Pacific Northern Gas Ltd.
TSX : PNG
TSX : PNG.PR.A

Pacific Northern Gas Ltd.

March 03, 2011 17:30 ET

Pacific Northern Gas Announces Special PTP Sale Dividend of $3 Per Share and 16 Percent Gain in Fourth Quarter Earnings

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 3, 2011) - Pacific Northern Gas Ltd. (TSX:PNG)(TSX:PNG.PR.A) announced today that the Board of Directors has declared a special dividend of $3.00 per common share in addition to a regular quarterly dividend of $0.30 per share. The latest quarterly dividend is unchanged from the fourth quarter of 2010 but up from $0.28 in the first quarter of 2010. The total dividend of $3.30 per share is payable March 24, 2011 to shareholders of record at the close of business on March 15, 2011.

The special dividend of $3.00 per share represents approximately $11 million or 50 percent of the net proceeds (after taxes and related transaction related expenses) from the initial payment of $30 million received on March 2, 2011 upon the closing of the sale of PNG's 50 percent stake in Pacific Trail Pipelines Limited Partnership (PTP). 

PNG also announced net income for the fourth quarter of 2010 was $4.0 million or $1.10 per share (basic), up 16 percent from $3.4 million or $0.95 per share in the fourth quarter of 2009. The basic earnings per common share are calculated after deducting preferred dividends of $0.1 million in the fourth quarter of 2010, unchanged from a year earlier.

"In the fourth quarter of 2010 our earnings benefited from the regulated pipeline component of our business and from lower expenditures on the proposed KSL pipeline," said Roy Dyce, PNG's President and Chief Executive Officer. "Demand for natural gas weakened, in part because of the loss of a significant industrial customer in the forest industry. But with new investment in mines, metal production and related infrastructure, as well as proposed LNG projects, natural gas demand in our service area is expected to recover."

Revenue in the fourth quarter of 2010 was $30.1 million, down 4 percent from $31.2 million in the same period in 2009. The decrease in revenue was mainly due to a decrease in off-system gas sales, partially offset by new revenue from the McNair Creek hydro-electricity generation facility (McNair), acquired in April 2010. 

Full year 2010 results

Net income for the full year 2010 was $7.1 million or $1.88 per share (basic), up 9 percent from $6.5 million or $1.72 per share for 2009. The basic earnings per common share are calculated after deducting preferred dividends of $0.3 million in 2010, unchanged from a year earlier.

The increase in earnings was due to higher regulated rates of return on common equity, higher regulated common equity components and incremental earnings from the McNair operations. These increases were partially offset by higher KSL pipeline project development expenses in 2010, by expenses incurred on the McNair acquisition and by expenses attributable to reorganization and other strategic initiatives.

As previously disclosed, the BC Utilities Commission (BCUC) allowed a weighted-average return on deemed common equity of 10.09 percent in 2010, up from 9.58 percent in 2009. The increase reflects the impact of the BCUC's decision in December 2009 to increase the return on equity for the benchmark low-risk utility in British Columbia to 9.50 percent from 8.47 percent effective July 1, 2009.

Included in net income for 2010 are after-tax charges of $0.4 million, or $0.11 per share, compared with after-tax charges of $0.1 million, or $0.04 per share for 2009, relating to PNG's share of KSL Project development expenses. Also included in net income for 2010 are after-tax charges of $0.7 million or $0.19 per share relating to the McNair acquisition and subsequent reorganization, compared with nil for 2009.

The McNair acquisition costs of approximately $0.5 million have been expensed as a result of PNG's decision to be an early adopter of the new Canadian accounting standard for business combinations. The new standard requires the expensing of related acquisition costs rather than their inclusion as part of the cost of the business acquisition. If not for PNG's early adoption of this standard, net earnings per common share for the year ended December 31, 2010 would have been $2.01 instead of $1.88.

Revenue for the full year 2010 was $95.2 million, down 8.5 percent from $104.1 million in 2009. This decline was mainly due to lower prevailing natural gas prices in 2010 compared with 2009, which in turn reduced by 14 percent the cost of natural gas embedded in PNG's rates. Also contributing to the decline in revenue was decreased demand for natural gas due to warmer weather experienced in 2010 compared to 2009. Partially offsetting these two factors were the positive impact of regulatory decisions on PNG's pipeline operations and the inclusion of revenue in 2010 from the McNair operations. 

PNG's current annualized dividend rate, excluding the special dividend, is $1.20 per share, up 25 percent from the $0.96 per share paid in 2009 and up 50 percent from the $0.80 per share paid in 2007. The progressive dividend increases are in line with PNG's strategy to raise its dividend payout ratio to be comparable to other publicly traded utilities.

KSL Pipeline project update

PNG completed the sale of its 50 percent interest in PTP on March 2, 2011 for consideration, to be paid in two parts, of up to a total of $50 million. PTP is the developer of the 463-kilometre KSL Project natural gas pipeline from Summit Lake, BC to Kitimat, BC and PNG has held an interest in the project since its inception in 2005.

The purchasers were PNG's former Calgary-based partners in PTP, Apache Canada Ltd. (Apache Canada) and EOG Resources Canada (EOG Canada). The project would serve the planned Kitimat liquefied natural gas (LNG) export terminal that Apache Canada and EOG Canada plan to bring into service in 2015. As a result of the transaction, Apache Canada's ownership of the pipeline has increased to 51 percent from 25.5 percent and EOG Canada's ownership has increased to 49 percent from 24.5 percent.

This transaction has two tranches, of which the first was a cash payment of $30 million (approximately $21 million after taxes and transaction related expenses) that PNG received on closing. The second tranche is a cash payment of $20 million to be paid contingent on the purchasers making a decision to proceed with construction of the Kitimat LNG export facility. PNG can give no assurances that the decision will be positive, or that the final $20 million payment will be made.

In connection with the sale, PNG has agreed on the terms for a 20-year transportation service agreement with Apache Canada and EOG Canada that will significantly increase the utilization of PNG's current pipeline in the event that LNG Partners LLC ("LNG Partners") does not claim this capacity first. PNG will operate the KSL Pipeline under an operating and maintenance agreement negotiated with Apache Canada and EOG Canada. The operating and maintenance agreement will have an initial term of seven years beginning in 2015, with renewal provisions, and will be subject to approval by the BCUC.

In the third quarter of 2010, prior to the sale, PTP commenced the detailed design phase of the KSL Pipeline Project and PNG commenced capitalization of its 50 percent share of these expenditures. PNG's share of expenditures on the KSL Pipeline Project for the year ended December 31, 2010 was $1.25 million, including $0.7 million which has been capitalized relating to engineering and technical studies.

LNG Partners small-scale LNG project update

During 2010 PNG received option payments totaling $2.0 million to reserve capacity on its pipeline system, compared with $2.5 million a year earlier. PNG received the most recent of these option payments, totaling $1.0 million, in the fourth quarter of 2010 from LNG Partners of Houston. If LNG Partners exercises its option, it expects to utilize the transportation service to deliver 80 million cubic feet (MMcf) per day of natural gas to a small-scale LNG facility to be located on the Douglas Channel near Kitimat.

As previously disclosed, PNG initially negotiated the terms of the option payments in March 2009 with Merrill Lynch Commodities Inc. The terms included a provision for the parties to negotiate a definitive transportation service agreement (TSA) and an option to contract for 75 MMcf per day using existing capacity on PNG's Western system. The BCUC accepted the negotiated TSA as a filed tariff on June 17, 2010. During final negotiations, the parties agreed to increase the capacity option to 80 MMcf per day from 75 MMcf per day. On August 11, 2010 Merrill Lynch assigned and novated the TSA to LNG Partners.

Since inception of the option agreement, PNG has received option fees of $4.5 million. In return LNG Partners currently has until June 30, 2011 to exercise an option to contract for firm gas transportation capacity for a two- to five-year primary term, with a right to renew for three additional five-year terms. LNG Partners may extend the option period by up to two further six-month periods, with payment of $1 million for each extension.

PNG can give no assurances that LNG Partners will continue to extend the option or exercise its option to take capacity on the Western system. However if service commences under the TSA, PNG's Western system would be at full capacity, generating approximately $16 million per year of incremental margin for the benefit of PNG and its customers.

LNG industry outlook

PNG believes there is growing potential for the LNG industry in PNG's service area due to a North American gas surplus, which is creating an attractive price spread between North American and Asian markets. The community of Kitimat B.C., which is served by PNG, is the ideal location for LNG liquefaction terminals because it is relatively close to large natural gas fields and is closer to Asian markets than more southerly ports.

PNG believes that it stands to benefit from the LNG industry because of PNG's relationships, an excellent operating track record, experience in obtaining pipeline permits in the region, an understanding of the regulatory industry and capability in terms of pipeline operation and maintenance. PNG believes there is room in Kitimat for more LNG terminals, and room for additional pipelines along the corridor.

Natural gas deliveries

PNG's deliveries of natural gas totaled 9,487 terajoules in 2010, down 21.9 percent from 12,145 terajoules in 2009, in part because of the loss of a significant industrial customer in the forest industry. Looking ahead, PNG believes that recent announcements of significant proposed mining and metal processing investments may lead to a recovery in natural gas demand in its service area.

The industrial customer no longer served by PNG is West Fraser Mills Ltd. (West Fraser), which operated the Eurocan Paper Mill in Kitimat. West Fraser permanently closed its Kitimat mill at the end of January 2010 and terminated its agreement with PNG by providing six months notice and making a termination payment to PNG of $5.1 million on December 1, 2010. Deliveries to West Fraser in the months of January and February of 2010 accounted for 2.5 percent of PNG's total gas deliveries and 2.2 percent of total revenues.

Reduced demand from Rio Tinto Alcan Inc., which operates an aluminum smelter at Kitimat, also contributed to the reduction in gas deliveries in 2010. Rio Tinto Alcan has a firm transportation service and interruptible sales/service agreement with PNG effective through October 31, 2012. During 2010, deliveries to Alcan accounted for 9.1 percent of PNG's total gas deliveries and 2.7 percent of revenues.

Smaller industrial customers, mainly in the forestry sector, also reduced gas consumption as mills scheduled shutdowns and reduced lumber production. Deliveries to residential and commercial customers in 2010 were lower by 784 terajoules, or 13 percent, compared to deliveries in 2009. The decrease was due primarily to warmer weather in 2010 compared to 2009.

The 2010 residential deliveries were lower than the forecast used for rate making purposes but this did not significantly impact net income due to the existence of the rate stabilization adjustment mechanism ("RSAM") deferral account that captured the after-tax value of the revenue variance, amounting to $2 million in 2010. In 2009, deliveries were higher than forecast due to colder weather and resulted in an after-tax value revenue variance of $1 million recorded as a credit to the RSAM deferral account.

Deferral accounts are in place that recover or refund margin differences resulting from deliveries to large industrial customers and to some small industrial customers varying from the forecast approved for ratemaking purposes. PNG's natural gas distribution business is very seasonal, with higher sales in the colder winter months and lower sales in warmer months. Given that a substantial portion of its gas sales are used for space heating purposes, PNG earns in excess of its annual net income in the first and fourth quarters of its fiscal year and generally realizes losses in the other two quarters.

Prospects for a recovery in natural gas demand were enhanced with the January 2011 announcement by Rio Tinto Alcan of a $300 million investment for pre-construction activities related to a potential $2.5 billion modernization of its aluminum smelter. This investment should generate significant economic activity in our service area, along with proposed investments in coal and metals mining and the possible expansion of the Ridley Terminals coal port at Prince Rupert.

Operating margin

Operating margin in the fourth quarter of 2010 was $16.0 million, up 15 percent from $13.9 million in the corresponding period in 2009. This increase is due to the higher common equity component in 2010 compared to 2009, new revenues from the 2010 McNair acquisition and the higher delivery rates in 2010 compared to 2009 mainly to recover the loss of the Methanex termination payment credit amortization which ended in October 2009.

For 2010 as a whole, operating margin was $51.1 million, up 9 percent from $46.9 million in 2009. This increase was mainly due to the inclusion of revenue from the McNair operations, the previously discussed higher weighted-average allowed return on deemed common equity and the recognition of the 5 percent increase in the equity component for PNG's Western system effective January 1, 2009. This was partially offset by lower than anticipated deliveries to large commercial customers and lower than anticipated net customer additions in 2010.

Renewable energy

PNG continues to expect that its $17.5 million investment in the 9.8 MW McNair Creek run-of-river hydroelectric generation facility will be cash flow positive for 2011 onwards. PNG acquired a 97.1% interest in the McNair Creek operation in April 2010. The operation is located near Port Mellon, B.C. PNG continues to examine other possible renewable energy acquisitions.

Forward-looking statements

This news release includes forward-looking statements. Forward-looking statements relate to, among other things, anticipated financial performance, business prospects, strategies, regulatory developments, new services, market forces, commitments and technological developments. Many of these statements can be identified by words such as "believe", "expects", "expected", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words. PNG believes the expectations reflected in such statements are reasonable but no assurance is given that such expectations will be correct. All forward-looking statements are based on management's beliefs and assumptions based on information available at the time the assumption was made and on its experience and perception of historical trends, current conditions and expected further developments as well as other factors deemed appropriate in the circumstances.

By its nature, such forward-looking information is subject to various risks and uncertainties that are known and unknown, including those material risks discussed in PNG's 2010 Annual Information Form under "Risk Factors" which could cause PNG's actual results and experience to differ materially from the anticipated results or other expectations expressed. Such risks and uncertainties include but are not limited to: general economic conditions and markets; gas supply and availability; gas commodity price volatility; competition; decisions by regulators; seasonal weather patterns; federal and provincial climate change initiatives; financing of investments as well as the value of such investments; the cost and availability of capital; the impact on PNG's liquidity if it were to go offside of the covenants in its debt facilities; successful execution of strategic initiatives; the ability of PNG to attract and retain quality employees and the impact of accounting changes including the transition to International Financial Reporting Standards. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date it is expressed in this news release or otherwise, and PNG undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities laws.

About Pacific Northern Gas

Headquartered in Vancouver, British Columbia, Pacific Northern Gas Ltd. (TSX:PNG)(TSX:PNG.PR.A) owns and operates natural gas transmission and distribution systems. PNG's western transmission line extends from the Spectra Energy (formerly Duke Energy) gas transmission system north of Prince George to tidewater at Kitimat and Prince Rupert, and provides service to 12 communities and a number of industrial facilities. In the northeast, PNG's subsidiary Pacific Northern Gas (N.E.) Ltd. provides gas distribution service in the Dawson Creek, Fort St. John and Tumbler Ridge areas. Further information is available at: www.png.ca.

PNG, for purposes of the Income Tax Act (Canada), and any similar provincial or territorial legislation, designates all dividends paid by PNG after December 31, 2005 to be "eligible dividends" unless otherwise notified by PNG. An eligible dividend paid to a Canadian resident is entitled to the enhanced dividend tax credit.

Fourth Quarter Consolidated Results
For the Three Month Period Ended
December 31, 2010 ($ thousand, except for per share and share data)
  2010 2009 Change
Revenues $30,081 $31,172 (3.5%)
Cost of gas 14,057 17,256 (22%)
Operating margin 16,024 13,916 15.1%
       
Net income applicable to common shares $3,899 $3,352 16%
Earnings per common share – basic $1.10 $0.95 16%
Earnings per common share – diluted $1.06 $0.93 14%
       
Basic average shares outstanding 3,555,964 3,546,864 0.3%
Fully diluted average shares outstanding 3,680,332 3,604,813 2.1%
       
Net cash provided from operating activities $5,480 $2,074 158%
Additions to plant, property and equipment (2,554) (4,291) (68%)
Repayment of long term debt (2,294) (1,900) 17%
Issue of long term debt, net of transaction costs  
Increase in bank indebtedness 613 2,579  
Share repurchase under normal course issuer bid  
Dividends paid (1,251) (1,054) 17%
Consolidated Results
For the Year Ended
December 31, 2010 ($ thousand, except for per share data)
  2010 2009 Change
Revenues $95,164 $104,131 (9.5%)
Cost of gas 44,113 57,239 (30%)
Operating margin 51,051 46,892 9%
       
Net income applicable to common shares $6,751 $6,195 9%
Earnings per common share – basic $1.88 $1.72 9%
Earnings per common share – diluted $1.83 $1.71 7%
       
Basic average shares outstanding 3,598,335 3,594,522 0.1%
Fully diluted average shares outstanding 3,697,121 3,625,868 2.0%
       
Net cash provided from operating activities $9,858 $18,876 (91%)
Additions to plant, property and equipment (7,399) (9,538) 29%
Acquisition, net of cash acquired (8,026)  
Repayment of long term debt (3,046) (5,400) 77%
Issue of long term debt, net of transaction costs 9,885 2,939 336%
Increase (decrease) in bank indebtedness 2,257 (419)  
Share repurchase under normal course issuer bid (1,806)  
Dividends paid (4,445) (3,785) 17%
       
Cash and cash equivalents $1,894 $1,511 25%
Common Shareholders' Equity 89,043 85,436 4.2%
Book Value per Common Share $24.63 $24.03 2.5%

Contact Information

  • Pacific Northern Gas Ltd.
    Janet Kennedy
    Vice President, Finance
    (604) 691-5684
    www.png.ca