In a significant recovery from having 600 MMcf/d of capacity on Northern Border Pipeline unsold during April, Northern Border Partners LP said Thursday that the pipeline was sold out during July and August and the partnership is reiterating guidance for the year. It expects second quarter net income of $26-28 million, or $0.50 to $0.55 per unit, compared to analysts’ expectations of 48 cents.
“Second quarter 2005 net income is expected to be slightly above earlier expectations,” the company said in a statement. “It is expected to reflect stronger than anticipated results from each of our natural gas pipelines and better than expected results in the natural gas gathering and processing segment’s joint venture assets. The partnership earnings are expected to include an approximate $1.6 million reduction in the allowance for doubtful accounts related to potential recoveries in the Enron bankruptcy.”
Net income for the year is expected to be $122-126 million, or $2.40-2.50/unit, compared to analysts estimates of $2.46/unit.
In the spring, the partnership warned investors that Northern Border Pipeline had contracts for firm transportation capacity primarily between Port of Morgan, MT, and Ventura, IA, expiring during 2005. As a result, during the second quarter there was up to 600 MMcf/d of firm transportation capacity unsold at times on the system and some of the capacity that was sold was sold at a discount.
The company said Northern Border Pipeline had about 292 MMcf/d of its firm capacity unsold in May and 184 MMcf/d in June out of a total summer design capacity of 2,374 MMcf/d. In an effort to sell the unused space on the pipeline the company offered capacity at discounted rates of between 78% and 88% of the firm contract rate.
The partnership said it believes that shifting market fundamentals caused a tightening in the natural gas price differentials (basis) between Alberta and the Midwest U.S. As these fundamentals have changed, they have contributed to increased basis volatility. The fundamental factors cited as affecting basis and volatility include the following:
The partnership said these fundamentals may cause the Alberta-to-the-Midwest U.S. basis to continue to narrow annually in the spring and fall months. Increased storage withdrawal capacity and storage levels in Western Canada combined with winter demand in the Midwest U.S. may, conversely, cause the winter basis to widen. As a result, it believes throughput on Northern Border may be more seasonal in the future and some discounting may be required at times to maximize revenue.
The greatest impact on capacity occurred during the second quarter this year as Canadian storage filled rapidly. There was a much better environment in July and August and the company was able to sell out its capacity at more favorable rates.
Northern Border said it expects capacity for next winter heating season will be sold out at near maximum rates. As of July 12, however, about 491 MMcf/d is unsold for the September-October period and 962 MMcf/d is unsold for the November-December period.
The partnership continues to expect that the most likely range of negative impact on Northern Border Pipeline’s revenue from unsold and discounted capacity in 2005 is $15 million to $28 million ($11 million to $20 million net to the partnership). If demand for Northern Border capacity continues at current volume and rate levels, the partnership said the impact on revenues may ultimately be at the lower end of the range.
Meanwhile, the partnership also anticipates that favorable natural gas and natural gas liquids volumes and prices will generate strong results for its gas gathering and processing segment in line with previous expectations.
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