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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
-----------------------
F O R M 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission file number: 000-26091
TC PIPELINES, LP
(Exact name of registrant as specified in its charter)
DELAWARE 52-2135448
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
110 TURNPIKE ROAD, SUITE 203
WESTBOROUGH, MASSACHUSETTS 01581
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 508-871-7046
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
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NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
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COMMON UNITS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on March 9, 2001, was approximately
$273.2 million.
As of March 9, 2001, there were 14,690,694 of the registrant's common
units outstanding.
TC PIPELINES, LP
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business 2
Item 2. Properties 10
Item 3. Litigation 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Units and Related
Security Holder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Officers of the General Partner 21
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management 24
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 27
FORWARD-LOOKING INFORMATION
-------------------------------------
Certain written and oral statements made or incorporated by reference from time
to time by TC PipeLines, LP, its general partner, or their representatives in
this Form 10-K and other reports and filings made with the Securities and
Exchange Commission, news releases, conferences or otherwise, are
forward-looking and relate to, among other things, anticipated financial
performance, business prospects, strategies, market forces and commitments. Much
of this information appears in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" found herein. By its nature, such
forward-looking information is subject to various risks and uncertainties,
including those discussed below, which could cause TC PipeLines' actual results
and experience to differ materially from the anticipated results or other
expectations expressed. Readers are cautioned not to place undue reliance on
this forward-looking information, which is as of the date of this Form 10-K, and
TC PipeLines undertakes no obligation to update publicly or revise any
forward-looking information, whether as a result of new information, future
events or otherwise.
Forward-looking information typically contains statements with words such as
"anticipate," "believe," "estimate," "expect," "plan," "target" or similar words
suggesting future outcomes. The following discussion is intended to identify
certain factors, though not necessarily all factors, which could cause future
outcomes to differ materially from those set forth in the forward-looking
information.
The risks and uncertainties that may affect the operations, performance,
development and results of TC PipeLines' business and its ability to make cash
distributions to unitholders include, but are not limited to, the following
factors:
o regulatory decisions, particularly those of the Federal Energy
Regulatory Commission (FERC);
o cost of acquisitions, including related debt service payments;
o competing pipelines;
o tariff and transportation charges to be collected by Northern Border
Pipeline Company for transportation services on the Northern Border
pipeline system or by Tuscarora Gas Transmission Company for
transportation services on the Tuscarora pipeline system;
o the amount of cash distributed to TC PipeLines by Northern Border
Pipeline or Tuscarora;
o the inability of Northern Border Pipeline or Tuscarora to maintain or
increase its rate base by successfully completing FERC approved
projects;
o a decline in the availability of western Canadian natural gas;
o majority control of the Northern Border Pipeline management committee by
Northern Border Partners, L.P.;
o the amount of cash required to be contributed by TC PipeLines to fund
the respective operations of Northern Border Pipeline or Tuscarora;
o competitive factors and pricing pressures;
o shifts in market demand;
o changes in laws and regulations, including environmental and regulatory
laws;
o increases in maintenance and operating costs that are not recovered by
increased transportation rates;
o prevailing economic conditions, particularly conditions of the capital
and equity markets;
o the effects of required compliance with debt covenants;
o timing of completion of capital or maintenance projects;
o the availability of adequate levels of insurance;
o currency and interest rate fluctuations;
o the potential that the Internal Revenue Service could treat TC PipeLines
as a corporation; and
o various events which could disrupt operations (including explosions,
fires, and severe weather conditions).
-------------------------------------
ALL AMOUNTS ARE STATED IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED.
1
PART I
ITEM 1. BUSINESS
BUSINESS OF TC PIPELINES, LP
TC PipeLines, LP and its subsidiary limited partnerships, TC PipeLines
Intermediate Limited Partnership and TC Tuscarora Intermediate Limited
Partnership, collectively referred to herein as "TC PipeLines" or "the
Partnership," own and participate in the management of United States based
pipeline assets. TC PipeLines GP, Inc., a wholly owned subsidiary of
TransCanada PipeLines Limited, is the general partner of the Partnership.
On May 28, 1999, the Partnership issued 14,300,000 common units (11,500,000 to
the public and 2,800,000 to an affiliate of the general partner) in its initial
public offering for net proceeds of $274.6 million. The Partnership used the net
proceeds from this offering, along with 3,200,000 subordinated units, an
aggregate 2% general partner interest and incentive distribution rights, to
acquire the collective 30% general partner interest in Northern Border Pipeline
previously held by TransCanada Border PipeLine Ltd. and TransCan Northern Ltd.,
affiliates of the general partner. The remaining 70% general partner interest in
Northern Border Pipeline is held by Northern Border Partners, L.P., a publicly
traded limited partnership that is not affiliated with TC PipeLines.
Subsequent to the initial public offering, the underwriters exercised a portion
of their over-allotment option and purchased 390,694 additional common units for
net proceeds to the Partnership of $7.5 million. The Partnership used these
proceeds to redeem an equal number of subordinated units held by the general
partner.
The general partner holds an aggregate 2% general partner interest in the
Partnership. The general partner also owns 2,809,306 subordinated units and is
entitled to incentive distribution rights if quarterly cash distributions on the
common and subordinated units exceed specified levels (see Item 5. - Market for
Registrant's Common Units and Related Security Holder Matters).
On September 1, 2000, TC PipeLines, based on the approval by a committee
comprised of its independent directors, acquired a 49% general partner
interest in Tuscarora Gas Transmission Company. The Partnership acquired this
asset from TCPL Tuscarora Ltd., an indirect subsidiary of TransCanada, for a
purchase price of $28.0 million. The Partnership borrowed $24.5 million from
the Revolving Credit Facility (see Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources of TC PipeLines, LP - General) to fund a portion of the
purchase price. The remainder of the purchase price was funded with cash on
hand.
For the year ended December 31, 2000, the Partnership's 30% general partner
interest in Northern Border Pipeline and 49% general partner interest in
Tuscarora represent its only material assets.
BUSINESS OF NORTHERN BORDER PIPELINE COMPANY
GENERAL
Northern Border Pipeline is a general partnership formed in 1978. The general
partners are TC PipeLines and Northern Border Partners, both of which are
publicly traded partnerships. Each of TC PipeLines and Northern Border Partners
holds its interest in Northern Border Pipeline, 30% and 70% of voting power,
respectively, through a subsidiary limited partnership. The general partner of
TC PipeLines is TC PipeLines GP, Inc., a subsidiary of TransCanada. The general
partners of Northern Border Partners and its subsidiary limited partnership are
Northern Plains Natural Gas Company and Pan Border Gas Company, both
subsidiaries of Enron Corp., and Northwest Border Pipeline Company, a subsidiary
of The Williams Companies, Inc.
Northern Border Pipeline owns an interstate pipeline system that transports
natural gas from the Montana-Saskatchewan border to natural gas markets in
the midwestern United States. The Northern Border pipeline system connects
with multiple pipelines that provide shippers with access to the various
natural gas markets served by those pipelines. In the year ended December 31,
2000, TC PipeLines estimates that Northern Border Pipeline transported
approximately 22% of the total amount of natural gas imported from Canada to
the United States. Over the same period, approximately 90% of the natural gas
transported was produced in the western Canadian sedimentary basin located in
the provinces of Alberta, British Columbia and Saskatchewan.
2
Northern Border Pipeline transports gas for shippers under a tariff regulated by
the FERC. The tariff specifies the calculation of amounts to be paid by shippers
and the general terms and conditions of transportation service on the pipeline
system. Northern Border Pipeline derives revenue from agreements for the receipt
and delivery of gas at points along the pipeline system as specified in each
shipper's individual transportation contract. Northern Border Pipeline does not
own the gas that it transports, and therefore it does not assume the related
natural gas commodity risk.
The management of Northern Border Pipeline is overseen by a four-member
management committee. One representative is designated by TC PipeLines; three
representatives are designated by Northern Border Partners, with each of its
general partners selecting one representative. Voting power on the management
committee is presently allocated among Northern Border Partners' three
representatives in proportion to their general partner interests in Northern
Border Partners. As a result, the 70% voting power of Northern Border
Partners' three representatives on the management committee is allocated as
follows: 35% to the representative designated by Northern Plains, 22.75% to
the representative designated by Pan Border and 12.25% to the representative
designated by Northwest Border. Northern Plains and Pan Border are
subsidiaries of Enron Corp. Therefore, Enron controls 57.75% of the voting
power of the management committee and has the right to select two of the
members of the management committee.
The Northern Border pipeline system is operated by Northern Plains pursuant to
an operating agreement. As of December 31, 2000, Northern Plains employed
approximately 200 individuals located at the operating headquarters in Omaha,
Nebraska, and at various locations along the pipeline route. Northern Plains'
employees are not represented by any labor union and are not covered by any
collective bargaining agreements.
THE NORTHERN BORDER PIPELINE SYSTEM
Northern Border Pipeline owns a 1,214-mile United States interstate pipeline
system that transports natural gas from the Montana-Saskatchewan border near
Port of Morgan, Montana, to interconnecting pipelines in the upper Midwest of
the United States. Construction of the Northern Border pipeline system was
initially completed in 1982 and was expanded and/or extended in 1991, 1992 and
1998.
The Northern Border pipeline system has pipeline access to natural gas reserves
in the western Canadian sedimentary basin in the provinces of Alberta, British
Columbia and Saskatchewan, as well as the Williston Basin in the United States.
The Northern Border pipeline system also has access to synthetic gas produced at
the Dakota Gasification plant in North Dakota. For the year ended December 31,
2000, of the natural gas transported on the system, approximately 90% was
produced in Canada, approximately 5% was produced by the Dakota Gasification
plant, and approximately 5% was produced in the Williston Basin.
The Northern Border pipeline system consists of 822 miles of 42-inch diameter
pipe designed to transport 2,373 million cubic feet per day (mmcfd) from the
Canadian border to Ventura, Iowa; 30-inch diameter pipe and 36-inch diameter
pipe, each approximately 147 miles in length, designed to transport 1,300 mmcfd
in total from Ventura, Iowa to Harper, Iowa; and 226 miles of 36-inch diameter
pipe and 19 miles of 30-inch diameter pipe designed to transport 645 mmcfd from
Harper, Iowa to a terminus near Manhattan, Illinois (Chicago area). Along the
pipeline there are 15 compressor stations with total rated horsepower of 476,500
and measurement facilities to support the receipt and delivery of gas at various
points. Other facilities include four field offices and a microwave
communication system with 51 tower sites.
At its northern end, the Northern Border pipeline system is connected to
TransCanada's majority-owned Foothills Pipe Lines (Sask.) Ltd. system in
Canada, which is connected to TransCanada's Alberta System and the pipeline
system owned by Transgas Limited in Saskatchewan. The Alberta System gathers
and transports approximately 18% of the total North American natural gas
production and approximately 74% of the natural gas produced in the western
Canadian sedimentary basin. The Northern Border pipeline system also connects
with facilities of Williston Basin Interstate Pipeline at Glen Ullin and
Buford, North Dakota, facilities of Amerada Hess Corporation at Watford City,
North Dakota and facilities of Dakota Gasification Company at Hebron, North
Dakota in the northern portion of the Northern Border pipeline system.
3
INTERCONNECTS
The Northern Border pipeline system connects with multiple pipelines that
provide its shippers with access to the various natural gas markets served by
those pipelines. The Northern Border pipeline system interconnects with pipeline
facilities of:
o Northern Natural Gas Company, an Enron subsidiary, at Ventura, Iowa as well as
multiple smaller interconnections in South Dakota, Minnesota and Iowa;
o Natural Gas Pipeline Company of America at Harper, Iowa;
o MidAmerican Energy Company at Iowa City and Davenport, Iowa and Cordova,
Illinois;
o Alliant Power Company at Prophetstown, Illinois;
o Northern Illinois Gas Company at Troy Grove and Minooka, Illinois;
o Midwestern Gas Transmission Company near Channahon, Illinois;
o ANR Pipeline Company near Manhattan, Illinois; and
o The Peoples Gas Light and Coke Company near Manhattan, Illinois at the
terminus of the Northern Border pipeline system.
The Ventura, Iowa interconnect with Northern Natural Gas Company functions as a
large market center, where natural gas transported on the Northern Border
pipeline system is sold, traded and received for transport to significant
consuming markets in the Midwest and to interconnecting pipeline facilities
destined for other markets.
SHIPPERS
The Northern Border pipeline system serves more than 50 firm transportation
shippers with diverse operating and financial profiles. Based upon shippers'
contractual obligations, as of December 31, 2000, 92% of the firm capacity is
contracted by producers and marketers. The remaining firm capacity is
contracted to local distribution companies (5%), interstate pipelines (2%)
and end-users (1%). As of December 31, 2000, the termination dates of these
contracts ranged from October 31, 2001 to December 21, 2013 and the weighted
average contract life, based upon annual contractual obligations, was
approximately six years with just under 99% of capacity contracted through
mid-September 2003.
Based on their proportionate shares of capacity, as of December 31, 2000, the
five largest shippers are: Pan-Alberta Gas (U.S.) Inc. (25.5%), TransCanada
Energy Marketing USA, Inc. (11.4%), PanCanadian Energy Services Inc (7.3%),
Enron North America Corp. (6.3%) and Engage Energy US, LP. (5.4%). The 20
largest shippers, in total, are responsible for approximately 93% of total
revenues.
As of December 31, 2000, Northern Border Pipeline's largest shipper,
Pan-Alberta, holds firm capacity of 690 mmcfd under three contracts with terms
to October 31, 2003. An affiliate of Enron provides guaranties for 300 mmcfd of
Pan-Alberta's contractual obligations through October 31, 2001. In addition,
Pan-Alberta's remaining capacity is supported by various credit support
arrangements, including, among others, a letter of credit, a guaranty from an
interstate pipeline company through October 31, 2001 for 132 mmcfd, an escrow
account and an upstream capacity transfer agreement. Mirant Americas Energy
Marketing, LP., formerly Southern Company Energy Marketing L.P., manages the
assets of Pan-Alberta Gas, Ltd., which include Pan-Alberta's contracts with
Northern Border Pipeline.
Some of Northern Border Pipeline's shippers are affiliated with the general
partners of TC PipeLines and Northern Border Partners. TransCanada Energy
Marketing USA, Inc., a subsidiary of TransCanada, holds firm contracts
representing 11.4% of capacity. Enron North America Corp., a subsidiary of
Enron, holds firm contracts representing 6.3% of capacity. Transcontinental Gas
Pipe Line Corporation, a subsidiary of Williams, holds a contract representing
0.8% of capacity.
4
DEMAND FOR TRANSPORTATION CAPACITY
Northern Border Pipeline's long-term financial condition is dependent on the
continued availability of economic western Canadian natural gas for import
into the United States. Natural gas reserves may require significant capital
expenditures by others for exploration and development drilling and the
installation of production, gathering, storage, transportation and other
facilities that permit natural gas to be produced and delivered to pipelines
that interconnect with the Northern Border pipeline system. Low prices for
natural gas, regulatory limitations or the lack of available capital for
these projects could adversely affect the development of additional reserves
and production, gathering, storage and pipeline transmission of western
Canadian natural gas supplies. Additional pipeline export capacity also could
accelerate depletion of these reserves.
Northern Border Pipeline's business depends in part on the level of demand for
western Canadian natural gas in the markets the pipeline system serves. The
volumes of natural gas delivered to these markets from other sources affect the
demand for both western Canadian natural gas and use of the Northern Border
pipeline system. Demand for western Canadian natural gas to serve other markets
also influences the ability and willingness of shippers to use the Northern
Border pipeline system to meet demand in the markets that the Northern Border
pipeline system serves.
A variety of factors could affect the demand for natural gas in the markets that
the Northern Border pipeline system serves. These factors include:
o economic conditions;
o fuel conservation measures;
o alternative energy requirements and prices;
o climatic conditions;
o government regulation; and
o technological advances in fuel economy and energy generation devices.
TC PipeLines cannot predict whether these or other factors will have an adverse
effect on demand for use of the Northern Border pipeline system or how
significant that adverse effect could be.
FUTURE DEMAND AND COMPETITION
On March 16, 2000, the FERC issued an order granting Northern Border Pipeline's
application for a certificate to construct and operate Northern Border
Pipeline's proposed Project 2000 facilities. Project 2000 will expand and extend
the Northern Border pipeline system into Indiana. Project 2000 will afford
shippers on Northern Border's extended pipeline system access to industrial gas
consumers in northern Indiana through an interconnect with Northern Indiana
Public Service Company, a major midwest local distribution company, at the
terminus near North Hayden, Indiana.
The capital expenditures for Project 2000 are estimated to be approximately $94
million with a planned in-service date of November 2001. Proposed facilities
include approximately 34.4 miles of 30-inch pipeline, new equipment and
modifications at three compressor stations resulting in a net increase of 22,500
compressor horsepower, and one meter station.
As a result of the Project 2000 expansion, the Northern Border pipeline system
will have the ability to transport 1,484 mmcfd from Ventura to Harper, Iowa, 844
mmcfd from Harper to Manhattan, Illinois, and 544 mmcfd on the new extension
from Manhattan to North Hayden, Indiana. Five shippers have contracted for all
the additional capacity under long-term transportation agreements.
The Project 2000 shippers are: Bethlehem Steel Corporation, El Paso Energy
Marketing Company, Northern Indiana Public Service Company, Peoples Energy
Services Corporation and The Peoples Gas Light and Coke Company.
5
Northern Border Pipeline competes with other pipeline companies that transport
natural gas from the western Canadian sedimentary basin or that transport
natural gas to markets in the midwestern United States. The competitors for the
supply of natural gas include six pipelines and the Canadian domestic users in
the western Canadian sedimentary basin region. Northern Border Pipeline's
competitive position is affected by the availability of Canadian natural gas for
export, the prices of natural gas in alternative markets, the cost of producing
natural gas in Canada, and demand for natural gas in the United States.
Alliance Pipeline, which commenced transporting natural gas from the western
Canadian sedimentary basin to the midwestern United States in December 2000,
delivers its volumes into the Chicago market and other interstate pipelines.
Alliance Pipeline transports for its shippers gas containing high-energy liquid
hydrocarbons. Additional facilities to extract the natural gas liquids were
constructed near Alliance Pipeline's terminus in Chicago to permit Alliance
to transport natural gas with the liquids-rich element.
As a consequence of Alliance Pipeline, there has been an increase in the
volume of natural gas moving from the western Canadian sedimentary basin to
Chicago. Vector Pipeline L.P. interconnects with Alliance and transports gas
eastward to a terminus in eastern Canada. There are several additional
projects proposed to transport natural gas from the Chicago area that would
provide access to additional markets for the shippers. The proposed projects
currently being pursued by third parties are targeting markets in northern
Illinois, Wisconsin, and the northeast United States. These proposed projects
are in various stages of regulatory approval.
Williams has a minority interest (14.6%) in Alliance Pipeline. TransCanada
and other unaffiliated companies own and operate pipeline systems that
transport natural gas from the same natural gas reserves in western Canada that
supply Northern Border Pipeline's customers.
Natural gas is also produced in the United States and transported by competing
pipeline systems to the same destinations as the Northern Border pipeline
system.
FERC REGULATION
GENERAL Northern Border Pipeline is subject to extensive regulation by the FERC
as a "natural gas company" under the Natural Gas Act. Under the Natural Gas Act
and the Natural Gas Policy Act, the FERC has jurisdiction with respect to
virtually all aspects of the business, including:
o transportation of natural gas;
o rates and charges;
o construction of new facilities;
o extension or abandonment of service and facilities;
o accounts and records;
o depreciation and amortization policies;
o the acquisition and disposition of facilities; and
o the initiation and discontinuation of services.
Where required, Northern Border Pipeline holds certificates of public
convenience and necessity issued by the FERC covering the facilities, activities
and services. Under Section 8 of the Natural Gas Act, the FERC has the power to
prescribe the accounting treatment for items for regulatory purposes. Northern
Border Pipeline's books and records are periodically audited under Section 8.
6
The FERC regulates the rates and charges for transportation in interstate
commerce. Natural gas companies may not charge rates exceeding rates judged just
and reasonable by the FERC. In addition, the FERC prohibits natural gas
companies from unduly preferring or unreasonably discriminating against any
person with respect to pipeline rates or terms and conditions of service. Some
types of rates may be discounted without further FERC authorization.
NORTHERN BORDER PIPELINE RATE CASE PROCEEDING In May 1999, Northern Border
Pipeline filed a rate case wherein it proposed, among other things, to
increase the allowed equity rate of return to 15.25%. The total annual cost
of service increase due to the proposed changes was approximately $30
million. A number of the shippers and competing pipelines filed interventions
and protests. In June 1999, the FERC issued an order in which the proposed
changes were suspended until December 1, 1999, after which they were
implemented with subsequent billings subject to refund. The order set for
hearing not only the proposed changes but also several issues raised by
intervenors including the appropriateness of the cost of service form of
tariff and the depreciation schedule. Upon a request for clarification, the
FERC issued an order in August 1999 that provided the manner in which the
costs of the recently completed expansion and extension project (The Chicago
Project) could be recovered from shippers may be examined in this proceeding
and that, while Northern Border Pipeline had not proposed to change the
depreciation rates approved in the last rate case, it had the burden of
proving that the depreciation rates are just and reasonable.
On September 26, 2000, Northern Border Pipeline filed a stipulation and
agreement in its 1999 rate case proceeding that documented a settlement. On
December 13, 2000, the FERC issued its order approving the terms of the
settlement. One of the important elements of the settlement is the conversion
of Northern Border Pipeline's form of tariff from cost of service to stated
rates based on a straight-fixed variable rate design. Under the former cost
of service tariff, the firm transportation shippers contracted to pay for a
proportionate share of Northern Border Pipeline's cost of service. During any
given month, each of these shippers paid a uniform mileage-based charge for
the amount of capacity contracted, and calculated under a cost of service
tariff. The shippers were obligated to pay their proportionate share of the
cost of service regardless of the amount of natural gas they actually
transported. Under the cost of service form of tariff, Northern Border
Pipeline could not charge or collect more than the cost of service. Under
Northern Border Pipeline's new form of tariff, shippers pay Northern Border
Pipeline on the basis of stated transportation rates. Under the terms of the
settlement, and in accordance with straight-fixed variable rate design
principles, approximately 98% of the agreed upon revenue level is attributed
to demand charges. The firm shippers are obligated to pay a monthly demand
charge, regardless of the amount of natural gas they actually transport, for
the term of their contracts. The remaining 2% of the agreed upon revenue
level is attributed to the commodity charge based on the volumes of gas
actually transported. From December 1, 1999, through and including December
31, 2000, the rates were based upon an annual revenue level of $307 million.
For periods after December 31, 2000, the rates are based upon an annual
revenue level of $305 million. On a per unit of transportation basis, the
rates under the new tariff are approximately equal to the cost of service on
a per unit basis charged prior to December 1, 1999. The settlement also
provides that neither Northern Border Pipeline nor its existing shippers can
seek rate changes until November 1, 2005, at which time Northern Border
Pipeline must file a new rate case. Prior to the new rate case, Northern
Border Pipeline will not be permitted to increase rates if its costs
increase, nor will Northern Border Pipeline be required to reduce rates based
on cost savings. Northern Border Pipeline's earnings and cash flow will
depend on its future costs, contracted capacity, the volumes of gas
transported and its ability to recontract capacity at acceptable rates.
Under Northern Border Pipeline's previous cost of service tariff, the amount
of revenue that Northern Border Pipeline collected from customers generally
declined as the rate base was recovered. Under its new tariff, Northern
Border Pipeline is entitled to collect revenue based on stated rates
established in its 1999 rate case until its next rate case, which will be
filed November 1, 2005. Northern Border Pipeline will, however, continue to
depreciate its rate base at an annual depreciation rate on transmission plant
in service of 2.25% and Northern Border Pipeline's rate base in 2005 will be
a factor in determining what Northern Border Pipeline can charge when it
files a new rate case at that time. In order to avoid a decline in the
revenue Northern Border Pipeline can collect from its customers, Northern
Border Pipeline must maintain or increase its rate base by acquiring or
constructing assets that replace or add to existing pipeline facilities or by
adding new facilities and maintain its level of contracted capacity at the
stated rates.
It was agreed in the settlement of the 1999 rate case, that there would be no
project cost containment mechanism adjustment for The Chicago Project and
that all costs as of November 30, 1999 incurred in the construction and
commissioning of the Chicago Project be included in rate base. The project
cost containment mechanism was created in the settlement of the 1995 rate
case. The purpose of the project cost containment mechanism was to limit
Northern Border Pipeline's ability to include cost overruns for The Chicago
Project in rate base and to provide incentives for cost underruns.
7
The settlement of Northern Border Pipeline's 1995 rate case, provided that
for at least seven years from the date The Chicago Project was completed,
Northern Border Pipeline could continue to calculate the allowance for income
taxes in the manner it had historically used. In addition, a settlement
adjustment mechanism of $31 million was implemented, which effectively
reduces the return on rate base. These provisions of the 1995 rate case were
maintained in the settlement of Northern Border Pipeline's 1999 rate case.
Northern Border Pipeline also provides interruptible transportation service.
Interruptible transportation service is transportation in circumstances when
surplus capacity is available after satisfying firm service requests. The
maximum rate that may be charged to interruptible shippers is calculated as the
sum of the firm transportation Rate Schedule T-1 maximum reservation charge and
commodity rate. Under Northern Border Pipeline's previous cost of service form
of tariff, all interruptible transportation service revenue generated was
credited to the benefit of the firm shippers. Under Northern Border Pipeline's
new tariff, Northern Border Pipeline shares net interruptible transportation
service revenue and any new services revenue on an equal basis with Northern
Border Pipeline's firm shippers through October 31, 2003. In addition, Northern
Border Pipeline is permitted to retain revenue from interruptible transportation
service to offset any decontracted firm capacity.
After October 31, 2003, all revenues from interruptible transportation
service and other new services will no longer be subject to sharing and thus
will be retained by Northern Border Pipeline. In addition, the settlement of
the 1999 rate case also provided for an equal sharing with Northern Border
Pipeline's firm shippers of revenue generated from a certain
telecommunications contract for the term of that contract. Northern Border
Pipeline intends to develop new services and seek the FERC's authorization to
implement such services. While the receipt of those approvals and the future
impact of the revenue sharing provisions of the settlement on Northern Border
Pipeline's earnings cannot be determined at this time, revenues from these
sources are expected to be minimal through at least October 31, 2003.
OPEN ACCESS REGULATION Beginning on April 8, 1992, the FERC issued a series of
orders, known as Order 636, which required pipeline companies to unbundle their
services and offer sales, transportation, storage, gathering and other services
separately, to provide all transportation services on a basis that is equal in
quality for all shippers and to implement a program to allow firm holders of
pipeline capacity to resell or release their capacity to other shippers.
Capacity release provisions were adopted that allowed shippers to release all
or part of their capacity either permanently or temporarily. Shippers on the
Northern Border pipeline system have temporarily released capacity as well as
permanently released capacity to other shippers who have agreed to comply with
the underlying contractual and regulatory obligations associated with that
capacity.
Beginning in 1996, the FERC issued a series of orders, referred to together as
Order 587, amending its open access regulations to standardize business
practices and procedures governing transactions between interstate natural gas
pipelines, their customers, and others doing business with the pipelines. The
intent of Order 587 was to assist shippers that deal with more than one pipeline
by establishing standardized business practices and procedures. These business
standards, developed by the Gas Industry Standards Board, govern important
business practices including shipper supplied service nominations, allocation of
available capacity, accounting and invoicing of transportation service,
standardized internet business transactions and capacity release. Northern
Border Pipeline has implemented the necessary changes to its tariff and internal
systems.
In 1998, the FERC initiated a number of proceedings to further amend its open
access regulations. In the resulting order, Order 637 issued February 9, 2000,
the FERC revised the short-term transportation regulations by 1) waiving the
maximum rate ceiling in its capacity release regulations until September 30,
2002 for short-term releases of capacity of less than one year; 2) permitting
value-oriented peak/off-peak rates to better allocate revenue responsibility
between short-term and long-term markets; 3) permitting term-differentiated
rates to better allocate risks between shippers and the pipelines; 4) revising
the regulations related to scheduling procedures, capacity segmentation,
imbalance management and penalties; 5) retaining the right of first refusal and
the five-year matching cap but limiting the right to customers with maximum rate
contracts for 12 or more consecutive months of service; and 6) adopting new
reporting requirements to take effect September 1, 2000 that include reporting
daily transactional data on all firm and interruptible contracts, daily
reporting of scheduled quantities at points or segments, and the posting of
corporate and pipeline organizational charts, names and functions. As required
by Order No. 637,
8
Northern Border Pipeline filed pro forma tariff sheets in compliance to address
the issues identified in 4) above. This filing is pending at the FERC. All other
related compliance filings and reporting requirements have been completed and
implemented.
TC PipeLines does not believe these regulatory initiatives will have a material
adverse impact to Northern Border Pipeline's operations.
ENVIRONMENTAL AND SAFETY MATTERS
Northern Border Pipeline's operations are subject to federal, state and local
laws and regulations relating to safety and the protection of the environment
which include the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
Clean Air Act, as amended, the Clean Water Act, as amended, the Natural Gas
Pipeline Safety Act of 1969, as amended, and the Pipeline Safety Act of 1992.
Although TC PipeLines believes that Northern Border Pipeline's operations and
facilities are in general compliance in all material respects with applicable
environmental and safety regulations, risks of substantial costs and liabilities
are inherent in pipeline operations, and TC PipeLines cannot provide any
assurances that Northern Border Pipeline will not incur such costs and
liabilities. Moreover, it is possible that other developments, such as
increasingly strict environmental and safety laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from Northern Border Pipeline's operations, could result in substantial costs
and liabilities to Northern Border Pipeline. If Northern Border Pipeline is
unable to recover such resulting costs, earnings and cash distributions could be
adversely affected.
BUSINESS OF TUSCARORA GAS TRANSMISSION COMPANY
Tuscarora is a Nevada general partnership that was formed in 1993. Its
general partners are TC Tuscarora Intermediate Limited Partnership, a direct
subsidiary of TC PipeLines, which holds a 49% general partner interest,
Tuscarora Gas Pipeline Co., a wholly owned subsidiary of Sierra Pacific
Resources Company, which holds a 50% general partner interest and TCPL
Tuscarora Ltd., an indirect wholly owned subsidiary of TransCanada, which
holds a 1% general partner interest.
The management of Tuscarora is overseen by a management committee that
determines the policies of, has authority over the affairs of, and approves
the actions of Tuscarora. The management committee participates in the
management of the construction, maintenance and operation of the Tuscarora
pipeline system.
Under the Tuscarora partnership agreement, voting control is allocated among
Tuscarora's three general partners in proportion to their general partner
interests in Tuscarora. As a result, TC PipeLines has a 49% voting interest,
Sierra Pacific has a 50% voting interest, and TransCanada has a 1% voting
interest on the Tuscarora management committee. Tuscarora Gas Operating Company,
a subsidiary of Sierra Pacific, operates the Tuscarora pipeline system pursuant
to an operating agreement.
THE TUSCARORA PIPELINE SYSTEM
Tuscarora owns a 229-mile, 20-inch diameter, United States interstate pipeline
system that originates at an interconnection point with facilities of PG&E Gas
Transmission - Northwest near Malin, Oregon and runs southeast through
northeastern California and northwestern Nevada. The Tuscarora pipeline system
terminates near Reno, Nevada at the Tracy Power Plant. Deliveries are also made
directly to the local gas distribution system of Sierra Pacific. Along its
route, deliveries are made in Oregon, northern California and northwestern
Nevada.
The Tuscarora pipeline system was constructed in 1995 and was placed into
service in December 1995. The Tuscarora pipeline system has the capacity to
transport, on a firm basis, approximately 124 mmcfd. TC PipeLines believes that
the Tuscarora pipeline system has the potential to be economically expanded up
to approximately 240 mmcfd.
Tuscarora has firm transportation contracts for over 94% of its capacity,
including a contract for 92% of the capacity held by Sierra Pacific Power
Company, a subsidiary of Sierra Pacific, which expires on November 30, 2015.
9
As of December 31, 2000, the weighted average contract life on the Tuscarora
pipeline system was approximately 15 years.
In December 2000, Tuscarora commenced construction of the Hungry Valley
lateral, a 16-mile, 16-inch pipeline extension to serve as Tuscarora's second
connection into Reno, Nevada. Sierra Pacific Power holds firm capacity on the
lateral for approximately 10 mmcfd under a 15-year firm transportation
contract. The project was completed in January 2001 at a capital cost of
approximately $10.7 million.
Tuscarora's competitive position is dependent on the continued availability of
economic western Canadian natural gas for import into the United States and on
the level of demand for western Canadian natural gas in the markets the
Tuscarora pipeline system serves. Shippers of natural gas from the western
Canadian sedimentary basin have other options for transporting Canadian natural
gas to the United States, including transportation on pipelines eastward in
Canada or to markets on the west coast of the United States and Canada.
Similarly, natural gas produced in the United States serves the same markets as
Tuscarora in northern Nevada. However, TC PipeLines believes Tuscarora has a
well diversified natural gas supply which allows it to transport both Canadian
and United States natural gas.
In 2000, Tuscarora embarked on a public solicitation for additional capacity on
its system. Based on the results of the solicitation, Tuscarora is currently
evaluating expanding its pipeline system. TC PipeLines expects Tuscarora to file
an application in the first half of 2001 with the FERC for approval to expand
the Tuscarora pipeline system. At this time, TC PipeLines can give no assurance
that Tuscarora will decide to or be able to expand its pipeline system.
FERC REGULATION
Tuscarora is subject to regulation by the FERC as a "natural gas company" under
the Natural Gas Act, and is subject to the FERC's rules, regulations and
accounting procedures.
Tuscarora generates revenues from individual transportation contracts with
shippers that provide for the receipt and delivery of natural gas at points
along the Tuscarora pipeline system. Tuscarora's transportation rates are based
on its cost of service as approved by the FERC. Tuscarora's cost of service
includes administrative and operating costs, depreciation and amortization,
taxes other than income taxes, an allowance for income taxes and a regulated
return on capital employed.
ENVIRONMENTAL AND SAFETY MATTERS
Tuscarora's operations are subject to federal, state and local laws and
regulations relating to safety and protection of the environment. TC PipeLines
believes that Tuscarora's operations and facilities comply in all material
respects with applicable United States environmental and safety regulations.
ITEM 2. PROPERTIES
TC PipeLines does not hold the right, title or interest in any properties.
Northern Border Pipeline holds the right, title and interest in its pipeline
system. With respect to real property, the Northern Border pipeline system falls
into two basic categories: (a) parcels which it owns in fee, such as certain of
the compressor stations, meter stations, pipeline field office sites, and
microwave tower sites; and (b) parcels where Northern Border Pipeline's interest
derives from leases, easements, rights-of-way, permits or licenses from
landowners or governmental authorities permitting the use of such land for the
construction and operation of the Northern Border pipeline system. The right to
construct and operate the Northern Border pipeline across certain property was
obtained by Northern Border Pipeline through exercise of the power of eminent
domain. Northern Border Pipeline continues to have the power of eminent domain
in each of the states in which it operates its pipeline system, although
Northern Border Pipeline may not have the power of eminent domain with respect
to Native American tribal lands.
Approximately 90 miles of the Northern Border pipeline system is located on fee,
allotted and tribal lands within the exterior boundaries of the Fort Peck Indian
Reservation in Montana. Tribal lands are lands owned in trust by the United
States for the Fort Peck Tribes and allotted lands are lands owned in trust by
the United States for an individual Indian or Indians. Northern Border Pipeline
does have the right of eminent domain with respect to allotted lands.
10
In 1980, Northern Border Pipeline entered into a pipeline right-of-way lease
with the Fort Peck Tribal Executive Board, for and on behalf of the Assiniboine
and Sioux Tribes of the Fort Peck Indian Reservation. This pipeline right-of-way
lease, which was approved by the Department of the Interior in 1981, granted to
Northern Border Pipeline the right and privilege to construct and operate its
pipeline on certain tribal lands. This lease expires in 2011.
In conjunction with obtaining a pipeline right-of-way lease across tribal lands
located within the exterior boundaries of the Fort Peck Indian Reservation,
Northern Border Pipeline also obtained a right-of-way across allotted lands
located within the reservation boundaries. This right-of-way on allotted lands
is either a perpetual easement or for a term of years. Most of the allotted
lands are subject to a perpetual easement either granted, by the Bureau of
Indian Affairs for and on behalf of individual Indian owners, or obtained
through condemnation. Several tracts are subject to a right-of-way grant that
has a term of 15 years.
Tuscarora holds the right, title and interest in its pipeline system. Tuscarora
owns all of its material equipment and personal property and leases office space
in Reno, Nevada. With respect to real property, Tuscarora's ownership falls into
two basic categories (a) parcels which it owns in fee, including meter stations;
and (b) parcels where its interest derives from leases, easements, grants,
temporary use of permits or licenses from landowners or governmental authorities
permitting the use of the land for the construction and operation of its
pipeline system.
ITEM 3. LITIGATION
TC PipeLines is not currently a party to any material legal proceedings.
Neither Northern Border Pipeline nor Tuscarora are currently party to any
material legal proceedings that, individually or in the aggregate, would
reasonably be expected to have a material adverse impact on TC PipeLines'
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the year ended December 31, 2000.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON UNITS AND RELATED SECURITY
HOLDER MATTERS
The common units, representing limited partner interests in the Partnership,
were issued pursuant to an initial public offering at a price of $20.50 per
common unit. The common units are quoted on the Nasdaq Stock Market and trade
under the symbol "TCLPZ". The common units began trading on May 28, 1999.
The following table sets forth, for the periods indicated, the high and low sale
prices per common unit, as reported by the Nasdaq Stock Market, and the amount
of cash distributions per common unit paid with respect to the corresponding
periods.
Price Range Cash Distributions
High Low Paid per Unit (1)
2000
First Quarter $18.375 $14.000 $0.4500
Second Quarter $17.000 $14.500 $0.4500
Third Quarter $20.375 $16.125 $0.4750
Fourth Quarter $20.500 $17.875 $0.4750
1999
Second Quarter (2) $21.000 $20.375 $0.1681
Third Quarter $20.625 $17.625 $0.4500
Fourth Quarter $18.500 $13.875 $0.4500
(1) Cash distributions are paid within 45 days after the end of each quarter.
(2) The Partnership commenced operations on May 28, 1999.
As of March 9, 2001, there were approximately 76 record holders of common units
and approximately 5,353 beneficial owners of the common units, including common
units held in street name.
The Partnership currently has 14,690,694 common units outstanding, of which
11,890,694 are held by the public and 2,800,000 are held by an affiliate of the
general partner. The Partnership also has 2,809,306 subordinated units
outstanding, all of which are held by the general partner, for which there is no
established public trading market. The common units and the subordinated units
represent an aggregate 98% limited partner interest and the general partner
interest represents an aggregate 2% general partner interest in the Partnership.
In general, the general partner is entitled to 2% of all cash distributions and
the holders of common units and subordinated units (collectively referred to as
unitholders) are entitled to the remaining 98% of all cash distributions. The
Partnership will make quarterly cash distributions to its partners (including
holders of subordinated units), comprising all of its Available Cash. Available
Cash is defined in the partnership agreement and generally means, with respect
to any quarter of the Partnership, all cash on hand at the end of such quarter
less the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the general partner to (i) provide for the proper
conduct of the business of the Partnership (including reserves for future
capital expenditures and for anticipated credit needs), (ii) comply with
applicable laws or any Partnership debt instrument or agreement, or (iii)
provide funds for cash distributions to unitholders and the general partner in
respect of any one or more of the next four quarters. Distributions of Available
Cash to the holder of subordinated units are subject to the prior rights of the
holders of common units to receive the minimum quarterly distribution for each
quarter while the subordinated units are outstanding (subordination period), and
to receive any arrearages in the cash distribution of minimum quarterly
distributions on the common units for prior quarters during the subordination
period. The partnership agreement defines the minimum quarterly distribution as
$0.45 for each full fiscal quarter (prorated for the initial partial fiscal
quarter commencing May 28, 1999, the closing date of the initial public
offering, through June 30, 1999). The subordination period will generally not
end before June 30, 2004. Upon expiration of the subordination period, all
subordinated units will be converted on a one-for-one basis into common units
and will participate pro rata with all other common units in future
distributions of Available Cash. Under certain circumstances, up to 66.7% of the
subordinated units may convert into common units prior to the expiration of the
subordination period.
12
The general partner is entitled to incentive distributions if the amount
distributed with respect to any quarter exceeds the minimum quarterly
distribution of $0.45 per common unit. Under the incentive distribution
provisions, the general partner is entitled to 15% of amounts distributed in
excess of $0.45 per common unit, 25% of amounts distributed in excess of $0.5275
per common unit, and 50% of amounts distributed in excess of $0.69 per common
unit. The amounts that trigger incentive distributions at various levels are
subject to adjustment in certain events, as described in the partnership
agreement.
On September 5, 2000, the Partnership announced an increase in the quarterly
cash distribution from $0.45 per unit to $0.475 per unit for the third quarter
cash distribution, which was paid on November 14, 2000. As a result, the first
tier of incentive distributions has been achieved.
In 2000, the Partnership made cash distributions to the limited partners and the
general partner that amounted to $32.7 million. These payments represented the
$0.45 per unit minimum quarterly cash distribution for the quarters ended
December 31, 1999, March 31, 2000 and June 30, 2000 and $0.475 per unit for the
quarter ended September 30, 2000. On February 14, 2001, the Partnership paid a
cash distribution of $8.5 million to the limited partners and the general
partner, representing a cash distribution of $0.475 per unit for the quarter
ended December 31, 2000.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with the financial
statements, including the notes thereto, and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
TC PIPELINES, LP
(thousands of dollars, except per unit amounts)
Year ended May 28 (1)-
INCOME DATA: December 31, 2000 December 31, 1999
--------------------- ---------------------
Equity income from investment in Northern 38,119 20,923
Border Pipeline
Equity income from investment in Tuscarora (2) 943 -
General and administrative expenses (1,337) (699)
Financial charges and other (501) -
--------------------- ---------------------
Net Income 37,224 20,224
--------------------- ---------------------
--------------------- ---------------------
Basic and fully diluted net income per unit $2.08 $1.13
Units outstanding (thousands) 17,500 17,500
CASH FLOW DATA:
Net cash provided by operating activities 40,366 11,832
Distributions paid 32,657 11,037
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in Northern Border Pipeline 248,098 250,450
Investment in Tuscarora (2) 27,881 -
Total assets 277,545 251,245
Long-term debt 21,500 -
Partners' capital 255,405 250,838
(1) The Partnership commenced operations on May 28, 1999.
(2) The Partnership acquired a 49% interest in Tuscarora on September 1, 2000.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions of the financial condition and results of operations
for the Partnership, Northern Border Pipeline and Tuscarora should be read in
conjunction with the financial statements and notes thereto of the Partnership
and Northern Border Pipeline 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 and Northern Border
Pipeline. All amounts are stated in United States dollars.
RESULTS OF OPERATIONS OF TC PIPELINES, LP
Currently, the Partnership holds two equity investments; a 30% general partner
interest in Northern Border Pipeline and a 49% general partner interest in
Tuscarora. TC PipeLines accounts for its interests in Northern Border Pipeline
and Tuscarora using the equity method of accounting. The Partnership's initial
investment in Northern Border Pipeline was recorded at $241.7 million, the
combined carrying values of the investment in Northern Border Pipeline as
reflected in the accounts of the predecessor companies as at May 28, 1999. This
amount equated to 30% of Northern Border Pipeline's partners' capital as at May
28, 1999. The Partnership's initial investment in Tuscarora, acquired on
September 1, 2000, was recorded at $28.4 million reflecting the purchase price
of the investment including acquisition costs.
Since the general partner's interests in Northern Border Pipeline and Tuscarora
are currently the Partnership's only material sources of income, the
Partnership's results of operations are influenced by and reflect the same
factors that influence the financial results of Northern Border Pipeline and
Tuscarora.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE PERIOD MAY 28 TO DECEMBER 31,
1999
For the year ended December 31, 2000, TC PipeLines recorded equity income of
$38.1 million from its investment in Northern Border Pipeline, compared to $20.9
million for the period from May 28 to December 31, 1999. The $17.2 million
increase reflects twelve months of activity in 2000 compared to approximately
seven months of activity in 1999 (TC PipeLines acquired its 30% general partner
interest in Northern Border Pipeline on May 28, 1999). In addition, Northern
Border Pipeline's 2000 net income reflects its rate case settlement, resulting
in incremental equity income to TC PipeLines. Northern Border Pipeline also
reduced reserves previously established for regulatory issues as the result of
the settlement of Northern Border Pipeline's rate case, resulting in increased
equity income to TC PipeLines.
For the year ended December 31, 2000, TC PipeLines recorded equity income of
$0.9 million from its investment in Tuscarora.
14
TC PipeLines incurred general and administrative expenses of $1.3 million for
the year ended December 31, 2000 compared to $0.7 million for the period from
May 28 to December 31, 1999. This increase reflects higher administrative costs
and a full year of operations in 2000.
The Partnership reported financial charges and other of $0.5 million for the
year ended December 31, 2000, which includes interest expense relating to the
Partnership's Revolving Credit Facility (see Item 7. - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources of TC PipeLines, LP - General). On September 1, 2000 the
Partnership borrowed $24.5 million from the Revolving Credit Facility to finance
a portion of the acquisition of a 49% general partner interest in Tuscarora. At
December 31, 2000, the Partnership had $21.5 million outstanding under the
Revolving Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES OF TC PIPELINES, LP
CASH DISTRIBUTION POLICY OF TC PIPELINES, LP
During the subordination period, which generally cannot end before June 30,
2004, the Partnership will make distributions of Available Cash in the following
manner:
o First, 98% to the common units, pro rata, and 2% to the general partner,
until there is distributed for each outstanding common unit an amount
equal to the minimum quarterly distribution for that quarter;
o Second, 98% to the common units, pro rata, and 2% to the general
partner, until there is distributed for each outstanding common unit an
amount equal to any arrearages in payment of the minimum quarterly
distribution on the common units for that quarter and for any prior
quarters during the subordination period;
o Third, 98% to the subordinated units, pro rata, and 2% to the general
partner, until there is distributed for each outstanding subordinated
unit an amount equal to the minimum quarterly distribution for that
quarter; and
o Thereafter, in a manner whereby the general partner has rights (referred
to as incentive distribution rights) to receive increasing percentages
of excess quarterly cash distributions over specified cash distribution
thresholds.
GENERAL
On January 19, 2001, the board of directors of the general partner declared the
Partnership's 2000 fourth quarter cash distribution. The fourth quarter cash
distribution which was paid on February 14, 2001, to unitholders of record as of
January 31, 2001, totaled $8.5 million and was paid in the following manner:
$7.0 million to common unitholders, $1.3 million to the general partner as
holder of the subordinated units, and $0.2 million to the general partner, as
holder of incentive distribution rights and in respect of its 2% general partner
interest.
On August 22, 2000, the Partnership entered into an unsecured three-year credit
facility with a third party (Revolving Credit Facility) under which the
Partnership may borrow up to an aggregate principal amount of $30.0 million.
Loans under the Revolving Credit Facility may bear interest, at the option of
the Partnership, at a one-, two-, three-, or six-month London Interbank Offered
Rate (LIBOR) plus 0.875%, or at a floating rate based on the higher of the
federal funds effective rate plus 0.5% and the prime rate. The Revolving Credit
Facility matures on August 31, 2003. Amounts borrowed may be repaid in part or
in full prior to that time without penalty. The Revolving Credit Facility may be
used to finance capital expenditures and for other general purposes. On
September 1, 2000, the Partnership borrowed $24.5 million under the Revolving
Credit Facility to fund a portion of the purchase price of the 49% general
partner interest in Tuscarora. In November, the Partnership made a $3.0 million
principal payment on the Revolving Credit Facility. Therefore, at December 31,
2000, the Partnership had $21.5 million outstanding under the Revolving Credit
Facility. The weighted average interest rate for the period from September 1 to
December 31, 2000 was 7.57%.
On May 28, 1999, the Partnership entered into a $40.0 million unsecured
two-year revolving credit facility with TransCanada PipeLine USA Ltd., an
affiliate of the general partner. The credit facility bears interest at LIBOR
plus 1.25%. The purpose of this credit facility is to provide borrowings to
fund capital expenditures, to fund capital contributions to Northern Border
Pipeline and for working capital and other general business purposes,
including funding cash distributions to partners, if necessary. At December
31, 2000, the Partnership had no amount outstanding under this credit
facility.
15
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased to $40.4 million for the
year ended December 31, 2000 from $11.8 million for the period May 28 to
December 31, 1999. For the year ended December 31, 2000, the Partnership
received cash distributions in aggregate of $42.0 million from its equity
investments in Northern Border Pipeline and Tuscarora. For the period May 28 to
December 31, 1999, the Partnership received cash distributions of $12.1 million
from Northern Border Pipeline.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities was $28.4 million for the year ended
December 31, 2000, relating to the purchase of a 49% general partner interest in
Tuscarora.
CASH FLOWS FROM FINANCING ACTIVITIES
For the year ended December 31, 2000, the Partnership paid $32.7 million in cash
distributions. This compares to cash distributions of $11.0 million that were
paid by the Partnership for the period May 28 to December 31, 1999.
On September 1, 2000, the Partnership borrowed $24.5 million from the Revolving
Credit Facility to fund a portion of the purchase price of the 49% general
partner interest in Tuscarora. At December 31, 2000, the Partnership had $21.5
million outstanding under the Revolving Credit Facility.
CAPITAL REQUIREMENTS
To the extent TC PipeLines has any capital requirements with respect to its
investments in Northern Border Pipeline and Tuscarora or makes acquisitions in
2001, TC PipeLines expects to finance these requirements with debt and/or
equity.
RESULTS OF OPERATIONS OF NORTHERN BORDER PIPELINE(1)
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Operating revenues, net for the year ended December 31, 2000 were $311.0 million
as compared to $298.3 million for the same period in 1999, an increase of $12.7
million (4%). Northern Border Pipeline's net operating revenues for 2000 reflect
the significant terms of the rate case settlement discussed in Item 1. "Business
of Northern Border Pipeline Company - Northern Border Pipeline Rate Case
Settlement." Operating revenues for 1999 were determined under Northern Border
Pipeline's cost of service tariff.
Operations and maintenance expense increased $2.8 million (7%) for the year
ended December 31, 2000, from the same period in 1999, due primarily to
increased employee payroll and benefit expenses and costs to operate Northern
Border Pipeline's two electric-powered compressor units.
Depreciation and amortization expense increased $5.4 million (10%) for the year
ended December 31, 2000, as compared to the same period in 1999, due primarily
to an increase in the depreciation rate applied to transmission plant. As a
result of the rate case settlement, Northern Border Pipeline used a depreciation
rate for transmission plant of 2.25% for 2000. Northern Border Pipeline had used
a depreciation rate of 2.0% for 1999.
Taxes other than income decreased $2.3 million (8%) for the year ended December
31, 2000, as compared to the same period in 1999, due primarily to adjustments
to previous estimates of ad valorem taxes.
Interest expense, net increased $4.9 million (8%) for the year ended December
31, 2000, as compared to the same period in 1999, due primarily to an increase
in average interest rates between 1999 and 2000. The impact of the increase in
interest rates was partially offset by a decrease in average debt outstanding.
- --------
1 Amounts discussed represent 100% of the operations of Northern Border
Pipeline, in which the Partnership has held a 30% interest since May 28, 1999.
16
Other income increased $6.7 million (491%) for the year ended December 31, 2000,
as compared to the same period in 1999, due primarily to a reduction in reserves
previously established for regulatory issues as the result of the settlement of
Northern Border Pipeline's rate case.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Operating revenues, net increased $101.7 million (52%) for the year ended
December 31, 1999, as compared to the same period in 1998, due primarily to
additional revenue from the operation of The Chicago Project facilities.
Additional receipt capacity of 700 mmcfd, a 42% increase, and new firm
transportation agreements with 27 shippers resulted from The Chicago Project.
Northern Border Pipeline's cost of service tariff provided an opportunity to
recover operations and maintenance costs of the pipeline, taxes other than
income taxes, interest, depreciation and amortization, an allowance for income
taxes and a regulated return on equity. Northern Border Pipeline was generally
allowed an opportunity to collect from its shippers a return on unrecovered rate
base as well as recover that rate base through depreciation and amortization.
The Chicago Project increased Northern Border Pipeline's rate base, which
increased return for the year ended December 31, 1999. Also reflected in the
increase in 1999 revenues are recoveries of increased pipeline operating
expenses due to the new facilities.
Operations and maintenance expense increased $9.3 million (31%) for the year
ended December 31, 1999, from the same period in 1998, due primarily to
operations and maintenance expenses for The Chicago Project facilities and
increased employee payroll and benefit expenses.
Depreciation and amortization expense increased $10.9 million (27%) for the year
ended December 31, 1999, as compared to the same period in 1998, due primarily
to The Chicago Project facilities placed into service. The impact of the
additional facilities on depreciation and amortization expense was partially
offset by a decrease in the depreciation rate applied to transmission plant from
2.5% to 2.0%. Northern Border Pipeline agreed to reduce the depreciation rate at
the time The Chicago Project was placed into service as part of a previous rate
case settlement.
Taxes other than income increased $8.9 million (42%) for the year ended December
31, 1999, as compared to the same period in 1998, due primarily to ad valorem
taxes attributable to the facilities placed into service for The Chicago
Project.
For the year ended December 31, 1998, Northern Border Pipeline recorded a
regulatory credit of $8.9 million. During the construction of The Chicago
Project, Northern Border Pipeline placed new facilities into service in advance
of the December 1998 project in-service date to maintain gas flow at firm
contracted capacity while existing facilities were being modified. The
regulatory credit deferred the cost of service of these new facilities, which
Northern Border Pipeline began to recover from its shippers commencing with the
in-service date of The Chicago Project.
Interest expense, net increased $34.7 million (136%) for the year ended December
31, 1999, as compared to the same period in 1998, due to an increase in interest
expense of $15.8 million and a decrease in interest expense capitalized of $18.9
million. Interest expense increased due primarily to an increase in average debt
outstanding, reflecting amounts borrowed to finance a portion of the capital
expenditures for The Chicago Project. The impact of the increased borrowings on
interest expense was partially offset by a decrease in average interest rates
between 1998 and 1999. The decrease in interest expense capitalized is due to
the completion of construction of The Chicago Project in December 1998.
Other income decreased $10.7 million (89%) for the year ended December 31, 1999,
as compared to the same period in 1998, primarily due to a decrease in the
allowance for equity funds used during construction. The decrease in the
allowance for equity funds used during construction is due to the completion of
construction of The Chicago Project in December 1998.
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE
GENERAL
In August 1999, Northern Border Pipeline completed a private offering of $200
million of 7.75% Senior Notes due 2009, which notes were subsequently exchanged
in a registered offering for notes with substantially identical terms (1999
Senior Notes). The indenture under which the 1999 Senior Notes were issued does
not limit the amount of
17
unsecured debt Northern Border Pipeline may incur, but does contain material
financial covenants, including restrictions on incurrence of secured
indebtedness. The proceeds from the 1999 Senior Notes were used to reduce
indebtedness under a June 1997 credit agreement.
In June 1997, Northern Border Pipeline entered into a credit agreement (Pipeline
Credit Agreement) with certain financial institutions to borrow up to an
aggregate principal amount of $750 million. The Pipeline Credit Agreement is
comprised of a $200 million five-year revolving credit facility maturing in June
2002 to be used for the retirement of Northern Border Pipeline's prior credit
facilities and for general business purposes, and a $550 million three-year
revolving credit facility to be used for the construction of The Chicago
Project. Effective March 31, 1999, the three-year revolving credit facility
converted to a term loan maturing in June 2002. At December 31, 2000, $424
million was outstanding under the term loan and $45 million was outstanding
under the five-year revolving credit facility.
At December 31, 2000, Northern Border Pipeline also had outstanding $184 million
of senior notes issued in a $250 million private placement under a July 1992
note purchase agreement. The note purchase agreement provides for four series of
notes, Series A through D, maturing between August 2000 and August 2003. The
Series A Notes with a principal amount of $66 million were repaid in August
2000. The Series B Notes with a principal amount of $41 million mature in August
2001. Northern Border Pipeline anticipates borrowing on the Pipeline Credit
Agreement to repay the Series B Notes.
Short-term liquidity needs will be met by Northern Border Pipeline's internal
sources and through the Pipeline Credit Agreement discussed above. Long-term
capital needs may be met through Northern Border Pipeline's ability to issue
long-term indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased $4.5 million to $176.0
million for the year ended December 31, 2000, as compared to the same period
in 1999, primarily due to increased earnings. During 2000, Northern Border
Pipeline realized net cash inflows of approximately $2.4 million related to
Northern Border Pipeline's rate case, which included approximately $25.1
million of amounts collected subject to refund less estimated refunds issued
in late December 2000 totaling approximately $22.7 million. Cash flows
provided by operating activities increased $67.7 million to $171.5 million
for the year ended December 31, 1999, as compared to the same period in 1998,
primarily attributed to The Chicago Project facilities placed into service in
late December 1998.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures of $15.5 million for the year ended December 31, 2000
included $7.4 million for Project 2000. For the same period in 1999, capital
expenditures were $101.7 million and included $85.5 million for The Chicago
Project and $2.5 million for Project 2000. The remaining capital expenditures
for 2000 and 1999 are primarily related to renewals and replacements of existing
facilities.
Total capital expenditures for 2001 are estimated to be $97 million, including
$81 million for Project 2000 (see Item 1. - Business of Northern Border Pipeline
- - Future Demand and Competition). The remaining capital expenditures planned for
2001 are for renewals and replacements of existing facilities. Northern Border
Pipeline currently anticipates funding its 2001 capital expenditures primarily
by borrowing on its Pipeline Credit Agreement and using internal sources.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities increased $58.8 million to $148.7
million for the year ended December 31, 2000, as compared to the same period
in 1999. Distributions paid to the general partners increased $7.7 million to
$134.9 million for the year ended December 31, 2000 as compared to the same
period of 1999 primarily due to an increase in Northern Border Pipeline's net
income. For the year ended December 31, 2000, advances under the Pipeline Credit
Agreement, which were primarily used to repay $66 million of Series A Notes,
were $75 million as compared to advances of $90 million for the same period in
1999, which were primarily used to finance a portion of the capital expenditures
for The Chicago Project. Financing activities for the year ended December 31,
1999 included $197.4 million from the issuance of the 1999 Senior Notes, net of
associated debt discounts and issuance costs, and $12.9 million from the
termination of interest rate forward agreements. Payments on the Pipeline Credit
Agreement were $45 million for the year ended December 31, 2000, as compared to
$263 million for the same period in 1999. At December 31, 2000, Northern Border
Pipeline reflected a cash overdraft of approximately $22.4 million
18
primarily due to refund checks outstanding. The goal of Northern Border
Pipeline's cash management program is to maximize the amount of Northern Border
Pipeline's cash and cash equivalents balance in highly liquid, interest-bearing
investments. Those investments are converted to cash when needed to replenish
Northern Border Pipeline's bank accounts for check clearing requirements.
Cash flows used in financing activities were $89.9 million for the year ended
December 31, 1999, as compared to cash flows provided by financing activities of
$564.8 million for the same period in 1998. During the year ended December 31,
1998, Northern Border Pipeline's general partners contributed $223.0 million to
finance a portion of the capital expenditures for The Chicago Project.
Distributions paid to the general partners increased $66.0 million to $127.2
million for the year ended December 31, 1999 as compared to the same period of
1998. The distributions for 1999 were impacted by increased earnings and
included distributions for 13 months' activity, rather than 12 months, resulting
from a change in the timing of distribution payments. The distributions for 1998
were impacted by a rate case refund during the fourth quarter of 1997 and by the
change in the timing of distribution payments. Advances under the Pipeline
Credit Agreement, which were primarily used to finance a portion of the capital
expenditures for The Chicago Project, were $90 million for the year ended
December 31, 1999 as compared to advances of $403 million for the same period in
1998.
RESULTS OF OPERATIONS OF TUSCARORA(2)
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Revenue generated by Tuscarora was $19.4 million and $19.3 million for the years
ended December 31, 2000 and 1999, respectively.
For the year ended December 31, 2000, Tuscarora incurred costs and expenses of
$2.4 million compared to $2.9 million for the same period last year. The
decrease in costs and expenses is primarily due to the capitalization of labor
costs relating to the construction of the Hungry Valley lateral and lower
property taxes.
Tuscarora recorded depreciation of $4.4 million for each of the years ended
December 31, 2000 and 1999.
Tuscarora recorded financial charges and other of $5.8 million for the year
ended December 31, 2000, compared to $6.0 million for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES OF TUSCARORA
GENERAL
In September 2000, Tuscarora adopted a cash distribution policy that became
effective January 1, 2001. Under the terms of the cash distribution policy,
Tuscarora will make quarterly cash distributions to its general partners in
accordance with their respective general partner interests. Cash distributions
will generally be computed as the sum of Tuscarora's net income before taxes and
depreciation and amortization, less amounts required for debt repayments, net of
refinancings, maintenance capital expenditures, certain non-cash items, and any
cash reserves deemed necessary by the management committee. Cash distributions
will be computed at the end of each calendar quarter and the distribution will
be made on or before the last day of the month following the quarter end.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities for the years ended December 31,
2000 and 1999 were $10.7 million.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities increased to $3.7 million for the year
ended December 31, 2000 compared to $0.7 million in 1999 due to capital
expenditures incurred in 2000 relating to construction of the Hungry Valley
lateral.
- --------
2 Amounts discussed represent 100% of the operations of Tuscarora, in which the
Partnership has held a 49% interest since September 1, 2000.
19
CASH FLOWS FROM FINANCING ACTIVITIES
For the year ended December 31, 2000, Tuscarora repaid $3.6 million in debt
compared to repayments of $2.8 million in the year ended December 31, 1999.
On December 19, 2000, Tuscarora issued Series B Senior Secured Notes in the
amount of $8.0 million. These notes bear interest at 7.99% and are due in 2010.
The proceeds from these notes were used to finance the construction of the
Hungry Valley lateral.
Tuscarora paid cash distributions of $5.3 million to its general partners for
the year ended December 31, 2000 compared to cash distributions of $8.5 million
for the year ended December 31, 1999. The decrease in cash distributions in 2000
is due to an increase in the amount of cash used to fund capital expenditures
relating to the Hungry Valley lateral.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. In June 2000 the FASB issued SFAS No.
138, which amended certain guidance within SFAS No. 133. TC PipeLines does
not believe SFAS No. 133, as amended, will have a material impact on its
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TC PipeLines' interest rate exposure results from its Revolving Credit Facility
which is subject to variability in LIBOR interest rates. If LIBOR interest rates
change by one percentage point compared to the rates in effect as of December
31, 2000, annual interest expense would change by approximately $0.2 million.
This amount has been determined by considering the impact of the hypothetical
interest rates on variable rate borrowings outstanding as of December 31, 2000.
The Partnership's market risk sensitivity is also influenced by and reflects the
same factors that influence Northern Border Pipeline.
Northern Border Pipeline's interest rate exposure results from variable rate
borrowings from commercial banks. To mitigate potential fluctuations in
interest rates, Northern Border Pipeline attempts to maintain a significant
portion of its debt portfolio in fixed rate debt. Northern Border Pipeline
also uses interest rate swap agreements to increase the portion of fixed rate
debt. As of December 31, 2000, approximately 50% of Northern Border
Pipeline's debt portfolio, after considering the effect of interest rate swap
agreements, is in fixed rate debt.
If average interest rates change by one percentage point compared to rates in
effect as of December 31, 2000, Northern Border Pipeline's annual interest
expense would change by approximately $4.3 million. This amount has been
determined by considering the impact of the hypothetical interest rates on
variable rate borrowings outstanding as of December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is included in this report as set forth in
the "Index to Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE GENERAL PARTNER
TC PipeLines is a limited partnership and has no officers, directors or
employees. Set forth below is certain information concerning the directors and
officers of the general partner. Each director holds office for a one-year term
or until his or her successor is earlier appointed. All officers of the general
partner serve at the discretion of the Board of Directors of the general
partner.
NAME AGE AS OF POSITION WITH GENERAL PARTNER
DECEMBER 31, 2000 AS OF DECEMBER 31, 2000
Ronald J. Turner 47 President, Chief Executive Officer and Director
Russell K. Girling 38 Chief Financial Officer and Director
Paul F. MacGregor 43 Vice-President, Business Development
Donald R. Marchand 38 Vice-President and Treasurer
Gary G. Penrose 58 Vice-President, Taxation
Theresa Jang 36 Controller
Rhondda E.S. Grant 43 Secretary
Robert A. Helman 66 Independent Director
Jack F. Jenkins-Stark 49 Independent Director
David L. Marshall 61 Independent Director
Dennis J. McConaghy 48 Director
Walentin Mirosh 55 Director
Mr. Turner has been a director of the general partner since April 1999 and
was appointed President and Chief Executive Officer in December 2000. Mr.
Turner's principal occupation is Executive Vice-President, Operations and
Engineering of TransCanada, a position he has held since December 2000. From
June 2000 until December 2000, Mr. Turner was Executive Vice-President,
International of TransCanada. From April 2000 until June 2000, Mr. Turner was
Senior Vice-President, International of TransCanada. From July 1999 until
April 2000, Mr. Turner was Senior Vice-President and President, International
of TransCanada. From July 1998 until July 1999, Mr. Turner was Senior
Vice-President of TransCanada. From April 1998 until July 1998, Mr. Turner
was Executive Vice-President, NOVA Gas Transmission Ltd. (natural gas
transmission). From December 1997 until April 1998, Mr. Turner was
Vice-President, Value Process West, NOVA Chemicals Ltd. (commodity
chemicals). From January 1994 until December 1997, Mr. Turner was
Vice-President Facilities Provision, NOVA Gas Transmission Ltd. Mr. Turner is
also a director of NOVA Gas Transmission Ltd.
Mr. Girling was appointed Chief Financial Officer and a director of the
general partner in April 1999. Mr. Girling's principal occupation is Executive
Vice-President and Chief Financial Officer of TransCanada, a position he has
held since June 2000. From July 1999 until June 2000, Mr. Girling was Senior
Vice-President and Chief Financial Officer of TransCanada. From January 1999
until July 1999, Mr. Girling was Vice-President, Finance of TransCanada. From
July 1998 until January 1999, Mr. Girling was Executive Vice-President, Power
(TransCanada Energy Ltd.). From October 1995 until July 1998, Mr. Girling was
Senior Vice-President, North American Power (TransCanada Energy Ltd.). Mr.
Girling is a director of the general partner of TransCanada Power, L.P., a
Canadian limited partnership. Mr. Girling is also a director of NOVA Gas
Transmission Ltd.
Mr. MacGregor was appointed Vice-President, Business Development of the general
partner in April 1999. Mr. MacGregor's principal occupation is Vice-President of
Business Development of TransCanada, a position he has held since September
1999. From July 1998 until September 1999, Mr. MacGregor was Vice-President,
North American Pipeline Investments for TransCanada's Transmission division.
From 1997 until July 1998, Mr. MacGregor was a Vice-President of Alberta Natural
Gas Company Ltd. (ANG) (energy services), a former subsidiary of TransCanada
which has since merged into TransCanada. In 1996, Mr. MacGregor was Director of
Field Operations of TransCanada.
Mr. Marchand was appointed Vice-President and Treasurer of the general partner
in October 1999. Mr. Marchand's principal occupation is Vice-President, Finance
and Treasurer of TransCanada, a position he has held since September 1999. From
January 1998 until September 1999, Mr. Marchand was Director, Finance of
TransCanada. From August 1996 until January 1998, Mr. Marchand was Manager,
Finance of TransCanada. From July 1995 until August 1996, Mr. Marchand was
Assistant Manager, Finance of TransCanada.
21
Mr. Penrose was appointed Vice-President, Taxation of the general partner in
April 1999. Mr. Penrose's principal occupation is Vice-President, Taxation of
TransCanada, a position he has held since February 1997. From August 1992
until February 1997, Mr. Penrose was General Manager, Taxation for
TransCanada. Mr. Penrose is also a director of TransCanada Hungary Liquidity
Management Limited Liability Company.
Ms. Jang was appointed Controller of the general partner in June 1999. From
May 1997 until June 1999, Ms. Jang was a Specialist in TransCanada's Financial
Reporting department. From February 1996 until May 1997, Ms. Jang was
Supervisor, Corporate Accounting of TransCanada. From August 1992 until
February 1996, Ms. Jang was Senior Financial Analyst, Corporate Accounting of
TransCanada.
Ms. Grant was appointed Secretary of the general partner in April 1999. Ms.
Grant's principal occupation is Vice-President and Corporate Secretary of
TransCanada, a position she has held since September 1999. From July 1998 until
September 1999, Ms. Grant was Corporate Secretary and Associate General
Counsel, Corporate of TransCanada. From October 1994 until July 1998, Ms.
Grant was Corporate Secretary and Associate General Counsel, Corporate of NOVA
Corporation (energy services and commodity chemicals).
Mr. Helman was appointed a director of the general partner in July 1999. Mr.
Helman has been a partner of Mayer, Brown & Platt (law firm) since 1967. Mr.
Helman also serves as a director of Brambles USA, Inc., Dreyers Grand Ice
Cream, Inc., Northern Trust Corporation and The Northern Trust Company.
Mr. Marshall was appointed a director of the general partner in July 1999. Mr.
Marshall was Vice-Chairman of The Pittston Company (diversified energy,
security and transportation services firm) from 1994 until 1998 and was the
Chief Financial Officer and a director of The Pittston Company from 1983 until
1994. Mr. Marshall also serves as a director on the board of M&S Austin One,
LLC.
Mr. Jenkins-Stark was appointed a director of the general partner in July
1999. Mr. Jenkins-Stark is currently Senior Vice-President and Chief
Financial Officer of Silicon Energy Corp. (a developer and seller of
internet-based energy technology software), a position he has held since
April 2000. From December 1998 until April 2000, Mr. Jenkins-Stark was Senior
Vice-President and Chief Financial Officer of GATX Capital (commercial
finance). From September 1998 until December 1998, Mr. Jenkins-Stark was
Senior Vice-President, Finance of GATX Capital. From May 1987 until September
1998, Mr. Jenkins-Stark was Senior Vice-President of PG&E Corp. (diversified
energy) and President and Chief Executive Officer of PG&E Gas Transmission
Company (natural gas transmission). Mr. Jenkins-Stark also serves as a
director of Hall-Kinion Corporation.
Mr. McConaghy was appointed a director of the general partner in December
2000. Mr. McConaghy's principal occupation is Senior Vice-President Business
Development of TransCanada, a position he has held since October 2000. From
June 2000 until October 2000, Mr. McConaghy was Senior Vice-President,
Midstream/Divestments of TransCanada. From July 1998 until June 2000, Mr.
McConaghy was Vice-President Corporate Strategy and Planning of TransCanada.
From May 1996 until July 1998, Mr. McConaghy was Vice-President, Strategy and
Corporate Development, NOVA Corporation. From November 1995 until May 1996,
Mr. McConaghy was Senior Vice-President and Chief Financial Officer, NOVA
Chemicals Ltd.
Mr. Mirosh has been a director of the general partner since October 1999. Mr.
Mirosh's principal occupation is Executive Vice-President, Regulatory Strategy
and Northern Development of TransCanada, a position he has held since June
2000. From April 2000 until June 2000, Mr. Mirosh was Senior Vice-President,
Regulatory Strategy and Northern Development of TransCanada. From July 1999
until April 2000, Mr. Mirosh was Senior Vice-President, Corporate Strategy and
Business Development of TransCanada. From July 1998 until July 1999, Mr.
Mirosh was Senior Vice-President, Business Development and Corporate Strategy
of TransCanada. From April 1996 until July 1998, Mr. Mirosh was President of
ANG and prior to that time, Mr. Mirosh was Executive Vice-President,
Operations of ANG. Mr. Mirosh is also a director of NOVA Gas Transmission Ltd.
22
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes certain information regarding the annual salaries
of Messrs. Ronald J. Turner and Garry P. Mihaichuk for the years ended December
31, 2000 and 1999 by TransCanada, parent company of the general partner. Mr.
Turner is an employee of TransCanada and was appointed President and Chief
Executive Officer of the general partner in December 2000. Mr. Mihaichuk was an
employee of TransCanada until December 2000 and served as President and Chief
Executive Officer of the general partner from October 1999 until December
2000. Through the general partner, TC PipeLines reimburses TransCanada for the
services contributed to its operations by Messrs. Turner and Mihaichuk.
TC PipeLines and the general partner were formed in December 1998 and the
general partner began compensating its directors and officers on May 28, 1999.
-------------------------------------------
Annual TransCanada Base Salary (1)
- ------------------------------------------------------- -------- -------------------------------------------
United States Dollar
Name and Principal Position Year Canadian Dollars Equivalent (2)
- ------------------------------------------------------- -------- -------------------- ----------------------
Ronald J. Turner (3)
President and Chief Executive Officer 2000 309,660 206,500
- ------------------------------------------------------- -------- -------------------- ----------------------
Garry P. Mihaichuk (4) 2000 431,250 287,600
Former President and Chief Executive Officer 1999 345,839 239,500
- ------------------------------------------------------- -------- -------------------- ----------------------
(1) Annualized base salary paid by parent of general partner. Only a
proportionate share, based on services provided, is attributed to the
Partnership.
(2) The compensation of the Chief Executive Officer of the general partner is
paid by TransCanada in Canadian dollars. The United States dollar
equivalents have been calculated using the applicable 2000 and 1999 noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes of 0.6669 and 0.6925, respectively, as
reported by the Federal Reserve Bank of New York.
(3) Mr. Turner was appointed President and Chief Executive Officer of the
general partner in December 2000.
(4) Mr. Mihaichuk was appointed President and Chief Executive Officer of the
general partner in October 1999 and resigned in December 2000.
Each director who is not an employee of TransCanada, the general partner or its
affiliates (independent director) is entitled to a directors' retainer fee of
$10,000 per annum and an additional fee of $2,000 per annum for each committee
of the board of which he is Chair. These fees are paid by the Partnership on a
semi-annual basis. For the year ended December 31, 1999, the three independent
directors were paid half of these annual fees as they were appointed in July
1999. Each independent director is also paid a fee of $1,500 for attendance at
each meeting of the Board of Directors and a fee of $750 for attendance at each
meeting of a committee of the Board. The independent directors are reimbursed
for out-of-pocket expenses incurred in the course of attending such meetings.
Under a directors' compensation plan adopted effective July 19, 1999, each
independent director receives 50% of his annual board retainer that is payable
on the applicable date in the form of common units of the Partnership. The
common units are purchased by the general partner on the open market and the
number of common units purchased under the directors' compensation plan is based
on the trading price of common units on the day preceding the applicable payment
date.
The Audit and Compensation Committee of the Board of Directors of the general
partner of TC PipeLines did not during the last completed fiscal year make any
determination with respect to the compensation of the Partnership's executive
officers. The executive officers' salaries are determined on a competitive and
market basis by the parent company of the general partner.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the voting securities
of the Partnership as of March 9, 2001 by the general partner's directors,
officers and certain beneficial owners. Officers of the general partner own
shares of TransCanada, which in the aggregate amount to less than 1% of
TransCanada's issued and outstanding shares. Other than as set forth below, no
person is known by the general partner to own beneficially more than 5% of the
voting securities of the Partnership.
---------------------------------------------------------------------
Amount and Nature of Beneficial Ownership
Name and Business Address Common Units Subordinated Units
- ------------------------------------------------------------------------------------------------------------------------
Percentage of
Number of Percent Number of Percent Interest for
Units of Class Units of Class all Units (1)
- ------------------------------------------------------------------------------------------------------------------------
TC PipeLines GP, Inc. (2)(3) - - 2,809,306 100 16.1
450 1st Street SW
Calgary, Alberta T2P 5H1
- ------------------------------------------------------------------------------------------------------------------------
TransCan Northern Ltd. (2) 2,800,000 19.1 - - 16.0
450 1st Street SW
Calgary, Alberta T2P 5H1
- ------------------------------------------------------------------------------------------------------------------------
Goldman, Sachs Group Inc. (4) 2,515,200 17.1 - - 14.4
85 Broad Street
New York, New York 10004
- ------------------------------------------------------------------------------------------------------------------------
Robert A. Helman (5) 6,450 * - - *
190 S. LaSalle Street
Chicago, Illinois 60603
- ------------------------------------------------------------------------------------------------------------------------
Jack F. Jenkins-Stark (6) 2,450 * - - *
1010 Atlantic Avenue
Alameda, California 94501
- ------------------------------------------------------------------------------------------------------------------------
David L. Marshall (7) 2,050 * - - *
450 1st Street SW
Calgary, Alberta T2P 5H1
- ------------------------------------------------------------------------------------------------------------------------
Ronald J. Turner - - - - -
450 1st Street SW
Calgary, Alberta T2P 5H1
- ------------------------------------------------------------------------------------------------------------------------
Garry P. Mihaichuk - - - - -
450 1st Street SW
Calgary, Alberta T2P 5H1
- ------------------------------------------------------------------------------------------------------------------------
Directors and Executive Officers as a Group
(12 persons) 10,950 * - - *
- ------------------------------------------------------------------------------------------------------------------------
(1) A total of 17,500,000 common and subordinated units are issued and
outstanding.
(2) TC PipeLines GP, Inc. and TransCan Northern Ltd. are wholly owned
subsidiaries of TransCanada.
(3) TC PipeLines GP, Inc. owns an aggregate 2% general partner interest of TC
PipeLines and its subsidiaries on a combined basis.
(4) As reported on a schedule 13(g) filed on February 14, 2001, each of Goldman
Sachs Group, Inc. (GS Group) and Goldman, Sachs & Co. (Goldman Sachs)
disclaim beneficial ownership of the securities beneficially owned by (i)
any client accounts with respect to which Goldman Sachs or employees of
Goldman Sachs have voting or investment discretion, or both and (ii)
certain investment entities, of which a subsidiary of GS Group or Goldman
Sachs is the general partner, managing general partner or other manager, to
the extent interests in such entities are held by persons other than GS
Group, Goldman Sachs or their affiliates.
(5) 6,000 units are held by Bank of Oklahoma N.A., trustee for Mayer, Brown &
Platt Savings Plan FBO Robert A. Helman and 450 units are held directly by
Mr. Helman.
(6) 2,450 units are held by the Jenkins-Stark Family Trust dated June 16, 1995.
(7) 2,050 units are held directly by Mr. Marshall.
* Less than 1%.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and officers,
and persons who own more than 10% of the common units, to file initial reports
of ownership and reports of changes in ownership (Forms 3, 4, and 5) of the
common units with the Securities and Exchange Commission (SEC) and the Nasdaq
Stock Market. Officers, directors and greater than 10% unitholders are required
by SEC regulation to furnish the Partnership with copies of all such forms that
they file.
Except as set forth below, based solely on the Partnership's review of the
copies of such reports received by the Partnership and on written
representations by certain reporting persons that no reports on Form 5 were
required, the Partnership believes that during the fiscal year ended December
31, 2000 all Section 16(a) filing requirements applicable to its officers,
directors and holders of 10% or more of its common units were complied with in a
timely manner. However, the Form 3 required to be filed by Mr. Dennis McConaghy
within 10 days of his appointment as a director of the general partner on
December 22, 2000, was filed late on March 5, 2001 due to a clerical error.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An affiliate of the general partner owns 2,800,000 common units and the general
partner owns 2,809,306 subordinated units, representing an aggregate 31.4%
limited partner interest in the Partnership. In addition, the general partner
owns an aggregate 2% general partner interest in the Partnership through which
it manages and operates the Partnership.
The general partner is accountable to TC PipeLines and the unitholders as a
fiduciary. Neither the Delaware Act nor case law defines with particularity the
fiduciary duties owed by general partners to limited partners of a limited
partnership. The Delaware Act does provide that Delaware limited partnerships
may, in their partnership agreements, restrict or expand the fiduciary duties
owed by a general partner to limited partners and the partnership.
In order to induce the general partner to manage the business of TC PipeLines,
the partnership agreement contains various provisions restricting the fiduciary
duties that might otherwise be owed by the general partner. The following is a
summary of the material restrictions of the fiduciary duties owed by the general
partner to the limited partners.
o The partnership agreement permits the general partner to make a number
of decisions in its "sole discretion." This entitles the general partner
to consider only the interests and factors that it desires and it shall
have no duty or obligation to give any consideration to any interest of,
or factors affecting, TC PipeLines, its affiliates or any limited
partner. Other provisions of the partnership agreement provide that the
general partner's actions must be made in its reasonable discretion.
o The partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not involving a
required vote of unitholders must be "fair and reasonable" to TC
PipeLines. In determining whether a transaction or resolution is "fair
and reasonable" the general partner may consider interests of all
parties involved, including its own. Unless the general partner has
acted in bad faith, the action taken by the general partner shall not
constitute a breach of its fiduciary duty.
o The partnership agreement specifically provides that it shall not be a
breach of the general partner's fiduciary duty if its affiliates engage
in business interests and activities in competition with, or in
preference or to the exclusion of, TC PipeLines. Also, the general
partner and its affiliates have no obligation to present business
opportunities to TC PipeLines.
o The partnership agreement provides that the general partner and its
officers and directors will not be liable for monetary damages to TC
PipeLines, the limited partners or assignees for errors of judgment or
for any acts or omissions if the general partner and those other persons
acted in good faith.
TC PipeLines is required to indemnify the general partner and its officers,
directors, employees, affiliates, partners, members, agents and trustees
(collectively referred to hereafter as the General Partner and others), to the
fullest extent permitted by law, against liabilities, costs and expenses
incurred by the General Partner and others. This indemnification is required if
the General Partner and others acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than the general
partner) not opposed to, the best interests of TC PipeLines. Indemnification is
required for criminal proceedings if the General Partner and others had no
reasonable cause to believe their conduct was unlawful.
The Partnership does not directly employ any persons to manage or operate its
business. These functions are provided by the general partner. The general
partner does not receive a management fee or other compensation in connection
with its management of the Partnership. The Partnership reimburses the general
partner for all costs of services provided, including the costs of employee,
officer and director compensation and benefits, and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to the
Partnership. The partnership agreement provides that the general partner will,
in its sole discretion, determine the expenses that are allocable to the
Partnership in any reasonable manner determined by it. Total costs reimbursed to
the general partner by the Partnership were approximately $0.7 million for the
year ended December 31, 2000. Such costs include, (i)
25
personnel costs (such as salaries and employee benefits) of the personnel
providing services, (ii) overhead costs (such as office space and equipment) and
(iii) out-of-pocket expenses related to the provision of services to the
Partnership.
On May 28, 1999, the Partnership entered into a $40.0 million unsecured
two-year revolving credit facility with TransCanada PipeLine USA Ltd., an
affiliate of the general partner. The credit facility bears interest at LIBOR
plus 1.25%. The purpose of this credit facility is to provide borrowings to
fund capital expenditures, to fund capital contributions to Northern Border
Pipeline and for working capital and other general business purposes,
including funding cash distributions to partners, if necessary. At December
31, 2000, the Partnership had no amount outstanding under this credit
facility.
On September 1, 2000, TC PipeLines, based on the approval of a committee
comprised of its independent directors, acquired a 49% general partner interest
in Tuscarora. The Partnership acquired this asset from TCPL Tuscarora Ltd., an
indirect subsidiary of TransCanada, for a purchase price of $28.0 million. The
Partnership borrowed $24.5 million from the Revolving Credit Facility (see Item
7. - Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources of TC PipeLines, LP - General) to
fund a portion of the purchase price. The remainder of the purchase price was
funded with cash on hand.
As of February 1, 2001, TransCanada Energy Marketing USA, Inc., an affiliate of
TransCanada, the parent of TC PipeLines' general partner, is one of Northern
Border Pipeline's firm shippers and is currently obligated to pay 11.4% of
Northern Border Pipeline's capacity. The terms of this transaction are no less
favorable to Northern Border Pipeline than those which Northern Border Pipeline
would expect to negotiate with unrelated third parties on an arm's length basis.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedules.
The financial statements filed as part of this report are listed in the
"Index to Financial Statements" on Page F-1.
(b) The Registrant filed the following reports on Form 8-K during the
fourth quarter of 2000:
A report on Form 8-K was filed on October 3, 2000 stating that Northern
Border Pipeline, a partnership in which TC PipeLines indirectly holds a
30% general partner interest, had filed for approval on September 26,
2000, a stipulation and agreement with the FERC that documents the
settlement of its pending rate case.
A report on Form 8-K was filed on December 20, 2000 announcing changes
to the officers and directors of the general partner of the Partnership
and the FERC's approval of the rate case settlement of Northern Border
Pipeline, a partnership in which TC PipeLines indirectly holds a 30%
general partner interest.
(c) Exhibits
EXHIBIT NO. DESCRIPTION
*3.1 Amended and Restated Agreement of Limited Partnership of
TC PipeLines, LP dated May 28, 1999 (Exhibit 3.1 to TC PipeLines,
LP's Form 10-K, March 28, 2000).
*3.2 Certificate of Limited Partnership of TC PipeLines, LP (Exhibit
3.2 to TC Pipelines, LP's Form S-1 Registration Statement
Registration No. 333-69947 ("1999 Form S-1")).
*3.3 Certificate of Limited Partnership of TC PipeLines Intermediate
Limited Partnership (Exhibit 3.3 to the 1999 Form S-1).
*3.4 Certificate of Limited Partnership of TC Tuscarora Intermediate
Limited Partnership (Exhibit 99.1 to TC PipeLines, LP's Form 8-K,
September 1, 2000).
*3.5 Agreement of Limited Partnership of TC Tuscarora Intermediate
Limited Partnership dated July 19, 2000 (Exhibit 99.2 to TC
PipeLines, LP's Form 8-K, September 1, 2000).
*4.1 Indenture, dated as of August 17, 1999 between Northern Border
Pipeline Company and Bank One Trust Company, NA, successor to The
First National Bank of Chicago, as trustee (Exhibit 4.1 to
Northern Border Pipeline Company's, Form S-4 Registration
Statement Registration No. 333-88577).
*4.2 Indenture, Assignment and Security Agreement dated December 21,
1995 between Tuscarora Gas Transmission Company and Wilmington
Trust Company, as trustee (Exhibit 99.1 to TC PipeLines, LP's
Form 10-Q, quarter ended September 30, 2000).
*10.1 Amended and Restated Agreement of Limited Partnership of TC
PipeLines Intermediate Limited Partnership dated May 28, 1999
(Exhibit 10.1 to TC PipeLines, LP's Form 10-K, March 28, 2000).
*10.2 Contribution, Conveyance and Assumption Agreement among TC
PipeLines, LP and certain other parties dated May 28, 1999
(Exhibit 10.2 to TC PipeLines, LP's Form 10-K, March 28, 2000).
*10.3 Northern Border Pipeline Company General Partnership Agreement
between Northern Border Intermediate Limited Partnership,
TransCanada Border PipeLine Ltd., and TransCan Northern Ltd.,
effective March 9, 1978 as amended (Exhibit 3.2 to Northern
Border Partners, L.P. Form S-1 Registration Statement No.
33-66158).
*10.3.1 Seventh Supplement Amending Northern Border Pipeline Company
General Partnership Agreement dated as of September 23, 1993
Partnership (Exhibit 10.3.1 to the 1999 Form S-1).
27
EXHIBIT NO. DESCRIPTION
*10.3.2 Eighth Supplement Amending Northern Border Pipeline Company
General Partnership Agreement dated May 21, 1999 by and among
TransCan Border PipeLine Ltd., TransCanada Northern Ltd.,
Northern Border Intermediate Limited Partnership and TC PipeLines
Intermediate Limited Partnership (Exhibit 10.3.2 to TC PipeLines,
LP's Form 10-K, March 28, 2000).
*10.4 Note Purchase Agreement between Northern Border Pipeline Company
and the parties listed therein, dated July 15, 1992 (Exhibit 10.6
to Northern Border Partners, L.P.'s Form S-1 Registration
Statement No. 33-66158).
*10.4.1 Supplemental Agreement to the Note Purchase Agreement dated as of
June 1, 1995 (Exhibit 10.6.1 to Northern Border Partners, L.P.'s
Form S-1 Registration Statement No. 33-66158).
*10.5 U.S. $40,000,000 Two-year Revolving Credit Facility between TC
PipeLines, LP, as borrower, and TransCanada PipeLine USA Ltd., as
lender dated May 28, 1999 (Exhibit 10.5 to TC PipeLines, LP's
Form 10-K, March 28, 2000).
*10.6 Form of Credit Agreement among Northern Border Pipeline Company,
The First National Bank of Chicago, as Administrative Agent, The
First National Bank of Chicago, Royal Bank of Canada, and Bank of
America National Trust and Savings Association, as Syndication
Agents, First Chicago Capital Markets, Inc., Royal Bank of
Canada, and BancAmerica Securities, Inc. as Joint Arrangers and
Lenders (as defined therein) dated as of June 16, 1997 (Exhibit
10(c) to Northern Border Partners, L.P.'s Form S-3 Registration
Statement No. 33-40601).
*10.7 Operating Agreement between Northern Border Pipeline Company and
Northern Plains Natural Gas Company, dated February 28, 1980
(Exhibit 10.3 to Northern Border Partners, L.P.'s Form S-1
Registration Statement No. 33-66158).
*10.8 Guaranty made by Panhandle Eastern Pipeline Company, dated
October 31, 1992 (Exhibit 10.9 to Northern Border Partners,
L.P.'s Form S-1 Registration Statement No. 33-65158).
*10.9 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Gas Marketing,
Inc., dated June 22, 1990 (Exhibit 10.10 to Northern Border
Partners, L.P.'s Form S-1 Registration Statement No. 33-66158).
*10.9.1 Amended Exhibit A to Northern Border Pipeline Company U.S.
Shipper Service Agreement effective April 1, 1998 (Exhibit
10.10.4 to Northern Border Partners, L.P.'s 1997 Form 10-K SEC
File No. 1-12202).
*10.10 Amended Exhibit A to Northern Border Pipeline Company U.S.
Shippers Service Agreement between Northern Border Pipeline
Company and Enron Gas Marketing, Inc. (Exhibit 10.10.1 to Northern
Border Partners, L.P.'s Form 10-K for the year ended December 31,
1993, SEC file No. 1-12202).
*10.11 Amended Exhibit A to Northern Border Pipeline U.S. Shippers
Service Agreement between Northern Border Pipeline Company and
Enron Gas Marketing, Inc., effective November 1, 1994 (Exhibit
10.10.2 to the Northern Border Partners, L.P.'s Form 10-K for the
year ended December 31, 1994, SEC File No. 1-12202).
*10.12 Amended Exhibit A's to Northern Border Pipeline Company U.S.
Shipper Service Agreement effective August 1, 1995 and November
1, 1995 (Exhibit 10.10.3 to Northern Border Partners, L.P.'s Form
10-K for the year ended December 31, 1995).
*10.13 Amended Exhibit A to Northern Border Pipeline Company U.S.
Shipper Service Agreement effective April 1, 1998 (Exhibit
10.10.4 to Northern Border Partners, L.P.'s Form 10-K for the
year ended December 31, 1997, SEC File No. 1-12202.
*10.14 Guaranty made by Northern Natural Gas Company, dated October 7,
1993 (Exhibit 10.11.1 to Northern Border Partners, L.P.'s 1993
Form 10-K SEC File No. 1-12202).
*10.14.1 Guaranty made by Northern Natural Gas Company, dated October 7,
1993 (Exhibit 10.11.2 to Northern Border Partners, L.P.'s 1993
Form 10-K SEC File No. 1-12202).
28
EXHIBIT NO. DESCRIPTION
*10.15 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Western Gas
Marketing Limited, as agent for TransCanada PipeLines Limited,
dated December 15, 1980 (Exhibit 10.13 to Northern Border
Partners, L.P.'s Form S-1 Registration Statement No. 33-66158).
*10.15.1 Amended Exhibit A to Northern Border Pipeline Company U.S.
Shippers Service Agreement between Northern Border Pipeline
Company and Western Gas Marketing Limited extending the term
effective April 2, 1999 (Exhibit 10.11.1 to 1999 Form S-1).
*10.16 Amendment to Northern Border Pipeline Company Service Agreement
extending the term effective November 1, 1995 (Exhibit 10.13.1 to
Northern Border Partners, L.P.'s Form 10-K for the year ended
December 31, 1995).
*10.17 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Transcontinental Gas
Pipe Line Corporation, dated July 14, 1983, with Amended Exhibit
A effective February 11, 1994 (Exhibit 10.17 to Northern Border
Partners, L.P.'s 1995 Form 10-K SEC File No. 1-12202).
*10.18 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Capital &
Trade Resources Corp. dated October 15, 1997 (Exhibit 10.21 to
Northern Border Partners, L.P.'s 1997 Form 10-K SEC File No.
1-12202).
*10.19 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Capital &
Trade Resources Corp. dated October 15, 1997 (Exhibit 10.22 to
Northern Border Partners, L.P.'s 1997 Form 10-K SEC File No.
1-12202).
*10.20 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Capital &
Trade Resources Corp. dated August 5, 1997 with Amendment dated
September 25, 1997 (Exhibit 10.25 to Northern Border Partners,
L.P.'s 1997 Form 10-K SEC File No. 1-12202).
*10.20.1 Amended Exhibit A to Northern Border Pipeline Company U.S.
Shippers Service Agreement between Northern Border Pipeline
Company and Enron Capital & Trade Resources Corp. effective
November 1, 1998 (Exhibit 10.15.1 to 1999 Form S-1).
*10.22 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron Capital &
Trade Resources Corp. dated August 5, 1997 (Exhibit 10.26 to
Northern Border Partners, L.P.'s 1997 Form 10-K SEC File No.
1-12202).
*10.22.1 Amended Exhibit A to Northern Border Pipeline Company U.S.
Shippers Service Agreement between Northern Border Pipeline
Company and Enron Capital & Trade Resources Corp. effective April
2, 1999 (Exhibit 10.16.1 to 1999 Form S-1).
*10.23 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc., as agent for TransCanada PipeLines Limited, dated
August 14, 1997 (Exhibit 10.28 to Northern Border Partners,
L.P.'s 1997 Form 10-K SEC File No. 1-12202).
*10.24 Agreement among Northern Plains Natural Gas Company, Pan Border
Gas Company, Northwest Border Pipeline Company, TransCanada
Border PipeLine Ltd., TransCan Northern Ltd., Northern Border
Intermediate Limited Partnership, Northern Border Partners, L.P.,
and the Management Committee of Northern Border Pipeline, dated
as of March 17, 1999 (Exhibit 10.21 to Northern Border Partners,
L.P.'s 1998 Form 10-K SEC File No. 1-12202).
*10.25 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc. as agent for TransCanada PipeLines Limited, dated
October 10, 1996, with Amended Exhibit A effective April 2, 1999
(Exhibit 10.19 to 1999 Form S-1).
29
EXHIBIT NO. DESCRIPTION
*10.26 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc., as agent for TransCanada PipeLines Limited dated
August 5, 1997 with Amended Exhibit A, effective April 2, 1999
(Exhibit 10.27 to Northern Border Partners, L.P.'s Form 10-K for
the year ended December 31, 1997).
*10.27 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc. as agent for TransCanada PipeLines Limited, dated
October 5, 1998, with Amended Exhibit A effective April 2, 1999
(Exhibit 10.20 to 1999 Form S-1).
*10.28 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc. as agent for TransCanada PipeLines Limited, dated
October 5, 1998, with Amended Exhibit A effective April 2, 1999
(Exhibit 10.21 to 1999 Form S-1).
*10.29 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc. as agent for TransCanada PipeLines Limited, dated
October 5, 1998, with Amended Exhibit A effective April 2, 1999
(Exhibit 10.22 to 1999 Form S-1).
*10.30 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc. as agent for TransCanada PipeLines Limited, dated
October 5, 1998, with Amended Exhibit A effective April 2, 1999
(Exhibit 10.23 to 1999 Form S-1).
*10.31 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and TransCanada Gas
Services Inc. as agent for TransCanada PipeLines Limited, dated
December 18, 1998 (Exhibit 10.24 to 1999 Form S-1).
*10.32 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Pan-Alberta Gas
(U.S.) Inc. dated October 1, 1993, with Amended Exhibit A
effective June 22, 1998 (Exhibit 10.25 to 1999 Form S-1).
*10.33 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Pan-Alberta Gas
(U.S.) Inc. (successor to Natgas U.S. Inc.), dated October 6,
1989, with Amended Exhibit A effective April 2, 1999 (Exhibit
10.26 to 1999 Form S-1).
*10.34 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Pan-Alberta Gas
(U.S.) Inc., dated October 1, 1992, with Amended Exhibit A
effective June 22, 1998 (Exhibit 10.27 to 1999 Form S-1).
*10.35 Project Management Agreement by and between Northern Plains
Natural Gas Company and Enron Engineering & Construction Company,
dated March 1, 1996 (Exhibit No. 10.39 to Northern Border
Pipeline Company, Form S-4 Registration Statement, Registration
No. 333-88577).
*10.36 Directors' Compensation Plan of TC PipeLines, GP, Inc. dated
effective July 19, 1999 (Exhibit 10.36 to TC PipeLines, LP's Form
10-K, March 28, 2000).
*10.37 Purchase and Sale Agreement dated July 19, 2000 among TCPL
Tuscarora Ltd., TC Tuscarora Intermediate Limited Partnership, TC
PipeLines GP, Inc., TransCanada PipeLines Limited and TransCanada
PipeLine USA Ltd. (Exhibit 99.3 to TC PipeLines, LP's Form 8-K,
September 1, 2000).
*10.38 Credit Agreement dated as of August 22, 2000 among TC PipeLines,
LP, the Lenders Party thereto and Bank One N.A., as
agent (Exhibit 99.2 to TC PipeLines, LP's Form 10-Q, quarter
ended September 30, 2000).
21.1 Subsidiaries of the Registrant
* Indicates exhibits incorporated by reference.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 29th day of March
2001.
TC PIPELINES, LP
(A Delaware Limited Partnership)
by its general partner, TC PipeLines GP, Inc.
/s/ Ronald J. Turner
By: -------------------------------------
Ronald J. Turner
President and Chief Executive Officer
TC PipeLines GP, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ronald J. Turner
- -------------------
Ronald J. Turner President and Chief Executive Officer
and Director (Principal Executive Officer) March 29, 2001
/s/ Russell K. Girling
- -------------------
Russell K. Girling Chief Financial Officer
and Director (Principal Financial Officer) March 29, 2001
/s/ Theresa Jang
- -------------------
Theresa Jang Controller (Principal Accounting Officer) March 29, 2001
/s/ Dennis J. McConaghy
- -------------------
Dennis J. McConaghy Director March 29, 2001
/s/ Walentin Mirosh
- -------------------
Walentin Mirosh Director March 29, 2001
- -------------------
Robert A. Helman Director March , 2001
- -------------------
Jack F. Jenkins-Stark Director March , 2001
- -------------------
David L. Marshall Director March , 2001
31
TC PIPELINES, LP
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
FINANCIAL STATEMENTS OF TC PIPELINES, LP
Independent Auditors' Report F-2
Balance Sheet - December 31, 2000 and 1999 F-3
Statement of Income - Year Ended December 31, 2000
and Period Ended December 31, 1999 F-3
Statement of Cash Flows - Year Ended December 31, 2000
and Period Ended December 31, 1999 F-4
Statement of Changes in Partners' Capital - Year Ended
December 31, 2000 and Period Ended December 31, 1999 F-4
Notes to Financial Statements F-5
FINANCIAL STATEMENTS OF NORTHERN BORDER PIPELINE COMPANY
Report of Independent Public Accountants F-10
Balance Sheet - December 31, 2000 and 1999 F-11
Statement of Income - Years Ended December 31, 2000, 1999 and 1998 F-12
Statement of Cash Flows - Years Ended December 31, 2000, 1999 and 1998 F-13
Statement of Changes in Partners' Capital - Years Ended
December 31, 2000, 1999 and 1998 F-14
Notes to Financial Statements F-15
FINANCIAL STATEMENTS SCHEDULE OF NORTHERN BORDER PIPELINE COMPANY
Report of Independent Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of TC PipeLines GP, Inc., General Partner of TC
PipeLines, LP:
We have audited the accompanying balance sheets of TC PipeLines, LP (a Delaware
limited partnership) as of December 31, 2000 and 1999 and the related statements
of income, cash flows and changes in partners' capital for the year ended
December 31, 2000 and the period from the commencement of operations on May 28,
1999 to December 31, 1999. These financial statements are the responsibility of
the General Partner. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TC PipeLines, LP as of December
31, 2000 and 1999 and the results of its operations and its cash flows for the
year ended December 31, 2000 and the period from the commencement of operations
on May 28, 1999 to December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ KPMG LLP
Calgary, Canada
January 22, 2001
F-2
TC PIPELINES, LP
BALANCE SHEET
DECEMBER 31 (THOUSANDS OF DOLLARS) 2000 1999
- -------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash 1,566 795
Investment in Northern Border Pipeline Company 248,098 250,450
Investment in Tuscarora Gas Transmission Company 27,881 -
------------------------------------
277,545 251,245
------------------------------------
------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable 499 407
Accrued interest 141 -
------------------------------------
640 407
------------------------------------
Long-Term Debt 21,500 -
Partners' Capital
Common units 212,253 208,573
Subordinated units 37,951 37,248
General partner 5,201 5,017
------------------------------------
255,405 250,838
------------------------------------
277,545 251,245
------------------------------------
------------------------------------
TC PIPELINES, LP
STATEMENT OF INCOME
YEAR ENDED May 28 (1) --
(THOUSANDS OF DOLLARS, EXCEPT PER UNIT AMOUNTS) DECEMBER 31, 2000 December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
EQUITY INCOME FROM INVESTMENT IN NORTHERN BORDER PIPELINE COMPANY 38,119 20,923
EQUITY INCOME FROM INVESTMENT IN TUSCARORA GAS TRANSMISSION COMPANY 943 -
GENERAL AND ADMINISTRATIVE EXPENSES (1,337) (699)
FINANCIAL CHARGES AND OTHER (501) -
------------------------------------------
NET INCOME 37,224 20,224
------------------------------------------
------------------------------------------
NET INCOME PER UNIT $2.08 $1.13
------------------------------------------
------------------------------------------
UNITS OUTSTANDING (THOUSANDS) 17,500 17,500
------------------------------------------
------------------------------------------
(1) Commencement of operations
The accompanying notes are an integral part of these financial statements.
F-3
TC PIPELINES, LP
STATEMENT OF CASH FLOWS
YEAR ENDED May 28 (1) -
(THOUSANDS OF DOLLARS) DECEMBER 31, 2000 December 31, 1999
- -----------------------------------------------------------------------------------------------------------
CASH GENERATED FROM OPERATIONS
Net income 37,224 20,224
Add/(Deduct):
Distributions received in excess of /(less than) equity 2,909 (8,799)
income
Increase in accounts payable 92 407
Increase in accrued interest 141 -
---------------------------------------------
40,366 11,832
---------------------------------------------
INVESTING ACTIVITIES
Investment in Tuscarora Gas Transmission Company (28,438) -
---------------------------------------------
(28,438) -
---------------------------------------------
---------------------------------------------
FINANCING ACTIVITIES
Distributions paid (32,657) (11,037)
Long-term debt issued 24,500 -
Reduction of long-term debt (3,000) -
Common units issued - 282,061
Common units redeemed - (274,560)
Subordinated units redeemed - (7,501)
---------------------------------------------
(11,157) (11,037)
---------------------------------------------
INCREASE IN CASH 771 795
CASH, BEGINNING OF PERIOD 795 -
---------------------------------------------
CASH, END OF PERIOD 1,566 795
---------------------------------------------
---------------------------------------------
TC PIPELINES, LP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Subordinated General
Common Units Units Partner Partners' Capital
--------------------- ---------------------- ------------ ----------------------
(thousands (thousands (thousands (thousands (thousands (thousands (thousands
of of of of of of of
units) dollars) units) dollars) dollars) units) dollars)
---------- ---------- ---------- ---------- ------------ ---------- -----------
PARTNERSHIP UNITS
Initial public offering 14,300 274,560 - - - 14,300 274,560
Contributions of assets 14,300 193,515 3,200 43,303 4,833 17,500 241,651
Redemption of common units (14,300) (274,560) - - - (14,300) (274,560)
Exercise of over-allotment
option 391 7,501 (391) (7,501) - - -
-----------------------------------------------------------------------------------
14,691 201,016 2,809 35,802 4,833 17,500 241,651
Net Income 16,637 3,182 405 20,224
Distributions Paid (9,080) (1,736) (221) (11,037)
-----------------------------------------------------------------------------------
Partners' Capital at
December 31, 1999 14,691 208,573 2,809 37,248 5,017 17,500 250,838
NET INCOME 30,490 5,830 904 37,224
DISTRIBUTIONS PAID (26,810) (5,127) (720) (32,657)
-----------------------------------------------------------------------------------
PARTNERS' CAPITAL AT DECEMBER 31, 2000 14,691 212,253 2,809 37,951 5,201 17,500 255,405
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
(1) Commencement of operations
The accompanying notes are an integral part of these financial statements.
F-4
TC PIPELINES, LP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
TC PipeLines, LP, a Delaware limited partnership, and its subsidiary limited
partnerships, TC PipeLines Intermediate Limited Partnership, a Delaware
limited partnership, and TC Tuscarora Intermediate Limited Partnership, a
Delaware limited partnership, are collectively referred to herein as TC
PipeLines or the Partnership. TC PipeLines was formed by TransCanada
PipeLines Limited (TransCanada) to acquire, own and participate in the
management of United States based pipeline assets.
TC PipeLines owns a 30% general partner interest in Northern Border
Pipeline Company (Northern Border Pipeline), a Texas general partnership.
Northern Border Pipeline owns a 1,214-mile natural gas transmission line
extending from the United States-Canadian border near Port of Morgan,
Montana, to a terminus near Manhattan, Illinois.
TC PipeLines also owns a 49% general partner interest in Tuscarora Gas
Transmission Company (Tuscarora), a Nevada general partnership. Tuscarora
owns a 229-mile interstate pipeline system that transports natural gas from
Malin, Oregon, where it interconnects with facilities of PG&E Gas
Transmission - Northwest, to the Reno, Nevada area.
TC PipeLines is managed by its general partner, TC PipeLines GP, Inc.
(General Partner), a wholly-owned subsidiary of TransCanada. The General
Partner provides certain administrative services for the Partnership and is
reimbursed for its costs and expenses. In addition to its 2% general partner
interest, the General Partner owns 2,809,306 Subordinated Units, representing
an effective 15.7% limited partner interest in the Partnership at December
31, 2000.
INITIAL PUBLIC OFFERING AND CONCURRENT TRANSACTIONS
TC PipeLines commenced operations on May 28, 1999, when it issued 14,300,000
Common Units (11,500,000 to the public and 2,800,000 to an affiliate of the
General Partner) for net proceeds of $274.6 million, after deducting
underwriters' fees of $15.0 million. These proceeds, along with 3,200,000
Subordinated Units, a 2% general partner interest and incentive distribution
rights, were issued to TransCanada Border PipeLine Ltd. and TransCan Northern
Ltd. (collectively, the predecessor companies), affiliates of the General
Partner, to acquire the predecessor companies' 30% general partner interest
in Northern Border Pipeline.
On June 25, 1999, the underwriters exercised a portion of their
over-allotment option under the terms of the underwriting agreement and
purchased 390,694 additional Common Units for net proceeds of $7.5 million.
The Partnership used those proceeds to redeem 390,694 Subordinated Units from
the General Partner.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying financial statements and related notes present the financial
position of the Partnership as of December 31, 2000 and 1999 and the results
of its operations, cash flows and changes in partners' capital for the year
ended December 31, 2000 and for the period from May 28, 1999 (commencement of
operations) to December 31, 1999. The Partnership uses the equity method of
accounting for its investments in Northern Border Pipeline and Tuscarora,
over which it is able to exercise significant influence. Amounts are stated
in United States dollars.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Although management believes these estimates are reasonable, actual results
could differ from these estimates.
(c) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
(d) PARTNERS' CAPITAL
Costs incurred in connection with the issuance of Units are deducted from the
proceeds received.
F-5
TC PIPELINES, LP
NOTES TO FINANCIAL STATEMENTS
(e) INCOME TAXES
No provision for income taxes related to the operations of the Partnership is
included in the accompanying financial statements because, as a partnership, it
is not subject to Federal or state income tax. The tax effect of the
Partnership's activities accrues to its partners.
NOTE 3 INVESTMENT IN NORTHERN BORDER PIPELINE COMPANY
The Partnership owns a 30% general partner interest in Northern Border
Pipeline, a partnership which owns a natural gas pipeline extending from the
Montana-Saskatchewan border near Port of Morgan, Montana, to a terminus near
Manhattan, Illinois. Northern Border Pipeline is subject to regulation by the
Federal Energy Regulatory Commission (FERC).
At the time of acquisition on May 28, 1999, the Partnership recorded its
investment in Northern Border Pipeline at $241.7 million, representing the
combined carrying values of the investment in Northern Border Pipeline as
reflected in the accounts of the predecessor companies at the same date. TC
PipeLines' equity income amounted to $38.1 million and $20.9 million for the
year ended December 31, 2000 and the period May 28 to December 31, 1999,
respectively, representing 30% of the net income of Northern Border Pipeline
for the same periods.
The following sets out summarized financial information for Northern
Border Pipeline as at and for the years ended December 31, 2000 and 1999. TC
PipeLines has held its general partner interest since May 28, 1999.
December 31 (millions of dollars) 2000 1999
- --------------------------------------------------------------------------
NORTHERN BORDER PIPELINE BALANCE SHEET
Cash and cash equivalents 29.0 17.3
Other current assets 38.1 33.8
Plant, property and equipment, net 1,687.0 1,731.4
Other assets 14.4 14.2
Current liabilities (114.3) (116.7)
Reserves and deferred credits (4.9) (10.7)
Long-term debt (822.3) (834.5)
-----------------------
Partners' capital 827.0 834.8
-----------------------
-----------------------
Year ended December 31 (millions of dollars) 2000 1999
- --------------------------------------------------------------------------
NORTHERN BORDER PIPELINE INCOME STATEMENT
Revenues 311.0 298.3
Costs and expenses (69.5) (69.0)
Depreciation (57.3) (51.9)
Financial charges and other (57.1) (58.8)
-----------------------
Net income 127.1 118.6
-----------------------
-----------------------
NOTE 4 INVESTMENT IN TUSCARORA GAS TRANSMISSION COMPANY
On September 1, 2000, TC PipeLines completed its acquisition of a 49% general
partner interest in Tuscarora Gas Transmission Company. The Partnership
acquired this asset from TCPL Tuscarora Ltd., an indirect subsidiary of
TransCanada, for a purchase price of $28.0 million. The Partnership borrowed
$24.5 million from the Revolving Credit Facility (see Note 5) to fund a
portion of the purchase price. The remainder of the purchase price was funded
with cash on hand. TCPL Tuscarora Ltd. has retained a 1% general partner
interest in Tuscarora. Tuscarora is subject to regulation by the FERC.
TC PipeLines' equity income from Tuscarora for the period September 1,
2000, the date of acquisition, to December 31, 2000 amounted to $0.9 million
representing 49% of the net income of Tuscarora for the same period.
The following sets out summarized financial information for Tuscarora as
at and for the year ended December 31, 2000. TC PipeLines has held its
general partner interest since September 1, 2000.
F-6
TC PIPELINES, LP
NOTES TO FINANCIAL STATEMENTS
December 31 (millions of dollars) 2000
- ------------------------------------------------------------
TUSCARORA BALANCE SHEET
Cash and cash equivalents 7.1
Other current assets 3.2
Plant, property and equipment, net 115.7
Other assets 2.5
Current liabilities (8.9)
Reserves and deferred credits (12.0)
Long-term debt (84.2)
------------
Partners' capital 23.4
------------
------------
Year ended December 31 (millions of dollars) 2000
- ------------------------------------------------------------
TUSCARORA INCOME STATEMENT
Revenues 19.4
Costs and expenses (2.4)
Depreciation (4.4)
Financial charges and other (5.8)
------------
Net income 6.8
------------
------------
NOTE 5 CREDIT FACILITIES AND LONG-TERM DEBT
On August 22, 2000, the Partnership entered into an unsecured three-year
credit facility with a third party (Revolving Credit Facility) under which
the Partnership may borrow up to an aggregate principal amount of $30.0
million. Loans under the Revolving Credit Facility bear interest at a
floating rate. The Revolving Credit Facility matures on August 31, 2003.
Amounts borrowed may be repaid in part or in full prior to that time without
penalty. The Revolving Credit Facility may be used to finance capital
expenditures and for other general purposes. On September 1, 2000, the
Partnership borrowed $24.5 million from the Revolving Credit Facility to fund
a portion of the purchase price of the 49% general partner interest in
Tuscarora. At December 31, 2000, the Partnership had $21.5 million
outstanding under the Revolving Credit Facility. The fair value of the
Revolving Credit Facility approximates its carrying value. The weighted
average interest rate for the period from September 1 to December 31, 2000,
the four months the Revolving Credit Facility has been outstanding, was
7.57%. Interest paid during the year ended December 31, 2000 and the period
May 28 to December 31, 1999 was $0.5 million and nil, respectively.
On May 28, 1999, the Partnership entered into a $40.0 million unsecured
two-year revolving credit facility with TransCanada PipeLine USA Ltd.
(TransCanada Credit Facility), an affiliate of the General Partner. The
credit facility bears interest at London Interbank Offered Rate plus 1.25%.
The purpose of the TransCanada Credit Facility is to provide borrowings to
fund capital expenditures, to fund capital contributions to Northern Border
Pipeline and for working capital and other general business purposes,
including funding cash distributions to partners, if necessary. At December
31, 2000 and 1999, the Partnership had no amount outstanding under this
credit facility.
NOTE 6 PARTNERS' CAPITAL AND DISTRIBUTIONS
Partners' capital consists of 14,690,694 Common Units representing an 82.3%
limited partner interest (an affiliate of the General Partner owns 2,800,000
of such Common Units), 2,809,306 Subordinated Units owned by the General
Partner representing a 15.7% limited partner interest and a 2% general
partner interest. In the aggregate, the General Partner's and its affiliate's
interests represent an effective 33.4% ownership of the Partnership's equity.
The Partnership will make distributions to its partners with respect to
each calendar quarter within 45 days after the end of each quarter.
Distributions are based on available cash which includes all cash and cash
equivalents of the Partnership and working capital borrowings less reserves
established by the General Partner. Amounts will generally be distributed 98%
to the holders of Common and Subordinated Units (collectively referred to as
Unitholders) and 2% to the General Partner. The Unitholders are entitled to
receive the minimum quarterly distribution (MQD) of $0.45 per unit if and to
the extent there is sufficient available cash. Distributions to holders of
the Subordinated Units are subject, while Subordinated Units remain
outstanding (Subordination Period), to the prior rights of holders of the
Common Units to receive the MQD. The Subordination Period generally cannot
end before June 30, 2004. Upon expiration of the Subordination Period, all
Subordinated Units will be converted on a one-for-one basis into Common Units
and will participate pro rata with all other Common Units in future
distributions. Under certain circumstances, up to 66.7% of the Subordinated
Units may
F-7
TC PIPELINES, LP
NOTES TO FINANCIAL STATEMENTS
convert into Common Units prior to the expiration of the Subordination
Period. Common Units will not accrue arrearages with respect to distributions
for any quarter after the Subordination Period and Subordinated Units will
not accrue any arrearages with respect to distributions for any quarter.
As an incentive, the General Partner's percentage interest in quarterly
distributions is increased after certain specified target levels are met. At
the time the quarterly distributions exceed $0.45 per unit, the General
Partner will receive 15% of the excess. As the quarterly distributions are
increased above $0.5275 per unit, the General Partner will receive increasing
percentages in excess of the targets reaching a maximum of 50% of the excess
of the highest target level. For the year ended December 31, 2000 and the
period May 28 to December 31, 1999, the Partnership distributed $1.85 and
$1.068, respectively, per unit. The distributions for the year ended December
31, 2000 and the period May 28 to December 31, 1999 included incentive
distributions to the General Partner in the amount of $0.2 million and nil,
respectively.
Partnership income is allocated to the General Partner and the limited
partners in accordance with their respective partnership percentages, after
giving effect to any priority income allocations for incentive distributions
that are allocated 100% to the General Partner.
NOTE 7 NET INCOME PER UNIT
Net income per unit is computed by dividing net income, after deduction of
the General Partner's allocation, by the weighted average number of Common
and Subordinated Units outstanding. The General Partner's allocation is equal
to an amount based upon the General Partner's 2% interest, adjusted to
reflect an amount equal to incentive distributions. Net income per unit was
determined as follows:
YEAR ENDED May 28 (1) -
(thousands of dollars, except per unit amounts) DECEMBER 31, 2000 December 31, 1999
- -----------------------------------------------------------------------------------------------------------
Net income 37,224 20,224
---------------------------------------
Net income allocated to General Partner (745) (405)
Adjustment to reflect incentive distribution income allocation (159) -
---------------------------------------
(904) (405)
---------------------------------------
Net income allocable to units 36,320 19,819
Weighted average units outstanding (thousands) 17,500 17,500
---------------------------------------
Net income per unit $2.08 $1.13
---------------------------------------
---------------------------------------
(1) Commencment of operations.
NOTE 8 RELATED PARTY TRANSACTIONS
The Partnership does not directly employ any persons to manage or operate its
business. These functions are provided by the General Partner. The General
Partner does not receive a management fee or other compensation in connection
with its management of the Partnership. The Partnership reimburses the
General Partner for all costs of services provided, including the costs of
employee, officer and director compensation and benefits, and all other
expenses necessary or appropriate to the conduct of the business of, and
allocable to the Partnership. The Partnership Agreement provides that the
General Partner will determine the expenses that are allocable to the
Partnership in any reasonable manner determined by the General Partner in its
sole discretion. Total costs reimbursed to the General Partner by the
Partnership were approximately $0.7 million for the year ended December 31,
2000 ($0.2 million for the period from May 28, 1999 to December 31, 1999).
Such costs include (i) personnel costs (such as salaries and employee
benefits) of the personnel providing such services, (ii) overhead costs (such
as office space and equipment) and (iii) out-of-pocket expenses related to
the provision of such services.
On September 1, 2000, TC PipeLines, based on the approval of a committee
comprised of its independent directors, completed its acquisition of a 49%
general partner interest in Tuscarora. The Partnership acquired this asset
from TCPL Tuscarora Ltd., an indirect subsidiary of TransCanada, for a
purchase price of $28.0 million. The Partnership borrowed $24.5 million from
the Revolving Credit Facility (see Note 5) to fund a portion of the purchase
price. The remainder of the purchase price was funded with cash on hand.
TransCanada Energy Marketing USA, Inc. (TransCanada Energy), an
affiliate of TransCanada, the parent of TC PipeLines' General Partner, has
firm service agreements representing approximately 11.4% of contracted
capacity. The firm service agreements for TransCanada Energy extend for
various terms with termination dates that range from October 2003 to December
2008.
F-8
TC PIPELINES, LP
NOTES TO FINANCIAL STATEMENTS
NOTE 9 QUARTERLY FINANCIAL DATA (UNAUDITED)
NET INCOME CASH
(thousands of dollars, except per unit amounts) EQUITY INCOME NET INCOME PER UNIT DISTRIBUTIONS(1)
- ------------------------------------------------------------------------------------------------------------------
2000
First Quarter 8,623 8,344 $0.47 8,036
Second Quarter 8,824 8,533 $0.48 8,036
Third Quarter 10,514 9,980 $0.55 8,550
Fourth Quarter 11,101 10,367 $0.58 8,550
1999
Second Quarter(2) 3,130 2,986 $0.17 3,001
Third Quarter 8,738 8,499 $0.48 8,036
Fourth Quarter 9,055 8,739 $0.49 8,036
(1) Cash distributions are paid within 45 days after the end of each quarter.
(2) The Partnership commenced operations on May 28, 1999.
NOTE 10 ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137 which deferred the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. In June 2000 the FASB issued SFAS No.
138, which amended certain guidance within SFAS No. 133. The adoption of SFAS
No. 133, as amended, will not have a material impact on TC PipeLines'
financial position or results of operations.
NOTE 11 SUBSEQUENT EVENTS
On January 18, 2001, the Board of Directors of the General Partner declared a
cash distribution of $0.475 per unit related to the three months ended
December 31, 2000. The $8.5 million distribution is payable on February 14,
2001 in the following manner: $7.0 million to the holders of Common Units as
of the close of business on January 31, 2000, $1.3 million to the General
Partner as holder of the Subordinated Units, and $0.2 million to the General
Partner as holder of incentive distribution rights and in respect of its 2%
general partner interest.
F-9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Northern Border Pipeline Company:
We have audited the accompanying balance sheet of Northern Border Pipeline
Company (a Texas partnership) as of December 31, 2000 and 1999, and the
related statements of income, cash flows and changes in partners' capital for
each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern Border Pipeline
Company as of December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
January 22, 2001
F-10
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
-------------------------------
ASSETS 2000 1999
-------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 29,046 $ 17,310
Accounts receivable 27,128 21,929
Related party receivables 6,008 5,120
Materials and supplies, at cost 4,957 3,645
Under recovered cost of service -- 3,068
-------------------------------
Total current assets 67,139 51,072
-------------------------------
NATURAL GAS TRANSMISSION PLANT
In service 2,364,487 2,363,291
Construction work in progress 14,405 4,730
-------------------------------
Total property, plant and equipment 2,378,892 2,368,021
Less: Accumulated provision for
depreciation and amortization 691,900 636,627
-------------------------------
Property, plant and equipment, net 1,686,992 1,731,394
-------------------------------
OTHER ASSETS 14,374 14,225
-------------------------------
Total assets $1,768,505 $1,796,691
-------------------------------
-------------------------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current maturities of long-term debt $ 41,000 $ 66,000
Accounts payable 26,087 5,588
Accrued taxes other than income 28,137 26,290
Accrued interest 14,401 16,504
Accumulated provision for rate refunds 4,726 2,317
-------------------------------
Total current liabilities 114,351 116,699
-------------------------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 822,267 834,459
-------------------------------
RESERVES AND DEFERRED CREDITS 4,892 10,698
-------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
PARTNERS' CAPITAL 826,995 834,835
-------------------------------
Total liabilities and partners' capital $1,768,505 $1,796,691
-------------------------------
-------------------------------
The accompanying notes are an integral part of these financial statements.
F-11
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
---------------------------------------------
OPERATING REVENUES
Operating revenues $334,978 $300,664 $196,600
Provision for rate refunds (23,956) (2,317) --
---------------------------------------------
Operating revenues, net 311,022 298,347 196,600
---------------------------------------------
OPERATING EXPENSES
Operations and maintenance 41,548 38,708 29,447
Depreciation and amortization 57,328 51,908 40,989
Taxes other than income 27,979 30,320 21,381
Regulatory credit -- -- (8,878)
---------------------------------------------
Operating expenses 126,855 120,936 82,939
---------------------------------------------
OPERATING INCOME 184,167 177,411 113,661
---------------------------------------------
INTEREST EXPENSE
Interest expense 65,489 60,312 44,542
Interest expense capitalized (328) (98) (19,001)
---------------------------------------------
Interest expense, net 65,161 60,214 25,541
---------------------------------------------
OTHER INCOME
Allowance for equity funds used
during construction 305 101 10,237
Other income, net 7,753 1,262 1,874
---------------------------------------------
Other income 8,058 1,363 12,111
---------------------------------------------
NET INCOME TO PARTNERS $127,064 $118,560 $100,231
---------------------------------------------
---------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-12
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 127,064 $ 118,560 $ 100,231
---------------------------------------
Adjustments to reconcile net income to
partners to net cash provided by
operating activities:
Depreciation and amortization 57,682 51,962 41,005
Provision for rate refunds 25,082 2,317 --
Rate refunds paid (22,673) -- --
Allowance for equity funds used
during construction (305) (101) (10,237)
Reserves and deferred credits (5,806) 880 (10)
Regulatory credit -- -- (9,105)
Changes in components of working capital (3,002) (2,112) (18,471)
Other (2,075) (40) 364
---------------------------------------
Total adjustments 48,903 52,906 3,546
---------------------------------------
Net cash provided by operating activities 175,967 171,466 103,777
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment, net (15,523) (101,678) (651,169)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from partners -- -- 223,000
Distributions to partners (134,904) (127,163) (61,205)
Issuance of long-term debt, net 75,000 289,026 403,000
Retirement of long-term debt (111,000) (263,000) --
Increase in bank overdraft 22,437 -- --
Proceeds received upon termination of
interest rate forward agreements -- 12,896 --
Long-term debt financing costs (241) (1,626) --
---------------------------------------
Net cash provided by (used in)
financing activities (148,708) (89,867) 564,795
---------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 11,736 (20,079) 17,403
Cash and cash equivalents-beginning of year 17,310 37,389 19,986
---------------------------------------
Cash and cash equivalents-end of year $ 29,046 $ 17,310 $ 37,389
---------------------------------------
---------------------------------------
- -------------------------------------------------------------------------------------------------
Changes in components of working capital:
Accounts receivable $ (6,087) $ (8,145) $ (1,567)
Materials and supplies (1,312) (285) 317
Accounts payable 1,585 (4,598) (10,769)
Accrued taxes other than income 1,847 6,462 (466)
Accrued interest (2,103) 4,741 1,396
Over/under recovered cost of service 3,068 (287) (7,382)
---------------------------------------
Total $ (3,002) $ (2,112) $ (18,471)
---------------------------------------
---------------------------------------
The accompanying notes are an integral part of these financial statements.
F-13
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
TC NORTHERN
TRANSCANADA PIPELINES BORDER
BORDER TRANSCAN INTERMEDIATE INTERMEDIATE TOTAL
PIPELINE NORTHERN LIMITED LIMITED PARTNERS'
LTD. LTD. PARTNERSHIP PARTNERSHIP CAPITAL
---------------------------------------------------------------------
Partners' Capital at
December 31, 1997 $ 34,885 $ 139,539 $ -- $406,988 $ 581,412
Net income to partners 6,014 24,055 -- 70,162 100,231
Contributions received 13,380 53,520 -- 156,100 223,000
Distributions paid (3,673) (14,689) -- (42,843) (61,205)
---------------------------------------------------------------------
Partners' Capital at
December 31, 1998 50,606 202,425 -- 590,407 843,438
Net income to partners 2,930 11,715 20,923 82,992 118,560
Distributions paid (5,206) (20,819) (12,124) (89,014) (127,163)
Ownership transfer (48,330) (193,321) 241,651 -- --
---------------------------------------------------------------------
Partners' Capital at
December 31, 1999 -- -- 250,450 584,385 834,835
Net income to partners -- -- 38,119 88,945 127,064
Distributions paid -- -- (40,471) (94,433) (134,904)
---------------------------------------------------------------------
Partners' Capital at
December 31, 2000 $ -- $ -- $248,098 $578,897 $ 826,995
---------------------------------------------------------------------
---------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-14
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
Northern Border Pipeline Company (Northern Border Pipeline) is a general
partnership, formed in 1978, pursuant to the Texas Uniform Partnership
Act. The ownership percentages of the partners in Northern Border
Pipeline (Partners) at December 31, 2000 and 1999, are as follows:
Ownership
Partner Percentage
------- ----------
Northern Border Intermediate Limited Partnership 70
TC PipeLines Intermediate Limited Partnership 30
Net income and distributions are allocated to the Partners based on
ownership percentage. Effective May 28, 1999, TransCanada Border
PipeLine Ltd. and TransCan Northern Ltd. transferred their combined 30%
ownership interest in Northern Border Pipeline to TC PipeLines
Intermediate Limited Partnership (TC PipeLines) in connection with an
initial public offering of limited partner interests in TC PipeLines,
LP. In accordance with the partnership agreement, net income and
distributions were prorated at the effective date of the ownership
transfer.
Northern Border Pipeline owns a 1,214-mile natural gas transmission
pipeline system extending from the United States-Canadian border near
Port of Morgan, Montana, to a terminus near Manhattan, Illinois.
Northern Border Pipeline is managed by a Management Committee that
includes three representatives from Northern Border Intermediate Limited
Partnership (Partnership) and one representative from TC PipeLines. The
Partnership's representatives selected by its general partners, Northern
Plains Natural Gas Company (Northern Plains), a wholly-owned subsidiary
of Enron Corp. (Enron), Pan Border Gas Company (Pan Border), a
wholly-owned subsidiary of Northern Plains, and Northwest Border
Pipeline Company, a wholly-owned subsidiary of The Williams Companies,
Inc., have 35%, 22.75% and 12.25%, respectively, of the voting interest
on the Management Committee. The representative designated by TC
PipeLines votes the remaining 30% interest. In December 1998, Northern
Plains acquired Pan Border from a subsidiary of Duke Energy Corporation.
At the closing of the acquisition, Pan Border's sole asset consisted of
its general partner interest in the Partnership. The day-to-day
management of Northern Border Pipeline's affairs is the responsibility
of Northern Plains (the Operator), as defined by the operating agreement
between Northern Border Pipeline and Northern Plains. Northern Border
Pipeline is charged for the salaries, benefits and expenses of the
Operator. For the years ended December 31, 2000, 1999, and 1998,
Northern Border Pipeline reimbursed the Operator approximately $31.7
million, $29.7 million and $30.0 million, respectively. Additionally,
Northern Border Pipeline utilizes Enron affiliates for management on
pipeline expansion and extension projects.
F-15
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
(B) GOVERNMENT REGULATION
Northern Border Pipeline is subject to regulation by the Federal
Energy Regulatory Commission (FERC). Northern Border Pipeline's
accounting policies conform to Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation." Accordingly, certain assets that result
from the regulated ratemaking process are recorded that would
not be recorded under generally accepted accounting principles
for nonregulated entities. At December 31, 2000 and 1999,
Northern Border Pipeline has reflected regulatory assets of
approximately $12.4 million and $12.1 million, respectively, in
Other Assets on the balance sheet. Northern Border Pipeline
is recovering the regulatory assets from its shippers over
varying time periods, which range from four to 43 years.
(C) REVENUE RECOGNITION
Northern Border Pipeline transports gas for shippers under a
tariff regulated by the FERC. The tariff specifies the
calculation of amounts to be paid by shippers and the general
terms and conditions of transportation service on the pipeline
system. Northern Border Pipeline's revenues are derived from
agreements for the receipt and delivery of gas at points along
the pipeline system as specified in each shipper's individual
transportation contract. Northern Border Pipeline does not own
the gas that it transports, and therefore it does not assume the
related natural gas commodity risk. See Notes 3 and 4 for a
further discussion of Northern Border Pipeline's tariff and
transportation agreements.
(D) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with
original maturities of three months or less. The carrying amount
of cash and cash equivalents approximates fair value because of
the short maturity of these investments.
F-16
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) INCOME TAXES
Income taxes are the responsibility of the Partners and are not
reflected in these financial statements. However, the Northern
Border Pipeline FERC tariff establishes the method of accounting
for and calculating income taxes and requires Northern Border
Pipeline to reflect in its rates the income taxes which would
have been paid or accrued if Northern Border Pipeline were
organized during the period as a corporation. As a result, for
purposes of determining transportation rates in calculating the
return allowed by the FERC, Partners' capital and rate base are
reduced by the amount equivalent to the net accumulated deferred
income taxes. Such amounts were approximately $326 million and
$316 million at December 31, 2000 and 1999, respectively, and are
primarily related to accelerated depreciation and other
plant-related differences.
(F) PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION AND
AMORTIZATION
Property, plant and equipment is stated at original cost. The
original cost of property retired is charged to accumulated
depreciation and amortization, net of salvage and cost of
removal. No retirement gain or loss is included in income
except in the case of extraordinary retirements or sales.
Maintenance and repairs are charged to operations in the period
incurred. The provision for depreciation and amortization of the
transmission line is an integral part of Northern Border
Pipeline's FERC tariff. The effective depreciation rates applied
to Northern Border Pipeline's transmission plant in 2000, 1999
and 1998 were 2.25%, 2.0% and 2.5%, respectively. Based upon the
rate case settlement discussed in Note 3, Northern Border
Pipeline will continue to use a 2.25% depreciation rate.
Composite rates are applied to all other functional groups of
property having similar economic characteristics.
(G) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance for funds used during construction (AFUDC)
represents the estimated costs, during the period of
construction, of funds used for construction purposes. For
regulated activities, Northern Border Pipeline is permitted to
earn a return on and recover AFUDC through its inclusion in rate
base and the provision for depreciation.
(H) RISK MANAGEMENT
Financial instruments are used by Northern Border Pipeline in
the management of its interest rate exposure. A control
environment has been established which includes policies and
procedures for risk assessment and the approval, reporting and
monitoring of financial instrument activities. As a result,
Northern Border Pipeline has entered into various interest
rate swap agreements with major financial institutions which
hedge interest rate risk by effectively converting
F-17
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) RISK MANAGEMENT (CONTINUED)
certain of its floating rate debt to fixed rate debt. Northern
Border Pipeline does not use these instruments for trading
purposes. The cost or benefit of the interest rate swap
agreements is recognized currently as a component of interest
expense.
3. RATES AND REGULATORY ISSUES
RATE CASE
Northern Border Pipeline's revenue is derived from agreements with
various shippers for the transportation of natural gas. It transports
gas under a FERC regulated tariff. Northern Border Pipeline had used a
cost of service form of tariff since its inception but agreed to
convert to a stated rate form of tariff as part of the settlement of
its current rate case discussed below.
Under the cost of service tariff, Northern Border Pipeline was provided
an opportunity to recover all of the operations and maintenance costs
of the pipeline, taxes other than income taxes, interest, depreciation
and amortization, an allowance for income taxes and a regulated return
on equity. Northern Border Pipeline was generally allowed to collect
from its shippers a return on regulated rate base as well as recover
that rate base through depreciation and amortization. Billings for the
firm transportation agreements were based on contracted volumes to
determine the allocable share of the cost of service and were not
dependent upon the percentage of available capacity actually used.
Under the cost of service tariff, Northern Border Pipeline billed
on an estimated basis for a six-month cycle. Any net excess or
deficiency resulting from the comparison of the actual cost of service
determined for the period in accordance with the FERC tariff to the
estimated billing was accumulated, including carrying charges thereon,
and was either billed to or credited back to the shippers. Revenues
reflected actual cost of service. An amount equal to differences
between billing estimates and the actual cost of service, including
carrying charges, was reflected in current assets or current
liabilities.
Northern Border Pipeline filed a rate proceeding with the FERC in May
1999 for, among other things, a redetermination of its allowed equity
rate of return. The total annual cost of service increase due to
Northern Border Pipeline's proposed changes was approximately $30
million. In June 1999, the FERC issued an order in which the proposed
changes were suspended until December 1, 1999, after which the proposed
changes were implemented with subsequent billings subject to refund.
In September 2000, Northern Border Pipeline filed a stipulation and
agreement with the FERC that documented the proposed settlement of its
pending rate case. The settlement was approved by the FERC in December
2000. Under the approved settlement, effective December 1, 1999,
shippers will pay stated transportation rates based on a straight-fixed
variable rate design. Under the straight-fixed variable rate design,
approximately 98% of the agreed upon revenue level is attributed to
demand charges, based upon contracted firm capacity, and the remaining
2% is attributed to commodity charges,
F-18
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. RATES AND REGULATORY ISSUES (CONTINUED)
RATE CASE (CONTINUED)
based on the volumes of gas actually transported on the system. From
December 1, 1999, through and including December 31, 2000, the rates
were based upon an annual revenue level of $307 million. For periods
after December 31, 2000, the rates are based upon an annual revenue
level of $305 million. The settlement further provides for the
incorporation into Northern Border Pipeline's rate base all of the
construction costs of The Chicago Project, which was Northern Border
Pipeline's expansion and extension of its pipeline from near Harper,
Iowa to a point near Manhattan, Illinois. Northern Border Pipeline
had placed into service the facilities for the Chicago Project in
December 1998. Under the settlement, both Northern Border Pipeline
and its existing shippers will not be able to seek rate changes until
November 1, 2005, at which time Northern Border Pipeline must file a
new rate case.
After the FERC approved the rate case settlement and prior to the end
of 2000, Northern Border Pipeline made estimated refund payments to
its shippers totaling approximately $22.7 million, primarily related
to the period from December 1999 to November 2000. At December 31,
2000, Northern Border Pipeline had estimated its remaining refund
obligation through the end of 2000 to be approximately $4.7 million,
which is expected to be paid in the first quarter of 2001. Northern
Border Pipeline's operating revenues for 2000 reflect the significant
terms of the approved settlement.
CERTIFICATE APPLICATION
In October 1998, Northern Border Pipeline filed a certificate
application with the FERC to seek approval to expand and extend its
pipeline system into Indiana (Project 2000). When completed, Project
2000 will afford shippers on the expanded and extended pipeline system
access to industrial gas consumers in northern Indiana. The certificate
application was subsequently amended by Northern Border Pipeline in
March and December 1999. On March 16, 2000, the FERC issued an order
granting Northern Border Pipeline's application for a certificate to
construct and operate the proposed facilities. The FERC approved
Northern Border Pipeline's request for rolled-in rate treatment based
upon the proposed project costs. The project has a targeted in-service
date of November 2001. The capital expenditures for the project are
estimated to be approximately $94 million, of which $10.8 million had
been incurred through December 31, 2000.
4. TRANSPORTATION SERVICE AGREEMENTS
Operating revenues are collected pursuant to the FERC tariff through
firm transportation service agreements (firm service agreements). The
firm service agreements extend for various terms with termination
dates that range from October 2001 to December 2013. Northern Border
Pipeline also has interruptible service agreements with numerous
other shippers as a result of its self-implementing blanket
transportation authority. Under the approved settlement of the rate
case discussed in Note 3, in certain situations, Northern Border
Pipeline will reduce the billings for the firm service agreements by
one half of the revenues received from the interruptible service
agreements through October 31, 2003. After October 31, 2003, all
revenues from interruptible transportation service will be retained
by Northern Border Pipeline.
F-19
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. TRANSPORTATION SERVICE AGREEMENTS (CONTINUED)
Northern Border Pipeline's largest shipper, Pan-Alberta Gas (U.S.) Inc.
(PAGUS), is presently obligated for approximately 25.5% of the
contracted firm capacity through three firm service agreements which
expire in October 2003. Financial guarantees exist through October 2001
for approximately 16.3% of the contracted firm capacity of PAGUS,
including 10.5% guaranteed by Northern Natural Gas Company, a
wholly-owned subsidiary of Enron. The remaining obligation of PAGUS is
supported by various credit support arrangements, including among
others, a letter of credit, an escrow account and an upstream capacity
transfer agreement. Operating revenues from the PAGUS firm service
agreements and interruptible service agreements for the years ended
December 31, 2000, 1999 and 1998 were $65.0 million, $76.6 million and
$87.3 million, respectively.
TransCanada Energy Marketing USA, Inc. (TransCanada Energy), an
affiliate of TC PipeLines, has firm service agreements representing
approximately 11.4% of contracted capacity. The firm service agreements
for TransCanada Energy extend for various terms with termination dates
that range from October 2003 to December 2008. Other shippers affiliated
with the Partners of Northern Border Pipeline have firm service
agreements representing approximately 7.1% of contracted capacity. These
firm service agreements extend for various terms with termination dates
that range from January 2002 to May 2009. Operating revenues from the
affiliated firm service agreements and interruptible service agreements
for the years ended December 31, 2000, 1999, and 1998 were $58.5
million, $52.5 million and $22.4 million, respectively.
5. CREDIT FACILITIES AND LONG-TERM DEBT
Detailed information on long-term debt is as follows:
December 31,
(Thousands of dollars) 2000 1999
----------------------------------------------------------------------------
1992 Senior Notes - average 8.49% and 8.43% at
December 31, 2000 and 1999, respectively,
due from 2000 to 2003 $184,000 $250,000
Pipeline Credit Agreement
Term loan, due 2002 424,000 439,000
Five-year revolving credit facility 45,000 --
1999 Senior Notes - 7.75%, due 2009 200,000 200,000
Unamortized proceeds from termination
of interest rate forward agreements 11,107 12,397
Unamortized debt discount (840) (938)
----------------------
Total 863,267 900,459
Less: Current maturities of long-term debt 41,000 66,000
----------------------
Long-term debt $822,267 $834,459
----------------------
----------------------
In August 1999, Northern Border Pipeline completed a private offering of
$200 million of 7.75% Senior Notes due 2009, which notes were
subsequently exchanged in a registered offering for notes with
substantially identical
F-20
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
5. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
terms (1999 Senior Notes). Also in August 1999, Northern
Border Pipeline received approximately $12.9 million from the
termination of interest rate forward agreements, which is included in
long-term debt on the balance sheet and is being amortized against
interest expense over the life of the 1999 Senior Notes. The interest
rate forward agreements, which had an aggregate notional amount of $150
million, had been executed in September 1998 to hedge the interest rate
on a planned issuance of fixed rate debt in 1999. The proceeds from the
private offering, net of debt discounts and issuance costs, and the
termination of the interest rate forward agreements were used to reduce
existing indebtedness under a June 1997 credit agreement.
In June 1997, Northern Border Pipeline entered into a credit agreement
(Pipeline Credit Agreement) with certain financial institutions to
borrow up to an aggregate principal amount of $750 million. The Pipeline
Credit Agreement is comprised of a $200 million five-year revolving
credit facility to be used for the retirement of a previously existing
bank loan agreement and for general business purposes, and a $550
million three-year revolving credit facility to be used for the
construction of The Chicago Project. Effective March 1999, in accordance
with the provisions of the Pipeline Credit Agreement, Northern Border
Pipeline converted the three-year revolving credit facility to a term
loan maturing in June 2002. The Pipeline Credit Agreement permits
Northern Border Pipeline to choose among various interest rate options,
to specify the portion of the borrowings to be covered by specific
interest rate options and to specify the interest rate period, subject
to certain parameters. Northern Border Pipeline is required to pay a
facility fee on the remaining aggregate principal commitment amount of
$624 million.
At December 31, 2000 and 1999, Northern Border Pipeline had an
outstanding interest rate swap agreement with a notional amount of $40
million, which will terminate in November 2001. Under the agreement,
Northern Border Pipeline makes payments to counterparties at fixed rates
and in return receives payments at variable rates based on the London
Interbank Offered Rate. At December 31, 2000 and 1999, Northern Border
Pipeline was in a payable position relative to its counterparties. The
average effective interest rate of Northern Border Pipeline's variable
rate debt, taking into consideration the interest rate swap agreement,
was 7.06% and 6.73% at December 31, 2000 and 1999, respectively.
Interest paid, net of amounts capitalized, during the years ended
December 31, 2000, 1999 and 1998 was $68.0 million, $55.5 million and
$23.8 million, respectively.
Aggregate required repayments of long-term debt are as follows: $41
million, $547 million and $65 million for 2001, 2002 and 2003,
respectively. There are no required repayment obligations for either
2004 or 2005.
F-21
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
5. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
Certain of Northern Border Pipeline's long-term debt and credit
arrangements contain requirements as to the maintenance of minimum
partners' capital and debt to capitalization ratios which restrict the
incurrence of other indebtedness by Northern Border Pipeline and also
place certain restrictions on distributions to the partners of Northern
Border Pipeline. Under the most restrictive of the covenants, as of
December 31, 2000 and 1999, respectively, $136 million and $132 million
of partners' capital of Northern Border Pipeline could be distributed.
The following estimated fair values of financial instruments
represent the amount at which each instrument could be exchanged in a
current transaction between willing parties. Based on quoted market
prices for similar issues with similar terms and remaining
maturities, the estimated fair value of the 1992 Senior Notes was
approximately $191 million and $273 million at December 31, 2000 and
1999, respectively. The estimated fair value of the 1999 Senior Notes
was approximately $213 million and $201 million at December 31, 2000
and 1999, respectively. At December 31, 2000 and 1999, the estimated
fair value which would be payable to terminate the interest rate swap
agreement, taking into account current interest rates, was
approximately $1 million. Northern Border Pipeline presently intends
to maintain the current schedule of maturities for the 1992 Senior
Notes, 1999 Senior Notes and the interest rate swap agreement which
will result in no gains or losses on their respective repayment. The
fair value of Northern Border Pipeline's variable rate debt
approximates the carrying value since the interest rates are
periodically adjusted to reflect current market conditions.
6. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
Total capital expenditures for 2001 are estimated to be $97 million.
This includes approximately $81 million for Project 2000 (see Note 3)
and approximately $16 million for renewals and replacements of the
existing facilities. Funds required to meet the capital expenditures
for 2001 are anticipated to be provided primarily from debt
borrowings and internal sources.
ENVIRONMENTAL MATTERS
Northern Border Pipeline is not aware of any material contingent
liabilities with respect to compliance with applicable environmental
laws and regulations.
OTHER
Various legal actions that have arisen in the ordinary course of
business are pending. Northern Border Pipeline believes that the
resolution of these issues will not have a material adverse impact on
Northern Border Pipeline's results of operations or financial position.
F-22
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
7. QUARTERLY FINANCIAL DATA (UNAUDITED)
Operating Operating Net Income
(In thousands) Revenues, net Income to Partners
---------------------------------------------------------------------------------------
2000
First Quarter $76,241 $44,628 $28,744
Second Quarter 77,346 44,305 29,413
Third Quarter 78,241 47,584 34,293
Fourth Quarter 79,194 47,650 34,614
1999
First Quarter $73,635 $44,271 $30,315
Second Quarter 73,022 43,788 28,933
Third Quarter 73,925 44,017 29,127
Fourth Quarter 77,765 45,335 30,185
8. ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either
an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company formally document,
designate and assess the effectiveness of transactions that receive
hedge accounting.
In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. In June 2000, the FASB issued SFAS No. 138, which amended
certain guidance within SFAS No. 133. Northern Border Pipeline will
adopt SFAS No. 133 beginning January 1, 2001. The adoption of SFAS
No. 133, as amended, will not have a material impact on Northern
Border Pipeline's financial position or results of operations.
9. SUBSEQUENT EVENTS
Northern Border Pipeline makes distributions to it general partners
approximately one month following the end of the quarter. The
distribution for the fourth quarter of 2000 of approximately $31.4
million is payable February 2, 2001.
F-23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Northern Border Pipeline Company:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of Northern Border Pipeline Company
included in this Form 10-K and have issued our report thereon dated January 22,
2001. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of Northern Border Pipeline
Company listed in Item 14 of Part IV of this Form 10-K is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
January 22, 2001
S-1
SCHEDULE II
NORTHERN BORDER PIPELINE COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------
Additions
------------------------- Deductions
Balance at Charged to Charged For Purpose For
Beginning Costs and to Other Which Reserves Balance at
Description of Year Expenses Accounts Were Created End of Year
- -------------------------------------------------------------------------------------------------------------------
Reserve for
regulatory issues
2000 $7,376 $1,800 $-- $7,376 $1,800
1999 $6,726 $ 650 $-- $ -- $7,376
1998 $6,726 $ -- $-- $ -- $6,726
S-2