The remaining 53.55 per cent general partner interest in Great Lakes is held by TransCanada.
We own a 50 per cent general partner interest in Northern Border. The other 50 per cent general partner interest in Northern Border is held by ONEOK Partners L.P. (ONEOK Partners), a publicly traded limited partnership that is controlled by ONEOK, Inc.
As of December 31, 2007, we acquired the remaining two per cent general partner interest in Tuscarora Gas Transmission Company (Tuscarora), thereby making it a wholly-owned subsidiary.
Our general partner interests in Great Lakes, Northern Border and Tuscarora represent our only material assets at December 31, 2008. As a result, we are dependent upon Great Lakes, Northern Border and Tuscarora for all of our available cash. Our pipeline systems derive their operating revenue from the provision of natural gas transportation services.
Great Lakes Overview
Great Lakes is a Delaware limited partnership formed in 1990. Great Lakes was originally constructed as an operational loop of the TransCanada Mainline Northern Ontario system. Great Lakes receives natural gas from TransCanada at the Canadian border near Emerson, Manitoba and extends across Minnesota, Northern Wisconsin and Michigan, and redelivers gas to TransCanada at the Canadian border at Sault Ste. Marie, Michigan and St. Clair, Michigan.
Northern Border Overview
Northern Border is a Texas general partnership formed in 1978. Northern Border transports natural gas from the Canadian border near Port of Morgan, Montana to a terminus near North Hayden, Indiana. Additionally, Northern Border transports natural gas produced in the Williston Basin of Montana and North Dakota, and the Powder River Basin of Wyoming and Montana, and synthetic gas produced at the Dakota Gasification plant in North Dakota.
Tuscarora Overview
Tuscarora is a Nevada general partnership formed in 1993. Tuscarora originates at an interconnection point with existingfacilities of Gas Transmission Northwest Corporation (GTN), a wholly-owned subsidiary of TransCanada, near Malin, Oregon and runs through Northeastern California and Northwestern Nevada to a terminus near Wadsworth, Nevada. Along its route, deliveries are made in Oregon, Northern California and Northwestern Nevada.
OBSERVATIONS ON CURRENT ENVIRONMENT
With the economic conditions in the U.S. having changed dramatically in the last half of 2008, there has been a tightening of the credit markets, impacting the availability and cost of financing. Both industrial production and consumer spending fell sharply in the last half of 2008. Businesses have been increasingly faced with reduced demand for their products, increased credit tightening, and deteriorating counterparty creditworthiness. In addition, commodity prices have decreased dramatically from multi-year highs in the summer of 2008 to multi-year lows by the end of the year. In short, worldwide economies have entered a recessionary period.
While the current economic environment has reduced the demand for natural gas, once the economy returns to growth mode, North America's demand for natural gas is expected to rise, especially in light of reduced commodity prices combined with the relative environmental merits of natural gas versus other carbon based forms of energy. Natural gas supplies in North America are also expected to be impacted by the current environment, mainly due to lower prices, along with credit and liquidity impacts on natural gas producers. Production from specific natural gas basins in North America will be dependent upon relative operating costs, with reduced natural gas drilling activity expected to contribute to lower production overall.
These reductions in natural gas demand and the changing geography and quantity of supply from various basins will impact the overall natural gas transportation infrastructure. With respect to our systems, demand for our pipeline systems' transportation services are directly related to the demand and supply alternatives for natural gas in the markets served by our pipeline systems. In addition, the impact of any changes in demand on the revenues of our pipeline systems is dependent upon the levels of firm transportation contracts and the creditworthiness of the counterparties which hold those positions. Tuscarora has firm transportation contracts for 100 per cent of its available capacity as at January 31, 2009. Great Lakes' average design capacity is 88 per cent contracted at January 31, 2009. Northern Border's system has the most exposure to changes in demand with approximately 60 per cent of its capacity available for 2009.
As we are dependent upon cash flows received from our pipeline systems to fund our distributions, if there is a prolonged impact to demand for natural gas transportation services or creditworthiness of our pipeline systems' shippers, our partnership cash flows may be negatively impacted. However, we have a strong financial position, including an available unused credit facility at favorable rates, which gives us the capacity to meet any funding commitments to our investments, along with pursuing opportunities to grow.
OUTLOOK
The Partnership
Access to capital markets is important to the Partnership to enable it to execute its business strategies, which include seeking opportunities to undertake accretive acquisitions and organic growth projects, and maximize the value of our existing portfolio of pipeline systems. Recently, the general economic and capital market conditions in the U.S. and other parts of the world have deteriorated significantly and have adversely affected access to capital and increased the cost of capital. If these conditions continue or become worse, the Partnership's future cost of debt and equity capital, and future access to capital markets could be adversely affected.
Our strong financial position, including an available unused credit facility, gives us the capacity to pursue opportunities to grow in a sustained and disciplined manner for the long-term benefit of our unitholders.
Great Lakes
At January 31, 2009, the weighted average remaining contract life of Great Lakes' contracts was 2.7 years and 88 per cent of its average design capacity was contracted on a firm basis for the first quarter of 2009. As of January 31, 2009, Great Lakes had approximately 12 per cent of its average design capacity uncontracted beginning in the second quarter of 2009 and 14 per cent by December 31, 2009. Dependent on competitive factors and prevailing market conditions, Great Lakes may discount transportation capacity as needed to optimize revenue.
Northern Border
At January 31, 2009, the weighted average remaining contract life of Northern Border's contracts was 2.1 years and 82 per cent of its capacity was contracted on a firm basis for the first quarter of 2009. As of January 31, 2009, Northern Border had approximately 60 per cent of its design capacity uncontracted beginning in the second quarter of 2009 through the remainder of 2009. Prevailing market conditions and increasing competitive factors in North America expected in 2009, including REX, will continue to challenge Northern Border's ability to market its available capacity, and may negatively impact revenue in 2009.
Tuscarora
At January 31, 2009, the weighted average remaining contract life of Tuscarora's contracts was 11.6 years. As of January 31, 2009, Tuscarora has approximately two per cent of its design capacity uncontracted beginning in the second quarter of 2009.
FACTORS THAT IMPACT OUR BUSINESS
Key factors that impact our business are the cash flows received from our investments and our ability to maintain a strong financial position. Cash flows from our investments are dependent upon the ability of Great Lakes and Northern Border to make distributions to us and of Tuscarora to generate positive operating cash flows. Partnership cash flows from our investments are necessary to fund distributions to our unitholders. A strong financial position will ensure that we are able to maintain a prudent level of available cash to make distributions to our unitholders.
FACTORS THAT IMPACT THE BUSINESS OF OUR PIPELINE SYSTEMS
Our pipeline systems provide natural gas transportation services to their customers. Key factors that impact their business are the supply of and demand for natural gas in the markets in which our pipeline systems operate; the customers of our pipeline systems and the mix of services they require; competition; and government regulation of natural gas pipelines. These factors are discussed in more detail below.
Supply and Demand of Natural Gas
Our pipeline systems depend upon the continued availability of natural gas production and reserves in the regions they access, primarily the Western Canada Sedimentary Basin (WCSB). Our pipeline systems provide their customers with natural gas transportation services to market demand areas. The "net WCSB flows to U.S. markets" are dependent upon natural gas production levels, demand for natural gas in Canada, and storage capacity for Canadian natural gas and demand for storage injection in Canada. The net WCSB flows to U.S. markets were lower in 2008 compared to 2007, due mainly to a decrease in production. Colder than normal weather conditions also contributed to increased Canadian demand. At the same time, there has been an increase in U.S. natural gas production, mainly due to the development of unconventional reserves in the lower-48 States.
Decreases in WCSB production are expected to continue in 2009 as there has been a decline in drilling and exploration activity by WCSB producers, mainly related to the sharp reductions in commodity prices over the last half of 2008. Decreases in WCSB production are also related to higher supply costs, including higher royalties, and competition for capital from other North American basins that have lower exploration costs. Commodity prices, combined with restrictions on liquidity and access to capital, have contributed to the postponement and/or cancellation of certain oil sands projects, which may impact Canadian demand for WCSB natural gas.
Factors which may mitigate declines related to WCSB production in the future include strengthening gas prices and decreases in oil prices as they affect demand from Alberta oil sands production. We expect WCSB producers will continue to explore and develop new fields in Western Canada as well as direct significant activity at unconventional resources such as coalbed methane and shale gas. As well, additional Canadian natural gas supply sources may be available in the future if new pipeline projects associated with the Montney and Horn River shale gas regions in Western Canada, the Mackenzie Delta in Northern Canada and the North Slope of Alaska are constructed.
Factors which may impact the overall demand for natural gas include weather conditions, economic conditions, government regulation, availability and price of alternative energy sources, fuel conservation measures, and technological advances in fuel economy and energy generation devices. Although demand for natural gas is expected to decline in North America in 2009 with the current economic downturn, we expect a demand increase in the long-term. Demand for natural gas transportation service on our pipeline systems is directly correlated to the activity in the natural gas markets served by these systems. Additionally, factors that may impact demand for transportation service on any one system include the ability and willingness of natural gas shippers to utilize one system over alternative pipelines, transportation rates, and the volume of natural gas delivered to markets from other supply sources and storage facilities.
The decline in net WCSB flows to markets in 2008 was not the primary factor which negatively impacted throughput on our pipeline systems in 2008. We cannot predict the impact of any continued declines in net WCSB flows to markets on 2009 throughput as this will depend on those net flows in the future and market conditions in the markets our pipeline systems serve.
The impact of changes in demand for natural gas transportation services on operating revenues for our pipeline systems is dependent upon the extent to which capacity has been contracted under long-term firm contracts.
Throughput on Great Lakes' pipeline system in 2008 was slightly lower than 2007 and 2006 primarily due to underutilization of firm contracts, and therefore had minimal impact on revenue.
The majority of Northern Border's supply comes from the WCSB. Increased drilling and production activity, primarily in Wyoming within the Powder River Basin, has resulted in producers expressing interest in the proposed Bison Pipeline Project which, if completed, would bring approximately 407 MMcf/d of additional supply from this region to Northern Border and would increase Northern Border's supply diversity. See the Year in Review - 2008 section of Item 1. "Business" for additional information about the Bison Pipeline Project. Growth in other producing regions such as the Williston Basin of Montana and Northern Dakota, and further development of the Rockies supply basin, may provide future opportunities for supplies being delivered from these other producing regions which would further diversify Northern Border's supply sources. Finally, another source of supply could come from future development of coal gasification projects that would be built close to coal producing regions most likely in North Dakota.
The Midwest markets served by Northern Border were impacted in 2008 by incremental supply from the Rockies natural gas basin with the completion of the Western segment of the Rockies Express Pipeline. Demand for transportation on Northern Borders' pipeline system in 2008 declined as a result of this increased supply competition, as discussed further under "Competition".
The GTN system is one of the U.S. transporters of Canadian natural gas from the WCSB, effectively the sole source of gas on Tuscarora. Tuscarora's largest customers are in the Reno-Sparks area of Washoe County, Storey County and downstream of the Paiute system, where gas consumption has increased significantly as a result of increased industrial use, population growth and gas-fired power generation.
Customers and Contracting
Our pipeline systems transport natural gas for a variety of customers including other natural gas pipelines, natural gas distribution companies, electric generation companies, natural gas producers, and natural gas marketers.
Our pipeline systems are subject to credit risk related to the ability of their customers or shippers to meet their contractual payment obligations. The tariffs on our pipeline systems allow for them to require customers to post credit support under the terms of these tariffs. This somewhat mitigates our pipeline systems' exposure to counterparty credit risk. During 2008, the bankruptcy of Lehman Brothers Holdings Inc. and the weakening of companies within the energy industry have underscored the importance of these tariff provisions. However, in some instances it is also limiting the amount of capacity a customer can contract for, as their ability to meet or post the required support is being negatively impacted by their liquidity constraints.
Great Lakes' average contracted capacity was near 100 per cent of its average design capacity for 2008. At January 31, 2009, 88 per cent of its average design capacity was contracted on a firm basis. In November 2008, TransCanada renewed 360 million Dth/d, or 16 per cent, of capacity on Great Lakes through October 2012. As well, Great Lakes' transportation values increased throughout 2008, partially due to the increase in tolls from its main competitor (the TransCanada Mainline), and partially because of strong spread values between Alberta and Dawn, Ontario. As a result, Great Lakes sold new contracts as well as renewed long and short haul contracts at maximum tariff rates for the next two years. Depleted storage inventories in Eastern Canada and the U.S. supported demand for Great Lakes' transportation, as customers utilized Great Lakes' transportation to access and fill storage locations adjacent to its pipeline over the summer months.
Northern Border's average contracted capacity was 90 per cent of its design capacity for 2008. Transportation values on Northern Border's system were strong in the fourth quarter, mainly related to weather conditions, which enabled Northern Border to sell its available capacity in the fourth quarter of 2008 at maximum rates. Northern Border's capacity to Chicago remains attractive and is substantially under contract for multiple years. Legacy contacts related to this capacity that were set to expire in the near term have been renewed. However, prevailing market conditions and increasing competitive factors in North America, including in-service of the Western segment of the Rockies
Express Pipeline (REX West), have caused Northern Border to experience a reduction in its revenues due to lower capacity sales and greater discounting of its rates. These factors, as well as expirations of certain long-term contracts, will continue to impact Northern Border's ability to market its available capacity into 2009. As of January 31, 2009, Northern Border had approximately 60 per cent of its design capacity uncontracted beginning in the second quarter of 2009 through the remainder of 2009.
Tuscarora operates under long-term contacts with 100 per cent of its design capacity contracted with a weighted average remaining life on those contracts of 11.6 years as of January 31, 2009. The weighted average remaining life of Tuscarora's contracts increased during 2008 with the completion of the compressor station expansion project, which was underpinned by a 22.5-year contract.
Competition
Our pipeline systems compete primarily with other interstate and intrastate pipelines in the transportation of natural gas. Additionally, supply competition from other natural gas sources can impact demand for transportation on our pipeline systems. Growth in supplies available from other natural gas producing regions can impact prices for natural gas delivered to some of the markets our pipeline systems serve relative to other market regions.
Great Lakes competes directly with Northern Border, Alliance/Vector, Viking and the TransCanada Mainline. In addition, supply competition from other natural gas sources can impact demand for transportation on Great Lakes. Great Lakes anticipates that further growth in supplies from the Rocky Mountain region will create additional supply in the markets Great Lakes serves. Anticipated additional supplies from the Eastern segment of the Rockies Express Pipeline (REX East), discussed below, may provide opportunities for Great Lakes to market its Eastern zone capacity for storage injection and withdrawal, which has historically been underutilized.
The pipeline systems that offer primary competition to Northern Border include Alliance Pipeline, Great Lakes, Gas Transmission Northwest, and other pipelines that interconnect with the TransCanada mainline for WCSB supply. Additionally, Northern Border competes with other pipelines that serve Northern Border's market areas, including Northern Natural Gas Company, Alliance Pipeline, ANR Pipeline Company, Midwestern Gas Transmission Company and Natural Gas Pipeline of America. Northern Border has seen growth in supplies from the Rocky Mountain region creating additional supply in the markets Northern Border serves, including Ventura, Harper and Chicago. REX West increased supply competition in Midwest markets and negatively impacted Northern Border's flows and sales of available capacity in 2008 and is anticipated to continue to impact in 2009. REX East, from Missouri to Ohio, will transport natural gas further east, potentially mitigating excess supply in Northern Border's Ventura market. REX has announced that REX East will be placed in service in the second and fourth quarters of 2009. As well, two other new pipeline projects are projected to go into service in 2009 that will ship growing supply volumes from the lower Mid-Continent east to the existing gulf coast infrastructure that includes transportation access to the Chicago market. As with all new pipeline projects, these will impact overall North American natural gas flows.
As of January 31, 2009, Northern Border had approximately 60 per cent of its design capacity uncontracted beginning in the second quarter of 2009 through the remainder of 2009. Additional supply in the Chicago market may impact Northern Border's ability to contract upstream available capacity in 2009 if flows to Chicago materially decrease.
Tuscarora maintains a very strong competitive position relative to other sources of gas in the markets it serves. Tuscarora is one of only two pipelines that serves the Northern Nevada market, the other being Paiute Pipeline. Tuscarora also has access to supply regions as its upstream pipelines have excess capacity.
Government Regulation
Natural gas transportation is regulated by the Federal Energy Regulatory Commission (FERC) and other federal and state regulatory agencies, including the Department of Transportation. FERC regulatory policies govern the rates that pipelines are permitted to charge customers for interstate transportation of natural gas. The operation and maintenance of our pipeline systems are also regulated by the federal and state regulatory agencies.
The FERC-approved rate designs used by our pipeline systems are based upon firm service and interruptible services. Customers with firm service transportation agreements pay a fee known as a reservation charge to reserve pipeline capacity, regardless of use, for the term of their contracts. Firm service transportation customers may also pay a variable fee that is based on the distance and volume of natural gas they transport. Customers with interruptible service transportation agreements may utilize available capacity on a pipeline system after firm service
transportation requests are satisfied. Interruptible service customers are assessed a variable fee based on distance and the volume of natural gas they transport. The majority of our pipeline systems' revenue is generated by firm service transportation agreements.
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 any standardized meaning prescribed by U.S. generally accepted accounting principles (GAAP). It is, therefore, considered to be a non-GAAP measure and is unlikely to be comparable to similar measures presented by other entities. Partnership cash flows is the sum of net income, cash distributions received from Great Lakes, Northern Border and Tuscarora (in 2006), and cash flows provided by Tuscarora's operating activities (in 2007 and 2008) less equity income from investments in Great Lakes, Northern Border and Tuscarora (in 2006) and Tuscarora's net income (in 2007 and 2008).
RESULTS OF OPERATIONS OF TC PIPELINES, LP
The general partner interests in Great Lakes, Northern Border and Tuscarora were our only material sources of income in 2008; therefore, our results of operations were influenced by and reflect the same factors that influenced the financial results of Great Lakes, Northern Border and Tuscarora. See Item 1. "Business".
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. The following summarizes the Partnership's and our pipeline systems' accounting policies and estimates, and should be read in conjunction with Note 2 of the Partnership's Financial Statements included elsewhere in this report.
We account for our investments in Great Lakes and Northern Border using the equity method of accounting. The equity method of accounting is appropriate where the investor does not control an investee, but rather is able to exercise significant influence over the operating and financial policies of an investee. We are able to exercise significant influence over our investments in Great Lakes and Northern Border because of our ownership interests and our representation on the Great Lakes and Northern Border management committees.
We used the equity method to account for our investment in Tuscarora until December 19, 2006. On this date, we acquired an additional 49 per cent general partner interest in Tuscarora and, as a result of acquiring a controlling interest in Tuscarora, began to consolidate its operations.
Regulatory Assets
Our pipeline systems' accounting policies conform to Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types . . .
|
|