MLP pick: An investor's guide to TC PipeLines' earnings (Part 6 of 6)
TC PipeLines (TCP) derives a significant part of its revenues from its top two customers. TCP’s customers include large utilities, local distribution companies (or LDCs), and major natural gas marketers and producing companies. Most of its services are provided through firm service transportation contracts, which entail a reservation charge regardless of the use. This partially insulates the company’s earnings from the sudden fluctuation in the demand and supply situation in the natural gas market. In 2014, TCP derived ~24% of its revenues from Anadarko Energy Services Company (ANR) and Pacific Gas and Electric Company (PCG). TCP’s general partner, TransCanada, is the 100% owner of ANR. Its concentration of revenues from the top two customers has increased through the past three years, as the graph below shows.
Business risk to the organization is quite low, as the assets owned are FERC-regulated pipelines with established tariffs. In recent times, TCP has experienced a number of rate settlements with FERC that could impact its revenues. Interstate natural gas pipelines are regulated by FERC. FERC approves the construction of new pipeline facilities and regulates certain aspects of ongoing operations, including the maximum rates that are allowed to be charged.. The company may also file with FERC a determination of a renewed annual rate.
On November 14, 2013, FERC approved a settlement between Great Lakes and Great Lakes’ customers to modify its transportation rates, effective November 1, 2013. The settlement increased maximum recourse transportation rates by approximately 21%. This is expected to have a positive impact on Great Lake’s performance in 2014.
Effective January 1, 2013, Northern Border signed an agreement for the maximum long-term transportation rates and charges of its pipeline services. The settlement reduced reservation rates by 11%. This settlement would effectively freeze Northern Border’s ability to renew rate until January 1, 2018.
The Bison and the North Baja pipeline systems also operate under the FERC rate settlement in connection with the initial constructions.
For Great Lakes, FERC approved a settlement rate with the company’s customers. Commencing November 2013, the maximum recourse rates that can be charged by Great Lakes increased, compared to previous rates, by approximately 21%. This restricts Great Lake’s ability to file for new rates with the FERC until March 31, 2015.
Investors may note that when long-term contracts expire, TCP’s pipeline systems will become subject to competitive pressures thatinfluence contract renewals and the rates charged for transportation services.
Since January 2012, the Tuscarora pipeline has a FERC-approved settlement agreement for transportation rates. The settlement includes a moratorium on the filing of future rate proceedings until December 31, 2014.
Other major developments
In December 2013, GTN and Portland General Electric Company (PGE) signed an agreement to supply 175,000 dekatherms per day of gas through Carty lateral pipeline (Carty Lateral). The Carty Lateral is expected to be in service in the fourth quarter of 2015 and will deliver natural gas to a PGE-owned power plant in Oregon. The 30-year contract has total value of $54.0 million.
TC PipeLines LP (TCP) is a master limited partnership operating in the midstream energy space. TC PipeLine’s general partner is wholly owned by TransCanada Corporation (TRP). TC Pipelines is also part of the Global X MLP & Infrastructure ETF (MLPX), Alerian MLP ETF (AMLP), and MLP ETF (MLPA).
To learn more about investing in MLPs, see Market Realist’s Master Limited Partnerships page.
Browse this series on Market Realist:
- Part 1 - MLP pick: An investor’s guide to TC PipeLines’ earnings
- Part 2 - Must-know analysis: A closer look at TC PipeLine’s 1Q14 earnings
- Part 3 - Backing TransCanada is a great support structure for TC PipeLines
- Utility Industry