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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, 2001 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON UNITS REPRESENTING LIMITED PARTNER INTERESTS
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 11, 2002, was approximately
$302.8 million.
As of March 11, 2002, 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 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Units and Related
Security Holder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
PART III
Item 10. Directors and Officers of the General Partner 29
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 31
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 35
ALL AMOUNTS ARE STATED IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED.
PART I
ITEM 1. BUSINESS
BUSINESS OF TC PIPELINES, LP
TC PipeLines, LP was formed in 1998 as a Delaware limited partnership to
acquire, own and participate in the management of United States based pipeline
assets. TC PipeLines, LP and its subsidiary limited partnerships, TC PipeLines
Intermediate Limited Partnership and TC Tuscarora Intermediate Limited
Partnership are collectively referred to herein as "TC PipeLines" or "the
Partnership." TC PipeLines GP, Inc., a wholly owned subsidiary of TransCanada
PipeLines Limited, is the general partner of the Partnership.
The Partnership owns a 30% general partner interest in Northern Border Pipeline
Company. The remaining 70% general partner interest in Northern Border Pipeline
is held by Northern Border Partners, L.P., a publicly traded limited partnership
not affiliated with TC PipeLines that is controlled by affiliates of Enron Corp.
As of September 1, 2000, TC PipeLines, also owns a 49% general partner interest
in Tuscarora Gas Transmission Company. The Partnership acquired this asset from
TCPL Tuscarora Ltd., an indirect subsidiary of TransCanada.
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 levels specified in the
partnership agreement (see Item 5. "Market for Registrant's Common Units and
Related Security Holder Matters").
At December 31, 2001, the Partnership had 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'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. Northern
Border Pipeline's general partners are TC PipeLines and Northern Border
Partners, both of which are publicly traded limited partnerships. Each of TC
PipeLines and Northern Border Partners holds its interest in Northern Border
Pipeline, representing 30% and 70% of
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voting power, respectively, through a subsidiary limited partnership. The
general partner of TC PipeLines and its subsidiary limited partnerships 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, 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, 2001, TC
PipeLines estimates that Northern Border Pipeline transported approximately 20%
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.
Northern Border Pipeline transports natural gas for shippers under a tariff
regulated by the Federal Energy Regulatory Commission (FERC). The tariff
specifies the calculation of amounts to be paid by shippers and the general
terms and conditions of transportation service on the Northern Border pipeline
system. Northern Border Pipeline's revenues are derived from agreements for the
receipt and delivery of natural gas at points along the Northern Border pipeline
system as specified in each shipper's individual transportation contract.
Northern Border Pipeline does not own the natural gas that it transports, and
therefore it does not assume the related natural gas commodity risk.
Northern Border Pipeline's management 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 allocated among the partners in accordance to their proportional
interest in the general partner interests. 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. Therefore, Enron controls 57.75% of the voting power
of the management committee and has the right to select two of the members. On
December 2, 2001, Enron filed a voluntary petition for Chapter 11 protection
in bankruptcy court. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations Results of Operations of
Northern Border Pipeline Company - Impact of Enron's Chapter 11 Filing on
Northern Border Pipeline's Business."
The Northern Border pipeline system is operated by Northern Plains pursuant to
an operating agreement. As of December 31, 2001, Northern Plains employed
approximately 215 individuals located at Northern Plains' 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 1,249-mile interstate pipeline system that
transports natural gas from the Montana-Saskatchewan border near Port of Morgan,
Montana to natural gas markets in the midwestern United States. Construction of
the Northern Border pipeline system was initially completed in 1982. The
Northern Border pipeline system was expanded and/or extended in 1991, 1992, 1998
and 2001. The Northern Border pipeline system connects directly and through
multiple pipelines with various natural gas markets.
The Northern Border pipeline system consists of 822 miles of 42-inch diameter
pipe designed to transport 2,374 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 1,484 mmcfd
in total from Ventura, Iowa to Harper, Iowa; 226 miles of 36-inch diameter pipe
and 19 miles of 30-inch diameter pipe designed to transport 844 mmcfd from
Harper, Iowa to Manhattan, Illinois (Chicago area); and 35 miles of 30-inch
diameter pipe designed to transport 545 mmcfd from Manhattan, Illinois to a
terminus near North Hayden, Indiana. Along the pipeline there are 16 compressor
stations with total rated horsepower of 499,000 and measurement facilities to
support the receipt and delivery of natural gas at various points. Other
facilities include four field offices and a microwave communication system with
51 tower sites.
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On October 1, 2001, Northern Border Pipeline completed construction and began
operation of its Project 2000 facilities. Project 2000 gives shippers access to
industrial natural 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 and provides 545 mmcfd of
transportation capacity. Project 2000 also expands Northern Border Pipeline's
delivery capability into the Chicago area by approximately 30%. Capital
expenditures for Project 2000 are approximately $63 million. Project 2000
facilities include approximately 35 miles of 30-inch pipeline, one 13,000
horsepower compressor station in Illinois, additional horsepower at two Iowa
compressor stations and one meter station.
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 in Canada, 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. At its northern
end, the Northern Border pipeline system's natural gas supplies are received
through an interconnection with 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
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. For the year ended December 31, 2001, of the
natural gas transported on the Northern Border pipeline 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.
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 until February 1,
2002, and now a subsidiary of Dynegy, Inc., 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, a wholly owned subsidiary of
Northern Border Partners, near Channahon, Illinois;
o ANR Pipeline Company near Manhattan, Illinois;
o Vector Pipeline L.P. in Will County, Illinois;
o The Peoples Gas Light and Coke Company near Manhattan, Illinois; and
o Northern Indiana Public Service Company near North Hayden, Indiana 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, 2001, 91% of the firm capacity is
contracted by producers and marketers. The remaining firm capacity is contracted
to local distribution companies (6%), interstate pipelines (2%) and end-users
(1%). As of December 31, 2001, the termination dates of these contracts ranged
from March 31, 2002 to December 21, 2013, and the weighted average contract
life, based upon annual contractual obligations, was approximately five and
one half years with just under 99% of capacity contracted through
mid-September 2003. Contracts for approximately 42% of the capacity will
expire prior to November 2003. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations of Northern Border Pipeline Company - Outlook."
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Northern Border Pipeline's mix and number of shippers may change throughout the
year as a result of its shippers utilizing Northern Border Pipeline's capacity
release provisions that allow shippers to release all or part of their capacity
to other shippers either permanently for the full term of their contract or
temporarily. Under the terms of Northern Border Pipeline's tariff, a temporary
capacity release does not relieve the original contract shipper from its
payment obligations if the replacement shipper fails to pay for the capacity
temporarily released to it. Shippers on the Northern Border pipeline system
temporarily released capacity during 2001 for varying periods of time. There
were also permanent releases of capacity to other shippers for the full term
of the contracts.
As of December 31, 2001, Northern Border Pipeline's largest shipper, Mirant
Americas Energy Marketing, LP, is obligated for approximately 33.7% of Northern
Border Pipeline's contracted firm capacity. Of this amount, 24.4% of Northern
Border Pipeline's contracted firm capacity was obtained under temporary
releases from Pan-Alberta Gas (U.S.) (Pan Alberta) for a term through October
31, 2002. Pan-Alberta's firm contracts expire October 31, 2003. Mirant
Americas Energy Marketing, LP, 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 Northern
Border Pipeline's general partners. Enron North America Corp. (ENA), a
subsidiary of Enron, which also has filed for bankruptcy protection, holds
firm contracts representing 3.5% of capacity, a portion of which (1.1%) has
been temporarily released to a third party until October 31, 2002. The third
party that holds the 1.1% of capacity has filed a complaint with the FERC
requesting, in effect, that its contract be deemed terminated as a
consequence of ENA's filing for bankruptcy protection. Northern Border
Pipeline believes this shipper's contract will remain in effect until October
31, 2002. ENA's contractual obligations were supported by guarantees from
Enron, which are subject to Enron's filing for bankruptcy protection.
Transcontinental Gas Pipe Line Corporation, a subsidiary of Williams, holds a
contract representing 0.7% of capacity. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations of Northern Border Pipeline Company - Impact of Enron's Chapter 11
Filing on Northern Border Pipeline's Business."
DEMAND FOR TRANSPORTATION CAPACITY
Northern Border Pipeline's long-term financial condition is dependent on the
continued availability of economic western Canadian natural gas supplies 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 interstate pipelines' systems. 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. Furthermore, the availability of export capacity could also
affect the demand or value of the transport on the Northern Border pipeline
system.
Northern Border Pipeline's business also depends on the level of demand for
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 the
natural gas supplies and the use of the Northern Border pipeline system. Demand
for 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 Northern Border Pipeline 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.
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Interstate pipelines' primary exposure to market risk occurs at the time
existing transportation contracts expire and are subject to renegotiation. A
key determinant of the value that customers can realize from firm
transportation on the pipeline system is the basis differential or market
price spread between two points on the pipeline. The difference in natural
gas prices between the points along the pipeline where natural gas enters and
where natural gas is delivered represents the gross margin that a customer
can expect to achieve from holding transportation capacity at any point in
time. This margin and its variability become important factors in determining
the level of demand charges customers are willing to commit to when they
renegotiate their transportation contracts. The basis differential between
markets can be affected by trends in production, available capacity, storage
inventories, weather, and general market demand in the respective areas.
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.
INTERSTATE PIPELINE COMPETITION
Northern Border Pipeline competes with other pipeline companies that
transport natural gas from the western Canadian sedimentary basin or that
transport natural gas to end-use markets in the midwest. Northern Border
Pipeline's competitive position is affected by the availability of Canadian
natural gas for export, the availability of other sources of natural gas and
demand for natural gas in the United States. Demand for transportation
services on the Northern Border pipeline system is affected by natural gas
prices, the relationship between export capacity from and production in the
western Canadian sedimentary basin and natural gas shipped from producing
areas in the United States. Shippers of natural gas produced in the western
Canadian sedimentary basin also have other options to transport Canadian
natural gas to the United States, including transportation on pipelines
eastward in Canada or to markets on the West Coast.
The Alliance Pipeline, which was placed in service in December 2000, competes
directly with Northern Border Pipeline in the transportation of natural gas from
the western Canadian sedimentary basin to the Chicago area. Williams has a
minority interest (14.6%) in Alliance Pipeline. Because it transports
liquids-rich natural gas, the Alliance Pipeline has no interconnections with
other pipelines upstream of the liquids extraction facilities, which are located
near Chicago. This contrasts with the Northern Border pipeline system, which
serves various markets through interconnections with other pipelines along its
route.
The competitive impact of the Alliance Pipeline has been mitigated by the
continuing development of additional capacity to ship natural gas from the
Chicago area to other markets in the United States. Vector Pipeline L.P., which
interconnects with the Alliance Pipeline and transports natural gas eastward to
a terminus in eastern Canada, commenced operations in December 2000. Guardian
Pipeline proposes to be in service in November 2002 and to interconnect with
Northern Border Pipeline. Guardian Pipeline is targeting markets in northern
Illinois and Wisconsin and could provide access to additional markets for
Northern Border Pipeline's shippers.
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 shippers.
Natural gas is produced in the United States and is also transported by
competing pipeline systems to the same markets as those served by the Northern
Border pipeline system.
FERC REGULATION
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 Northern Border Pipeline's 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 may be periodically audited under Section 8.
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. Generally, rates are based on the cost of
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service including recovery of and a return on the pipeline's actual historical
cost investment. 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 and rates may be negotiated
subject to FERC approval. The rates and terms and conditions for Northern Border
Pipeline's service are found in its FERC approved Gas Tariff.
Under Northern Border Pipeline's tariff, Northern Border Pipeline is allowed
to charge for its services on the basis of stated transportation rates
established in Northern Border Pipeline's 1999 rate case. Northern Border
Pipeline also may provide services under negotiated and discounted rates.
Approximately 98% of the agreed upon cost of service or revenue level is
attributed to demand charges. Firm shippers that contract for the stated
transportation rate 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
commodity charges based on the volumes of natural gas actually transported.
Under the terms of settlement in Northern Border Pipeline's 1999 rate case,
neither Northern Border Pipeline's existing shippers nor Northern Border
Pipeline 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 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 future costs, contracted capacity, the volumes of natural gas
transported and Northern Border Pipeline's ability to recontract capacity at
acceptable rates.
Until new transportation rates are approved by FERC, Northern Border Pipeline
continues to depreciate its transmission plant at the FERC approved annual
depreciation rate. Northern Border Pipeline's annual depreciation rate on
transmission plant in service is 2.25%. In order to avoid a decline in
transporation rates set in future rate cases as a result of accumulated
depreciation, 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.
In Northern Border Pipeline's 1995 rate case, the FERC addressed the issue of
whether the federal income tax allowance included in Northern Border Pipeline's
proposed cost of service was reasonable in light of recent FERC rulings. In
those rulings, the FERC held that an interstate pipeline is not entitled to a
tax allowance for income attributable to limited partnership interests held by
individuals. The settlement of Northern Border Pipeline's 1995 rate case
provided that until at least December 2005, 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
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 maximum reservation charge and commodity rate. Under
Northern Border Pipeline's 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 Northern Border Pipeline's revenues from
interruptible and other new transportation service will no longer be subject to
sharing and thus, will be retained by Northern Border Pipeline. During 2001,
Northern Border Pipeline filed and received approval to implement several new
services. Northern Border Pipeline intends to continue to develop other new
services to meet customer needs and seek the FERC's authorization to implement
such services. Revenues from these sources are expected to be minimal for the
near term.
Northern Border Pipeline is subject to the requirements of FERC Order Nos. 497
and 566, which prohibit preferential treatment by interstate natural gas
pipelines of their marketing affiliates and govern how information may be
provided to those marketing affiliates. In September 2001, the FERC issued a
Notice of Proposed Regulation proposing new standards of conduct that would
apply uniformly to natural gas pipelines and transmitting
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public utilities. FERC is proposing one set of standards to govern
relationships between regulated transmission providers and all energy
affiliates. Should a final rule be issued in this proceeding, Northern Border
Pipeline may be subject to standards that could result in additional costs.
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 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
National Energy Group, 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 127 mmcfd of natural gas.
Tuscarora has firm transportation contracts for over 98% of its capacity,
including contracts held by Sierra Pacific Power Company, a subsidiary of Sierra
Pacific, for 94% of the total available capacity, the majority of which
expires on November 30, 2015. As of December 31, 2001, the weighted average
contract life on the Tuscarora pipeline system was approximately fourteen
years.
In January 2001, Tuscarora completed construction of the Hungry Valley lateral,
a 14-mile, 16-inch pipeline
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extension that serves as Tuscarora's second connection into Reno, Nevada. Sierra
Pacific Power holds firm capacity on the lateral for approximately 15 mmcfd
through firm transportation contracts that expire in January and October 2016.
The project was completed at a capital cost of approximately $8.0 million.
On January 30, 2002, the FERC issued a final certificate, approving the proposed
expansion of Tuscarora's pipeline system. The Tuscarora expansion consists of
three compressor stations and a 14-mile pipeline extension from the current
terminus of the Tuscarora pipeline system near Reno, Nevada to Wadsworth,
Nevada. The expansion is expected to cost $60 million and will increase
Tuscarora's capacity from 127 mmcfd to approximately 220 mmcfd. Approximately
two-thirds of the capital budget is expected to be spent in 2002. Commercial
operations are targeted to begin in November 2002 with approximately 40% of the
expansion volumes flowing. The full incremental 93 mmcfd of contracted volumes
are expected to be flowing by late 2003 when construction is expected to be
completed. The expansion is supported by long-term firm transportation contracts
ranging from ten to fifteen years. Sierra Pacific Power has contracted for
approximately 11 mmcfd of the increased capacity. At the request of the Public
Utilities Commission of Nevada, Tuscarora will submit to a cost and revenue
study to be conducted by the FERC within 3 years of the in service date of the
expansion.
On March 15, 2002, Tuscarora issued Series C Senior Secured Notes in the amount
of $10 million. These notes bear interest at 6.89% and are due in 2012. The
proceeds from these notes will be used to finance a portion of the construction
of Tuscarora's expansion project.
Tuscarora's competitive position is dependent on the continued availability of
commercially attractive 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. Tuscarora is able to transport both Canadian and
United States natural gas providing Tuscarora with a well-diversified supply of
natural gas to serve its markets.
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.
PROPERTIES OF NORTHERN BORDER PIPELINE COMPANY
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 are owned 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 system 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 Northern Border Pipeline operates,
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 are 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.
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 the Northern Border pipeline system on certain
tribal lands. This pipeline right-of-way 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. 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,
expiring in 2015.
PROPERTIES OF TUSCARORA GAS TRANSMISSION COMPANY
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. LEGAL PROCEEDINGS
TC PipeLines is not currently a party to any material legal proceedings.
On July 31, 2001, the Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation filed a lawsuit in Tribal Court against Northern Border Pipeline to
collect more than $3 million in back taxes, together with interest and
penalties. The lawsuit relates to a utilities tax on certain of Northern Border
Pipeline's properties within the Fort Peck Reservation. Based on recent
decisions by the federal courts and other defenses, TC PipeLines believes that
the Tribes do not have authority to impose the tax and that the lawsuit will not
have a material adverse impact on TC PipeLines.
8
Neither Northern Border Pipeline nor Tuscarora are currently party to any
other 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, 2001.
9
PART II
ITEM 5. MARKET FOR 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 on May 28, 1999 at a price of
$20.50 per common unit. The common units are quoted on the Nasdaq Stock Market
and trade under the symbol "TCLP" as of February 4, 2002. Prior to February 4,
2002, the common units traded under the symbol "TCLPZ."
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. Cash distributions are paid within 45 days after the end of each
quarter.
Price Range Cash Distributions
High Low Paid per Unit
2001
FIRST QUARTER $24.500 $16.250 $0.475
SECOND QUARTER $24.240 $20.000 $0.500
THIRD QUARTER $27.000 $21.850 $0.500
FOURTH QUARTER $27.600 $23.000 $0.500
2000
First Quarter $18.375 $14.000 $0.450
Second Quarter $17.000 $14.500 $0.450
Third Quarter $20.375 $16.125 $0.475
Fourth Quarter $20.500 $17.875 $0.475
As of March 11, 2002, there were approximately 93 record holders of common units
and approximately 6,100 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 are 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.
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 provided the balance has been first distributed to unitholders on a pro
rata basis. The amounts that trigger
10
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 2000 third
quarter cash distribution, which was paid on November 14, 2000, resulting in the
first tier of incentive distributions being achieved. On July 19, 2001, the
Partnership announced another increase in the quarterly cash distribution from
$0.475 per unit to $0.50 per unit for the 2001 second quarter cash distribution,
which was paid on August 14, 2001.
In 2001, the Partnership made cash distributions to the limited partners and the
general partner that amounted to $35.2 million. These payments represented
$0.475 per unit for the quarters ended December 31, 2000 and March 31, 2001 and
$0.50 per unit for the quarters ended June 30, 2001 and September 30, 2001. On
February 14, 2002, the Partnership paid a cash distribution of $9.1 million to
the limited partners and the general partner, representing a cash distribution
of $0.50 per unit for the quarter ended December 31, 2001.
SUBORDINATION PERIOD
The subordination period extends until the first day of any quarter beginning
after June 30, 2004 in respect of which: (i) distributions of Available Cash
from operating surplus on the common units and the subordinated units for each
of the three non-overlapping four-quarter periods immediately preceding that
date equaled or exceeded the sum of the minimum quarterly distribution on all of
the outstanding common units and subordinated units during those periods, (ii)
the adjusted operating surplus generated during each of the three
non-overlapping four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distribution on all of the common
units and the subordinated units that were outstanding on a fully diluted basis
and the related distributions on the general partner interest during those
periods, and (iii) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
Before the end of the subordination period and to the extent the tests for
conversion described above are satisfied, a portion of the subordinated units
may convert into common units prior to June 30, 2004. Subordinated units will
convert into common units on a one-for-one basis on the first day after the
record date established for the distribution in respect of any quarter ending on
or after: (i) June 30, 2002 with respect to one-third of the subordinated units
(936,435 subordinated units), and (ii) June 30, 2003 with respect to one-third
of the subordinated units (936,435 subordinated units), in respect of which each
of the financial tests described above have been satisfied; provided, however,
that the early conversion of the second one-third of subordinated units may not
occur until at least one year following the early conversion of the first
one-third of subordinated units.
Upon expiration of the subordination period, all remaining subordinated units
will convert into common units on a one-for-one basis and will thereafter
participate, pro rata with the other common units in distributions of Available
Cash.
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."
11
TC PIPELINES, LP
(thousands of dollars, except per unit amounts)
Year ended December 31
---------------------------- May 28 (1) -
2001 2000 December 31, 1999
------------- -------------- ---------------------
INCOME DATA:
Equity income from investment in Northern Border Pipeline 42,138 38,119 20,923
Equity income from investment in Tuscarora (2) 3,608 943 -
General and administrative expenses (1,251) (1,337) (699)
Financial charges (973) (501) -
------------- -------------- ---------------------
Net income 43,522 37,224 20,224
------------- -------------- ---------------------
------------- -------------- ---------------------
Basic and diluted net income per unit $2.40 $2.08 $1.13
Units outstanding (thousands) 17,500 17,500 17,500
CASH FLOW DATA:
Net cash provided by operating activities 42,978 40,366 11,832
Distributions paid 35,231 32,657 11,037
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in Northern Border Pipeline 250,078 248,098 250,450
Investment in Tuscarora (2) 29,297 27,881 -
Total assets 288,688 277,545 251,245
Long-term debt 21,500 21,500 -
Partners' equity 266,704 255,405 250,838
(1) The Partnership commenced operations on May 28, 1999.
(2) The Partnership acquired a 49% interest in Tuscarora on September 1, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AS A RESULT OF THE PARTNERSHIP'S OWNERSHIP OF INVESTMENTS IN BOTH NORTHERN
BORDER PIPELINE AND TUSCARORA, THE FOLLOWING DISCUSSES FIRST THE RESULTS OF
OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES OF TC PIPELINES, THEN THOSE OF
EACH OF NORTHERN BORDER PIPELINE AND TUSCARORA IN THEIR ENTIRETY.
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. As of December 31, 2001, TC PipeLines' interest in Northern Border
Pipeline represents approximately 87% of TC PipeLines' total assets and has
provided approximately 92% of TC PipeLines' equity income for the year ended
December 31, 2001. All amounts are stated in United States dollars.
RESULTS OF OPERATIONS OF TC PIPELINES, LP
CRITICAL ACCOUNTING POLICY
TC PipeLines accounts for its investments in both Northern Border Pipeline and
Tuscarora using the equity method of accounting as detailed in notes three and
four to the financial statements. The equity method of accounting is appropriate
where the investor is able to exercise significant influence over the operating
and financial policies of an investee. TC PipeLines is able to exercise
significant influence over its investments in Northern Border Pipeline and
Tuscarora as evidenced by its representation on their respective management
committees.
Since the 30% general partner interest in Northern Border Pipeline and the 49%
general partner interest in 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.
12
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
For the year ended December 31, 2001, TC PipeLines recorded equity income of
$42.1 million from its investment in Northern Border Pipeline, compared to $38.1
million for 2000, an increase of $4.0 million. Approximately $1.0 million of
this increase is due to Project 2000, Northern Border Pipeline's 35-mile
extension and expansion into northern Indiana, which was completed in October
2001. An additional $1.9 million of the increase is due to lower operating and
maintenance costs as a result of Northern Border Pipeline's efforts to reduce
these costs, offset by the reserve to provide for November and December 2001
revenues due to Northern Border Pipeline under transportation agreements with
ENA, a subsidiary of Enron. ENA, which filed for Chapter 11 bankruptcy
protection on December 2, 2001, is in default of its payments to Northern
Border Pipeline, starting with payments due for November 2001 (see "Results
of Operations of Northern Border Pipeline - Impact of Enron's Chapter 11
Filing on Northern Border Pipeline's Business"). Favorable interest rates
decreased Northern Border Pipeline's interest expense in 2001, further
increasing 2001 equity income by $2.9 million. These increases to 2001 equity
income were partially offset by lower other income for Northern Border
Pipeline in 2001, resulting in a $2.5 million decrease in 2001 equity income
to TC PipeLines. In 2000, Northern Border Pipeline's other income was higher
due to non-recurring adjustments related to the approval of its rate
settlement agreement.
For the year ended December 31, 2001, TC PipeLines recorded equity income of
$3.6 million from its investment in Tuscarora, compared to $0.9 million for
2000, an increase of $2.7 million. This increase is attributed to the
Partnership acquiring its interest in Tuscarora in September 2000 and
incremental revenues from Tuscarora's 14-mile Hungry Valley lateral, which was
placed into service in January 2001.
General and administrative expenses were $1.3 million for each of the years
ended December 31, 2001 and 2000.
Financial charges were $1.0 million for the year ended December 31, 2001
compared to $0.5 million in 2000. This increase is attributed to the
Partnership having a balance of $21.5 million outstanding on its Revolving
Credit Facility for the full year in 2001 compared to 2000 when the Partnership
only had debt outstanding for four months of the year, partially offset by a
decrease in interest rates in 2001. The Partnership drew on the Revolving Credit
Facility in September 2000 in order to fund a portion of the purchase price of a
49% general partner interest in 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.
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 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 under 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.
13
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 makes 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 18, 2002, the board of directors of the general partner declared the
Partnership's 2001 fourth quarter cash distribution. The fourth quarter cash
distribution, which was paid on February 14, 2002 to unitholders of record as of
January 31, 2002, totaled $9.1 million and was paid in the following manner:
$7.3 million to common unitholders, $1.4 million to the general partner as
holder of the subordinated units, and $0.3 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 (Revolving Credit Facility) with a third party 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 2000, the Partnership made a $3.0
million principal payment on the Revolving Credit Facility. At December 31,
2001, the Partnership had $21.5 million outstanding under the Revolving Credit
Facility. The interest rate on the Revolving Credit Facility at December 31,
2001 and 2000 was 3.0% and 7.6%, respectively.
On May 28, 2001, the Partnership renewed its $40.0 million unsecured two-year
revolving credit facility (TransCanada Credit Facility) with TransCanada
PipeLine USA Ltd., an affiliate of the general partner. The TransCanada Credit
Facility bears interest at LIBOR 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, Tuscarora and any other
entity in which the Partnership directly or indirectly acquires an interest, to
fund working capital and for other general business purposes, including
temporary funding of cash distributions to partners, if necessary. At December
31, 2001, the Partnership had no amount outstanding under the TransCanada Credit
Facility.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased to $43.0 million for the
year ended December 31, 2001 from $40.4 million for 2000. In 2001, the
Partnership received cash distributions of $42.9 million and $2.4 million from
its investments in Northern Border Pipeline and Tuscarora, respectively,
compared to $40.5 million and $1.5 million in 2000.
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 period May 28 to December 31, 1999, the Partnership
received cash distributions of $12.1 million from Northern Border Pipeline.
14
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities decreased by $28.3 million for the year
ended December 31, 2001 compared to 2000 due to the purchase of a 49% general
partner interest in Tuscarora in 2000.
CASH FLOWS FROM FINANCING ACTIVITIES
The Partnership paid cash distributions of $35.2 million in 2001 compared to
$32.7 million in 2000. The increase in cash distributions in 2001 is due to the
Partnership increasing its cash distribution from $0.475 per unit to $0.50 per
unit beginning with the second quarter cash distribution in 2001.
For the period May 28 to December 31, 1999, the Partnership paid cash
distributions of $11.0 million.
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, 2001, 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
2002, TC PipeLines expects to finance these requirements with debt and/or
equity.
RESULTS OF OPERATIONS OF NORTHERN BORDER PIPELINE COMPANY
IN THE FOLLOWING DISCUSSION OF THE RESULTS OF NORTHERN BORDER PIPELINE, ALL
AMOUNTS REPRESENT 100% OF THE OPERATIONS OF NORTHERN BORDER PIPELINE, IN WHICH
THE PARTNERSHIP HAS HELD A 30% INTEREST SINCE MAY 28, 1999.
The discussion and analysis of Northern Border Pipeline's financial condition
and operations are based on Northern Border Pipeline's financial statements,
which were prepared in accordance with accounting principles generally accepted
in the United States of America. The following discussion and analysis should be
read in conjunction with Northern Border Pipeline's financial statements
included elsewhere in this report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain amounts included in or affecting Northern Border Pipeline's financial
statements and related disclosures must be estimated, requiring Northern Border
Pipeline to make certain assumptions with respect to values or conditions that
cannot be known with certainty at the time the financial statements are
prepared. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Any effects on Northern Border Pipeline's business, financial
position or results of operations resulting from revisions to these estimates
are recorded in the period in which the facts that give rise to the revision
become known.
Northern Border Pipeline's significant accounting policies are summarized in
Note 2 - Notes to Northern Border Pipeline's Financial Statements included
elsewhere in this report. Certain of Northern Border Pipeline's accounting
policies are of more significance in their financial statement preparation
process than others. 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. Northern Border Pipeline's long-lived assets are stated at original
cost. Northern Border Pipeline must use estimates in determining the economic
useful lives of those assets. For utility property, no retirement gain or
loss is included in income except in the case of extraordinary retirements or
sales. The original cost of utility property retired is charged to
accumulated depreciation and amortization, net of salvage and cost of
removal. Finally, Northern Border Pipeline's accounting for financial
instruments follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which Northern Border Pipeline adopted on January 1,
2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Northern Border Pipeline's net income to partners increased $13.4 million (11%)
for the year ended December 31, 2001, as compared to the same period in 2000.
Northern Border Pipeline benefited from reductions in interest rates,
15
which reduced Northern Border Pipeline's interest expense for 2001 as compared
to 2000. Northern Border Pipeline was also able to control its operating costs
resulting in reductions to operations and maintenance expenses.
Operating revenues, net increased $2.1 million for the year ended December 31,
2001, as compared to the same period in 2000 primarily due to additional
revenues associated with the completion of Project 2000 in October 2001. See
Item 1. "Business of Northern Border Pipeline Company - The Northern Border
Pipeline System."
Operations and maintenance expense decreased $7.9 million (19%) for the year
ended December 31, 2001, as compared to the same period in 2000, due primarily
to a decrease in Northern Border Pipeline's regulatory commission expense,
decreased costs to operate two of Northern Border Pipeline's electric-powered
compressor units and decreased employee payroll, benefit and administrative
expenses for the Northern Border pipeline system. Operations and maintenance
expense for 2001 includes approximately $1.3 million of bad debt expense related
to ENA (see "Impact of Enron's Chapter 11 Filing on Northern Border
Pipeline's Business").
Taxes other than income decreased $2.3 million (8%) for the year ended December
31, 2001, as compared to the same period in 2000, due primarily to a decrease in
use taxes paid to the state of Minnesota. Northern Border Pipeline had been
paying Minnesota a use tax based on the fuel used at Northern Border Pipeline's
compressor stations located in the state. A recent ruling by the Minnesota
Supreme Court directed that the compressor fuel used was exempt from this
particular tax. Northern Border Pipeline filed for a refund of amounts
previously paid, which was received by Northern Border Pipeline in March 2002.
Interest expense, net decreased $9.8 million (15%) for the year ended December
31, 2001, as compared to the same period in 2000, due primarily to a decrease in
Northern Border Pipeline's average interest rate between 2000 and 2001 as well
as a decrease in average debt outstanding.
Other income (expense) decreased $8.5 million for the year ended December 31,
2001, as compared to the same period in 2000. Other income (expense) for 2001
includes a net charge of approximately $1.5 million for an uncollectable
receivable from a telecommunications company that had purchased excess capacity
on Northern Border Pipeline's communication system. In 2000, Northern Border
Pipeline had recorded approximately $1.7 million of income from the sale of
excess capacity on Northern Border Pipeline's communication system. Other income
(expense) for 2000 also included $5.6 million of income due 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, 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 - FERC Regulation." Operating revenues for
1999 were determined under Northern Border Pipeline's former 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.
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.
17
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE COMPANY
SUMMARY OF CERTAIN CONTRACTUAL OBLIGATIONS
Payments Due by Period
---------------------------------------------------
Less Than After 5
Total 1 Year 1-3 Years 4-5 Years Years
------------- ------------ ------------- ------------ -----------
(In Thousands)
-----------------------------------------------------------------
1992 Series C and D Senior Notes $143,000 $78,000 $65,000 $- $ -
Senior Notes due 2009 200,000 - - - 200,000
Senior Notes due 2021 250,000 - - - 250,000
Credit Agreement 272,000 272,000 - - -
------------- ------------ ------------- ------------ -----------
Total $865,000 $350,000 $65,000 $- $450,000
------------- ------------ ------------- ------------ -----------
------------- ------------ ------------- ------------ -----------
DEBT AND CREDIT FACILITIES
In February 2002, Moodys' Investor Services, Inc. (Moodys) placed Northern
Border Pipeline on credit review for a possible downgrade in credit rating. At
this time, no action has been taken by Moodys. If Moodys was to issue the
downgrade, TC PipeLines expects Northern Border Pipeline's credit rating to
remain above investment grade.
Northern Border Pipeline had previously entered into a 1997 credit agreement
(Pipeline Credit Agreement) with certain financial institutions, which is
comprised of a $100 million five-year revolving credit facility and a $272
million term loan, both maturing in June 2002. At December 31, 2001, no amounts
were outstanding under the five-year revolving credit facility. Northern Border
Pipeline anticipates refinancing the Pipeline Credit Agreement in the second
quarter of 2002. Northern Border Pipeline's refinancing plans are to issue $225
million of senior notes and to enter into a $175 million revolving credit
facility.
At December 31, 2001, Northern Border Pipeline also had outstanding $143 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 and Series B Notes with a
principal amount of $41 million were repaid in August 2000 and August 2001,
respectively. The Series C Notes with a principal amount of $78 million mature
in August 2002. Northern Border Pipeline anticipates borrowing on the refinanced
Pipeline Credit Agreement to repay the Series C Notes.
In September 2001, Northern Border Pipeline completed a private offering of $250
million of 7.50% Senior Notes due 2021 (2001 Pipeline Senior Notes) and in
August 1999, Northern Border Pipeline completed a private offering of $200
million of 7.75% Senior Notes due 2009 (1999 Pipeline Senior Notes). Both the
2001 Pipeline Senior Notes and the 1999 Pipeline Senior Notes were subsequently
exchanged in a registered offering for notes with substantially identical terms.
The indentures under which the 2001 Pipeline Senior Notes and 1999 Pipeline
Senior Notes were issued do not limit the amount of unsecured debt Northern
Border Pipeline may incur, but they do contain material financial covenants,
including restrictions on incurrence of secured indebtedness. The proceeds from
the 2001 Pipeline Senior Notes and 1999 Pipeline Senior Notes were used to
reduce indebtedness outstanding under the Pipeline Credit Agreement.
In November 2001, Northern Border Pipeline entered into forward starting
interest rate swaps with notional amounts totaling $150 million related to the
planned issuance of senior notes discussed previously. The swaps were entered
into to hedge the fluctuations in Treasury rates and spreads between the
execution date of the swaps and the issuance date of the senior notes.
Short-term liquidity needs will be met by operating cash flows and through the
Pipeline Credit Agreement, which is being refinanced in 2002. 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 $21.4 million to $197.3
million for the year ended December 31, 2001, as compared to the same period in
2000, primarily due to increased earnings and positive changes in
18
working capital. During 2001, Northern Border Pipeline realized net cash
outflows of approximately $4.7 million related to Northern Border Pipeline's
rate case refunds.
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 FROM INVESTING ACTIVITIES
Capital expenditures of $54.7 million for the year ended December 31, 2001
included $49.0 million for Project 2000 (see Item 1. "Business of Northern
Border Pipeline Company - The Northern Border Pipeline System"). For the same
period in 2000, capital expenditures were $15.5 million, which included $7.4
million for Project 2000. The remaining capital expenditures for 2001 and 2000
are primarily related to renewals and replacements of existing facilities.
Total capital expenditures for 2002 are estimated to be $12 million, including
$2.5 million for Project 2000. Northern Border Pipeline currently anticipates
funding its 2002 capital expenditures primarily by borrowing on debt facilities
and using operating cash flows.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities increased $12.0 million to $160.7
million for the year ended December 31, 2001, as compared to the same period in
2000. Distributions to partners increased $8.1 million to $143.0 million for the
year ended December 31, 2001, as compared to the same period in 2000, primarily
due to an increase in Northern Border Pipeline's net income. The net proceeds
from the issuance of the 2001 Pipeline Senior Notes totaled approximately $247.2
million and were used for repayment of amounts borrowed under the Pipeline
Credit Agreement. In August 2001 and August 2000, Northern Border Pipeline
repaid its Series B and A Notes of $41 million and $66 million, respectively,
primarily by borrowing under the Pipeline Credit Agreement. During the year
ended December 31, 2001, Northern Border Pipeline had net repayments under the
Pipeline Credit Agreement of $197.0 million, which consisted of borrowings of
$136.0 million and repayments of $333.0 million. For the comparable period in
2000, Northern Border Pipeline had net borrowings of $30.0 million, which
consisted of borrowings of $75.0 million and repayments of $45.0 million. For
the year ended December 31, 2001, Northern Border Pipeline recognized a decrease
in bank overdrafts of $22.4 million. At December 31, 2000, Northern Border
Pipeline reflected the bank overdraft primarily due to rate case refund checks
outstanding. In September 2001, Northern Border Pipeline paid approximately $4.1
million to terminate interest rate swap agreements upon issuance of the 2001
Pipeline Senior Notes. The swaps were entered into to hedge the fluctuations in
Treasury rates and spreads between the execution date of the swaps and the
issuance of the 2001 Pipeline Senior Notes.
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, borrowings under the Pipeline
Credit Agreement, which were primarily used to repay $66 million of Series A
Notes, were $75 million as compared to borrowings 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, which was Northern Border Pipeline's
expansion and extension project completed in December 1998. Financing
activities for the year ended December 31, 1999 included $197.4 million from
the issuance of the 1999 Pipeline 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 bank overdrafts of approximately $22.4 million primarily
due to refund checks outstanding.
IMPACT OF ENRON'S CHAPTER 11 FILING ON NORTHERN BORDER PIPELINE'S BUSINESS
On December 2, 2001, Enron filed a voluntary petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. A number of
wholly owned Enron subsidiaries also filed for Chapter 11 bankruptcy
protection on or after December 2, 2001. Northern Border Pipeline has not
filed for bankruptcy protection. Northern Plains, Pan Border and Northwest
Border are the general partners of Northern Border Partners, which holds a
70% general partner interest in Northern Border Pipeline. Each of
19
Northern Plains and Pan Border are wholly owned subsidiaries of Enron, and
Northwest Border is a wholly owned subsidiary of Williams. Northern Plains and
Pan Border were not among the Enron companies filing for Chapter 11 protection.
The business of Enron and its subsidiaries that have filed for bankruptcy
protection are currently being administered under the direction and control
of the bankruptcy court. An unsecured creditors committee has been appointed
in the Chapter 11 cases. The creditors committee is responsible for general
oversight of the bankruptcy case, and has the power, among other things, to:
investigate the acts, conduct, assets, liabilities, and financial condition
of the debtor, the operation of the debtor's business and the desirability of
the continuance of such business; participate in the formulation of a plan of
reorganization; and file acceptances or rejections to such a plan. Factors
taken into account by Enron in making its business decisions while in Chapter
11 may include decisions with respect to its investment in Northern Plains,
Pan Border and Northern Border Partners, which decisions may affect Northern
Border Pipeline.
CURRENT EFFECTS Enron's bankruptcy filing has had an impact on Northern
Border Pipeline. At the time of the filing of the bankruptcy petition,
Northern Border Pipeline had a number of contractual relationships with Enron
and its subsidiaries. Northern Plains provided and continues to provide
operating and administrative services for Northern Border Pipeline. Northern
Plains has continued to meet its operational and administrative service
obligations under the existing agreements, and Northern Border Pipeline
believes Northern Plains will continue to do so.
ENA, a wholly owned subsidiary of Enron that is in bankruptcy, is a party to
shipper contracts obligating ENA to pay for 3.5% of Northern Border
Pipeline's capacity. Through October 31, 2002, ENA has temporarily released
1.1% of this capacity to a third party. Although this third party has filed a
complaint with the FERC requesting, in effect, that its contracts be deemed
terminated as a consequence of ENA's filing for bankruptcy protection,
Northern Border Pipeline believes this shipper's contract will remain in
effect until October 31, 2002. ENA has not assumed or rejected these
contracts, but its ability to use the capacity has been suspended until it
provides adequate assurance of credit support. Northern Border Pipeline
estimates that it has aggregate financial exposure over the next 12 months of
approximately $9 million of revenues under its firm transportation contracts
with ENA (TC PipeLines' share equates to approximately $2.7 million).
Northern Border Pipeline believes that failure by ENA to perform its
obligations under the firm transportation contracts will not have a material
adverse impact on its financial condition (see "Impact of Enron's Chapter 11
Filing on TC PipeLines' Business").
Northern Border Pipeline has retained outside counsel and TC PipeLines has
been advised that Northern Border Pipeline intends to assert and file claims
against ENA's bankruptcy estate related to these agreements. These claims
will likely be deemed to be unsecured claims against the Enron related
Chapter 11 companies. Northern Border Pipeline is uncertain regarding the
ultimate amount of damages for breach of contract or other claims that it
will be able to establish in the bankruptcy proceeding, and Northern Border
Pipeline cannot predict the amounts that it will collect or the timing of
collection. Northern Border Pipeline believes, however, that any such delay
in collecting or failure to collect will not have a material adverse effect
on its financial condition, and any amounts collected will not be material to
Northern Border Pipeline.
Enron's filing for bankruptcy protection and the related developments have
had other impacts on Northern Border Pipeline's business and management. On
February 5, 2002, Arthur Andersen LLP resigned as Northern Border Pipeline's
independent auditor, and Northern Border Pipeline subsequently retained KPMG
LLP as its new independent auditor for the fiscal year 2001 effective as of
February 11, 2002. Enron has received several requests for information from
different agencies and committees of the United States House of
Representatives and Senate. Some of the information requested from Enron may
include information about Northern Border Pipeline. In addition, TC PipeLines
is aware that the Senate Committee on Governmental Affairs has issued a
subpoena to Enron requesting documents disclosing Enron's communications with
the Securities and Exchange Commission (SEC) and the FERC, as well as
information on compensation matters. As a result of Enron's indirect
ownership interest in Northern Border Pipeline, Northern Border Pipeline has
advised that it is willing to comply with the mandate of the subpoena in such
a manner that may be determined by the Committee on Governmental Affairs of
the Senate of the United States.
POSSIBLE EFFECTS While Northern Plains and Pan Border have not filed for
Chapter 11 bankruptcy protection, they are wholly owned subsidiaries of
Enron, which is in bankruptcy. It is possible that in the course of Enron's
bankruptcy proceedings Enron could attempt to sell its interest in Northern
Plains and/or Pan Border, or take other action with respect to its investment
in Northern Border Partners. Enron could also cause Northern Plains and Pan
Border to file for bankruptcy protection. Northern Border Pipeline has
advised that it has had no current indication from Enron that it intends to
sell all or a part of its ownership interest in Northern Plains or Pan Border
or cause either of these companies to file for bankruptcy protection.
Northern Border Pipeline is managed by a four-member management committee.
One representative is designated by TC PipeLines and three representatives
are designated by Northern Border Partners, with each of its general partners
selecting one representative. The vote among Northern Border Partners'
representatives on the Northern Border Pipeline management committee is in
proportion to their general partner interests in Northern Border Partners. As
a result, the 70% voting interest of Northern Border Partners' three
representatives is allocated 35%, 22.75% and 12.25% among Northern Plains,
Pan Border and Northwest Border,
20
respectively. If Enron were to sell all of its ownership interest in each of
Northern Plains and Pan Border, the purchaser would have the right to appoint
a majority of the Northern Border Pipeline management committee and control
the activities of Northern Border Pipeline, except for those activities
requiring a unanimous vote, which include changes to Northern Border
Pipeline's cash distribution policy, certain expansions and extensions of the
Northern Border pipeline system, some transfers of general partner interests
and settlement of rate cases.
If Northern Plains and Pan Border were to file for bankruptcy protection,
Northern Border Partners' Partnership Agreement provides that they would
automatically be deemed to have withdrawn as general partners of Northern
Border Partners. It is possible that the enforceability of the automatic
withdrawal provisions in this partnership agreement may be challenged. The
success and impact of a challenge are unknown. Upon the occurrence of such an
event of withdrawal, the remaining general partner of Northern Border
Partners, would have the right to purchase the withdrawing partners' general
partnership interests. Should the remaining general partner elect not to
purchase these general partnership interests, the limited partners of
Northern Border Partners would have the right to elect new general partners.
In either event, the party acquiring the general partner interests currently
held by Northern Plains and Pan Border would have the right to appoint a
majority of the Northern Border Pipeline management committee and control the
activities of Northern Border Pipeline, except for those activities requiring
a unanimous vote.
Northern Plains also serves as operator of the Northern Border pipeline
system. If Northern Plains were to file for bankruptcy protection, it could
potentially be removed as operator. Northern Border Pipeline's 1997 credit
agreements provide that an event of default would occur if Northern Plains
was replaced as operator without the consent of the lenders.
Other than the complaint against Northern Border Pipeline filed with the FERC
by the shipper with temporarily released capacity, Northern Border Pipeline
has advised that it is currently not aware of any claims made against
Northern Border Pipeline that arise out of the Enron bankruptcy cases.
IMPACT OF ENRON'S CHAPTER 11 FILING ON TC PIPELINES'S BUSINESS
Based on currently available information, TC PipeLines does not expect the
impact of Enron's bankruptcy protection filing on Northern Border Pipeline to
have a material impact on the business or financial condition of TC
PipeLines. TC PipeLines' 30% share of Northern Border Pipeline's aggregate
financial exposure over the next 12 months under Northern Border Pipeline's
firm transportation contracts with ENA equates to $2.7 million (see "Impact
of Enron's Chapter 11 Filing on Northern Border Pipeline's Business").
TC PipeLines plans to continue to monitor developments at Enron and to
continue to assess any impact of Enron's Chapter 11 proceedings on Northern
Border Pipeline in light of Northern Border Pipeline's existing agreements
and relationships with Enron and its subsidiaries, and to take all
appropriate action to protect the interests of TC PipeLines and its
unitholders.
OUTLOOK
Northern Border Pipeline will continue to focus on the safe, efficient, and
reliable operations and the further development of the Northern Border
pipeline system. Northern Border Pipeline intends to maintain its position as
a low cost transporter of Canadian natural gas to the midwestern, U.S. and
provide highly valued services to Northern Border Pipeline's customers.
Growth is expected to occur primarily in market areas Northern Border
Pipeline serves through incremental projects supported by long-term
contracts. Project 2000, Northern Border Pipeline's recently completed
extension into Indiana, is a good example of the kinds of growth projects
Northern Border Pipeline expects to pursue. This project, completed on time
and well under budget, connects Northern Border Pipeline directly to a large
Chicago-area gas distribution company, (Northern Indiana Public Service
Company) and to industrial gas consumers in northern Indiana. Northern Border
Pipeline also intends to continue to expand the marketing of new services to
meet its customers' needs. Depending on natural gas prices and natural gas
development activities, selected opportunities to connect new sources of
supply to the Northern Border pipeline system may arise. Northern Border
Pipeline is currently working with producers and marketers to develop the
contractual support for a new pipeline project, the Bison Pipeline, to
connect the coal bed methane reserves in the Powder River Basin to markets
served by Northern Border Pipeline.
In 2002, Northern Border Pipeline will begin contract extension discussions
with its customers for contracts that will expire prior to November 1, 2003,
which represents approximately 42% of the Northern Border pipeline system
capacity. Similar to other industries, the value of capacity on interstate
pipelines is driven by supply and demand conditions. In particular, the
relationship between natural gas prices in Canada and prices in the
midwestern U.S. markets will determine the underlying value of
transportation. This relationship, and natural gas markets overall, has been
volatile of late, which is also an important factor in contracting for firm
transportation capacity. Under Northern Border Pipeline's FERC tariff,
Northern Border Pipeline may concurrently solicit bids for available capacity
from other parties subject to the existing customer's rights to match the
best offer. Northern Border Pipeline can begin this process during a period
that extends from 6 to 18 months before the termination date of the contract.
The commencement of any bidding process will be dependent upon the progress
of negotiations and the market conditions affecting the value of
transportation on the pipeline. Based on current conditions, contracts for
service on the Northern Border pipeline system may require discounts from
maximum transportation rates established in Northern Border Pipeline's tariff
and/or shorter duration than its existing contract portfolio. Additionally,
Northern Border Pipeline may enter into negotiated rate contracts involving
charges established on the basis of Canadian-midwestern U.S. natural gas
price differentials or other factors.
RESULTS OF OPERATIONS OF TUSCARORA GAS TRANSMISSION COMPANY
IN THE FOLLOWING DISCUSSION OF THE RESULTS OF TUSCARORA, ALL AMOUNTS REPRESENT
100% OF THE OPERATIONS OF TUSCARORA, IN WHICH THE PARTNERSHIP HAS HELD A 49%
INTEREST SINCE SEPTEMBER 1, 2000.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
21
Revenues generated by Tuscarora increased to $21.3 million for the year ended
December 31, 2001 compared to $19.4 million in 2000 due to the Hungry Valley
lateral which was placed into service in January 2001.
Tuscarora incurred costs and expenses of $2.6 million for the year ended
December 31, 2001 compared to $2.4 million for the year ended December 31, 2000.
Tuscarora recorded depreciation of $4.6 million and $4.4 million for the years
ended December 31, 2001 and 2000, respectively.
Tuscarora reported financial charges of $6.1 million and $6.0 million for the
years ended December 31, 2001 and 2000, respectively.
Tuscarora reported other income of $0.3 million and $0.2 million for the years
ended December 31, 2001 and 2000, respectively.
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 in 1999. 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 of $6.0 million and $6.2 million for the
years ended December 31, 2000 and 1999, respectively.
Tuscarora recorded other income of $0.2 million for each of the years ended
December 31, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES OF TUSCARORA GAS TRANSMISSION COMPANY
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.
In November 2001 and January 2002, Tuscarora entered into forward starting
interest rate swaps with notional amounts of $10 million and $8 million,
respectively, related to the planned issuance of Series C Senior Secured Notes.
The swaps were settled on February 15, 2002 for net proceeds of
approximately $0.2 million. The swaps were entered into to hedge the
fluctuations in treasury rates and spreads between the execution date of the
swaps and the issuance date of the Series C Senior Secured Notes.
On January 4, 2002, Tuscarora entered into a credit agreement with a third party
for a $5 million, 364-day revolving credit facility which bears interest at
either the LIBOR rate plus 1% or the prime rate.
On March 15, 2002, Tuscarora issued Series C Senior Secured Notes in the amount
of $10 million. These notes bear interest at 6.89% and are due in 2012. The
proceeds from these notes will be used to finance the construction of
Tuscarora's expansion project.
22
Short-term liquidity needs will be met by operating cash flows and through the
credit agreement discussed above. Long-term capital needs may be met through the
ability to issue long-term indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased to $13.4 million for the
year ended December 31, 2001 compared to $10.7 million in 2000. This increase is
due to increased earnings and a decrease in working capital.
Cash flows provided by operating activities for the year ended December 31, 1999
were $10.7 million.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities increased to $10.2 million for the year
ended December 31, 2001 compared to $3.7 million for the same period in 2000.
This increase is due to capital expenditures incurred in 2001 relating to the
construction of the Hungry Valley lateral and Tuscarora's expansion project.
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.
CASH FLOWS FROM FINANCING ACTIVITIES
For the years ended December 31, 2001, 2000 and 1999 Tuscarora made debt
repayments of $4.2 million, $3.6 million and $2.8 million, respectively.
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 $5.0 million, $5.3 million and $8.5 million
to its general partners for the years ended December 31, 2001, 2000 and 1999,
respectively. The decrease in cash distributions in 2001 compared to 2000 is
due to the timing of implementation of the cash distribution policy. The
decrease in cash distributions in 2000 compared to 1999 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 the third quarter of 2001, the Financial Accounting Standards Board issued
SFAS No. 141, "Business Combinations," SFAS No. 142, "Goodwill and Other
Intangible Assets," SFAS No. 143, "Accounting for Asset Retirement
Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
SFAS No. 141 requires all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. The Partnership did not enter into
any business combinations subsequent to June 30, 2001.
SFAS No. 142 modifies the accounting and reporting of goodwill and intangible
assets. It requires entities to discontinue the amortization of goodwill,
reallocate goodwill among its reporting segments and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Subsequent to the initial adoption, goodwill must be tested for
impairment annually or more frequently if circumstances indicate a possible
impairment. For goodwill and intangible assets on the balance sheet at June 30,
2001, the provisions of SFAS No. 142 must be applied to fiscal years beginning
after December 15, 2001. At December 31, 2001, the Partnership's balance sheet
does not include any goodwill.
SFAS No. 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for fiscal years
23
beginning after June 15, 2002 with earlier application encouraged. The
Partnership is in the process of evaluating the application of this
pronouncement on its investments in Northern Border Pipeline and Tuscarora.
SFAS No. 144 establishes one accounting model to be used for long-lived assets
to be disposed of by sale, and broadens the presentation of discontinued
operations to include more disposal transactions. SFAS No. 144 supercedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB Opinion No. 30. This standard is effective for fiscal years
beginning after December 15, 2001. The Partnership is in the process of
evaluating the application of this pronouncement on its investments in Northern
Border Pipeline and Tuscarora.
RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
A number of statements made or incorporated by reference by TC PipeLines, in
this Form 10-K filing made with the SEC, 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. Forward-looking information typically contains
statements with words such as "anticipate," "believe," "estimate," "expect,"
"plan," "target" or similar words suggesting future outcomes. By its nature,
such forward-looking information is subject to various risks and
uncertainties, which could cause TC PipeLines' actual results and experience
to differ materially from the anticipated results or other expectations
expressed in this Form 10-K. 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.
RISK FACTORS
TC PIPELINES MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO PAY
THE MINIMUM QUARTERLY DISTRIBUTION ON THE COMMON UNITS EVERY QUARTER
The actual amount of cash TC PipeLines has available to pay the minimum
quarterly distribution will depend upon numerous factors relating to each of TC
PipeLines', Northern Border Pipeline's and Tuscarora's business, some of which
are beyond the control of TC PipeLines or the general partner, including:
o the tariff and transportation charges collected by Northern Border
Pipeline and Tuscarora for transportation services on their pipeline
systems;
o the amount of cash distributed to TC PipeLines by Northern Border
Pipeline and Tuscarora;
24
o the amount of cash set aside and the adjustment in reserves made by
the general partner at its discretion;
o the amount of cash required to be contributed by TC PipeLines to
either Northern Border Pipeline or Tuscarora in the future;
o required principal and interest payments on TC PipeLines debt;
o the cost of acquisitions, including related debt service payments;
o TC PipeLines' issuance of debt and equity securities;
o pipelines competing with Northern Border Pipeline and Tuscarora;
o increases in Northern Border Pipeline's and Tuscarora's maintenance
and operating costs;
o payment defaults of shippers, including affiliates of Enron, on
Northern Border's pipeline system and payment defaults of shippers on
Tuscarora's pipeline system; and
o expansion costs related to these systems.
CASH DISTRIBUTIONS ARE DEPENDENT PRIMARILY ON TC PIPELINES' CASH FLOW, FINANCIAL
RESERVES AND WORKING CAPITAL BORROWINGS
Cash distributions are not dependent solely on TC PipeLines' profitability,
which is affected by non-cash items. Therefore, TC PipeLines may make cash
distributions during periods when losses are recorded and may not make cash
distributions during periods when profits are recorded.
TC PIPELINES DOES NOT PRESENTLY HAVE SUFFICIENT STAND-ALONE MANAGEMENT RESOURCES
TO OPERATE WITHOUT SERVICES PROVIDED BY TRANSCANADA
TransCanada provides all of TC PipeLines' management resources. Further, TC
PipeLines would not be able to evaluate potential acquisitions and successfully
complete acquisitions without TransCanada's resources.
NORTHERN BORDER PIPELINE'S AND TUSCARORA'S INDEBTEDNESS MAY LIMIT THEIR ABILITY
TO BORROW ADDITIONAL FUNDS, MAKE DISTRIBUTIONS TO TC PIPELINES OR CAPITALIZE ON
BUSINESS OPPORTUNITIES
Northern Border Pipeline is prohibited from making cash distributions during an
event of default under its indebtedness. Provisions in Northern Border
Pipeline's indebtedness limit its ability to incur indebtedness and engage in
specific transactions which could reduce its ability to capitalize on business
opportunities that arise in the course of its business. Tuscarora is prohibited
from making cash distributions during an event of default under its
indebtedness. Under Tuscarora's indebtedness, Tuscarora has granted a security
interest in certain of its transportation contracts, which are available to
noteholders during an event of default. Any future refinancing of their existing
indebtedness or any new indebtedness could have similar or greater restrictions.
IF TC PIPELINES IS UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY
ACCEPTABLE TERMS, EITHER FROM THIRD PARTIES OR TRANSCANADA, TC PIPELINES' FUTURE
FINANCIAL PERFORMANCE WILL BE LIMITED TO PARTICIPATION IN NORTHERN BORDER
PIPELINE AND TUSCARORA
Future acquisitions may involve the expenditure of significant funds. Depending
upon the nature, size and timing of future acquisitions, TC PipeLines may be
required to secure additional financing. Additional financing may not be
available to TC PipeLines on acceptable terms.
MAJORITY CONTROL OF THE NORTHERN BORDER PIPELINE MANAGEMENT COMMITTEE BY
AFFILIATES OF ENRON MAY LIMIT TC PIPELINES' ABILITY TO INFLUENCE NORTHERN BORDER
PIPELINE
TC PipeLines owns a 30% general partner interest in Northern Border Pipeline.
The remaining 70% general partner interest in Northern Border Pipeline is owned
by Northern Border Partners, a publicly traded limited partnership, which
is not affiliated with TC PipeLines. The general partners of Northern Border
Partners are Northern Plains and Pan Border, both subsidiaries of Enron, and
Northwest Border, a subsidiary of The Williams Companies. Except as to any
matters requiring unanimity, such as significant expansions or extensions to the
pipeline system, the acceptance of rate cases and changes to, or suspensions of,
the cash distribution policy, management committee members designated by
subsidiaries of Enron have the power to approve a particular matter requiring a
majority vote despite the fact that TC PipeLines' representative may vote
against the project or other matter. Conversely, with
25
respect to any matter requiring a majority vote, management committee members
designated by subsidiaries of Enron may disapprove a particular matter despite
the fact that TC PipeLines' representative may vote in favor of that matter.
NORTHERN PLAINS NATURAL GAS COMPANY MAY NOT BE ABLE TO CONTINUE TO EFFICIENTLY
OPERATE OR MAY BE FORCED TO CEASE TO OPERATE NORTHERN BORDER PIPELINE
Since Northern Plains is a wholly owned subsidiary of Enron it depends on
Enron and some of its affiliates for some of the administrative services
Northern Plains provides to Northern Border Pipeline. Potential further
developments in the Enron situation may cause Northern Plains to be unable to
provide a sufficient level of services or any services as operator. Any
interruption of services may have a significant impact on the operations of
Northern Border Pipeline and Northern Border Pipeline may not be able to
transition to a new operator in a timely and efficient manner.
THE IRS COULD TREAT TC PIPELINES AS A CORPORATION, WHICH WOULD SUBSTANTIALLY
REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS
Current law may change so as to cause TC PipeLines to be taxable as a
corporation for federal income tax purposes or otherwise to be subject to
entity-level taxation. The partnership agreement provides that, if a law is
enacted or existing law is modified or interpreted in a manner that subjects TC
PipeLines to taxation as a corporation or otherwise subjects TC PipeLines to
entity-level taxation for federal, state or local income tax purposes, then
specified provisions of the partnership agreement relating to distributions will
be subject to change, including a decrease in distributions to reflect the
impact of that law on TC PipeLines.
NORTHERN BORDER PIPELINE AND TUSCARORA ARE EXTENSIVELY REGULATED BY THE FERC
If the FERC requires that Northern Border Pipeline's or Tuscarora's tariff be
changed, Northern Border Pipeline's or Tuscarora's cash flow may be adversely
affected.
IF NORTHERN BORDER PIPELINE OR TUSCARORA DO NOT MAINTAIN OR INCREASE THEIR
RESPECTIVE RATE BASES BY SUCCESSFULLY COMPLETING FERC-APPROVED PROJECTS, THE
AMOUNT OF REVENUE ATTRIBUTABLE TO THE RETURN ON THE RATE BASE THEY COLLECT FROM
THEIR SHIPPERS WILL DECREASE OVER TIME
The Northern Border and Tuscarora pipeline systems are generally allowed to
collect from their customers a return on their assets or "rate base" as
reflected in their financial records as well as recover that rate base through
depreciation. The amount they may collect from customers decreases as the rate
base declines as a result of, among other things, depreciation and amortization.
In order to avoid a reduction in the level of cash available for distributions
to its partners based on its current FERC-approved tariff, each of these
pipelines must maintain or increase its rate base through projects that maintain
or add to existing pipeline facilities. These projects will depend upon many
factors including:
o sufficient demand for natural gas;
o an adequate supply of proved natural gas reserves;
o available capacity on pipelines that connect with these pipelines;
o the execution of natural gas transportation contracts;
o the approval of any expansion or extension of the pipeline systems by
their respective management committees, or in some cases, a ruling
from an arbitrator;
o obtaining financing for these projects; and
o receipt and acceptance of necessary regulatory approvals.
Northern Border Pipeline's and Tuscarora's ability to complete these projects is
also dependent on numerous business, economic, regulatory, competitive and
political uncertainties beyond its control, and neither Northern Border Pipeline
nor Tuscarora may be able to complete these projects.
IF ANY SHIPPER FAILS TO PERFORM ITS CONTRACTUAL OBLIGATIONS, NORTHERN BORDER
PIPELINE'S OR TUSCARORA'S RESPECTIVE CASH FLOWS AND FINANCIAL CONDITION COULD BE
ADVERSELY IMPACTED
26
If any shipper fails to perform its contractual obligations, Northern Border
Pipeline's or Tuscarora's cash flows and financial condition could be adversely
impacted. As a result, the cash available for distribution by TC PipeLines to
unitholders could be reduced.
As of December 31, 2001, the five largest shippers on the Northern Border
pipeline system accounted for approximately 48% of contracted capacity. ENA has
3.5% of the firm capacity on the Northern Border pipeline system. Since November
2001, ENA has not made scheduled payments pursuant to these firm contracts and
may not be able to resume these payments. Northern Border Pipeline may not be
able to re-contract any or a portion of the firm capacity held by ENA on a
short-term or long-term basis. Sierra Pacific Power is Tuscarora's largest
shipper, accounting for 94% of Tuscarora's contracted capacity.
THE LONG-TERM FINANCIAL CONDITIONS OF NORTHERN BORDER PIPELINE AND TUSCARORA AND
AS A RESULT, OF TC PIPELINES, ARE DEPENDENT ON THE CONTINUED AVAILABILITY OF
WESTERN CANADIAN NATURAL GAS FOR IMPORT INTO THE UNITED STATES
The development of additional natural gas reserves requires 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 Northern Border's and Tuscarora's pipeline systems.
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 and import and export of natural gas supplies. While
substantially all of Northern Border Pipeline's and Tuscarora's capacity is
contractually committed through 2003 and 2015, respectively, if the
availability of western Canadian natural gas were to decline over these
periods, existing shippers may be unlikely to extend their contracts. In
addition, Northern Border Pipeline or Tuscarora may be unable to find
replacement shippers for lost capacity. Northern Border Pipeline may not be
able to replace its long-term contracts covering approximately 42% of its
capacity that expire in October of 2003 with long term contracts under
similarly attractive economic terms. Additional natural gas reserves may not
be developed in commercial quantities and in sufficient amounts to fill the
capacities of each of the Northern Border or Tuscarora pipeline systems.
NORTHERN BORDER PIPELINE'S AND TUSCARORA'S BUSINESS DEPENDS IN PART ON THE LEVEL
OF DEMAND FOR WESTERN CANADIAN NATURAL GAS IN THE MARKETS THE PIPELINE SYSTEMS
SERVE
The volumes of natural gas delivered to these markets from other sources affect
the demand for both western Canadian natural gas and use of these pipeline
systems. Demand for western Canadian natural gas also influences the ability and
willingness of shippers to use the Northern Border and Tuscarora pipeline
systems to meet the demand that these pipeline systems serve.
Natural gas is also produced in the United States and transported by competing
unaffiliated pipeline systems to the same destinations as natural gas
transported by the Northern Border and Tuscarora pipeline systems. Because of
the highly competitive nature of the natural gas transmission business, Northern
Border Pipeline and Tuscarora may not be able to maintain existing customers or
acquire new customers when the current shipper contracts expire. For a
discussion regarding contract profiles see Item 1. "Business of Northern Border
Pipeline Company - Shippers" and Item 1. "Business of Tuscarora Gas Transmission
Company- The Tuscarora Pipeline System"
NORTHERN BORDER PIPELINE'S AND TUSCARORA'S OPERATIONS ARE REGULATED BY FEDERAL
AND STATE AGENCIES RESPONSIBLE FOR ENVIRONMENTAL PROTECTION AND OPERATIONAL
SAFETY
TC PipeLines believes that these operations comply in all material respects with
applicable environmental and safety regulations. However, risks of substantial
costs and liabilities are inherent in pipeline operations and each of Northern
Border Pipeline and Tuscarora may incur substantial costs and liabilities in the
future as a result of stricter environmental and safety laws, regulations and
enforcement policies and claims for personal or property damages resulting from
Northern Border Pipeline's or Tuscarora's operations. If either Northern Border
Pipeline or Tuscarora, as applicable, was not able to recover these costs, cash
distributions to TC PipeLines' unitholders could be adversely affected.
27
Northern Border Pipeline's and Tuscarora's operations are subject to operational
hazards and unforeseen interruptions, including natural disasters, adverse
weather, accidents or other events beyond its control. A casualty occurrence
might result in a loss of equipment or life, as well as injury and extensive
property or environmental damage.
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 percent compared to the rates in effect as of December 31, 2001,
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, 2001.
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. As of December 31, 2001, approximately
69% of Northern Border Pipeline's debt portfolio was in fixed rate debt.
If average interest rates change by one percent compared to rates in effect as
of December 31, 2001, Northern Border Pipeline's annual interest expense would
change by approximately $2.7 million. This amount has been determined by
considering the impact of the hypothetical interest rates on variable rate
borrowings outstanding as of December 31, 2001.
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.
28
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 DECEMBER POSITION WITH GENERAL PARTNER
31, 2001 AS OF DECEMBER 31, 2001
Ronald J. Turner 48 President, Chief Executive Officer and Director
Russell K. Girling 39 Chief Financial Officer and Director
Paul F. MacGregor 44 Vice-President, Business Development
Donald R. Marchand 39 Vice-President and Treasurer
Gary G. Penrose 59 Vice-President, Taxation
Theresa Jang 37 Controller
Rhondda E.S. Grant 44 Secretary
Robert A. Helman 67 Independent Director
Jack F. Jenkins-Stark 50 Independent Director
David L. Marshall 62 Independent Director
Albrecht W.A. Bellstedt 52 Director
Dennis J. McConaghy 49 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 and chairman of the board of directors 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,
Eastern 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. (energy services), a
former subsidiary of TransCanada which has since merged into 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.
29
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 of 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.
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, Rowe & Maw (law firm) since 1967.
Mayer, Brown, Rowe & Maw provides, legal services on U.S. related matters to
TransCanada, the parent of the general partner. Mayer, Brown, Rowe & Maw also
provides limited legal services to the general partner on behalf of the
Partnership solely relating to matters arising from Enron's voluntary
petition for bankruptcy protection. 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. 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. Bellstedt was appointed a director of the general partner in December 2001.
Mr. Bellstedt's principal occupation is Executive Vice-President, Law and
General Counsel of TransCanada, a position he has held since June 2000. From
April 2000 until June 2000, Mr. Bellstedt was Senior Vice-President, Law and
General Counsel of TransCanada. From August 1999 until April 2000, Mr. Bellstedt
was Senior Vice-President, Law and Administration of TransCanada. From February
1999 until August 1999, Mr. Bellstedt was Senior Vice-President, Law and Chief
Compliance Officer of TransCanada. Prior to February 1999, Mr. Bellstedt was a
partner of Fraser Milner, a Canadian law firm.
Mr. McConaghy was appointed a director of the general partner in December 2000.
Mr. McConaghy's principal occupation is Executive Vice-President, Gas
Development of TransCanada, a position he has held since May 2001. From October
2000 until May 2001, Mr. McConaghy was Senior Vice-President, Business
Development of TransCanada. 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.
30
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes certain information regarding the annual salary
of Ronald J. Turner, the President and Chief Executive Officer of the general
partner of the Partnership since December 2000, for the years ended December 31,
2001 and 2000 paid by TransCanada, parent company of the general partner. Mr.
Turner is an employee of TransCanada. TC PipeLines reimburses TransCanada for
the services contributed to its operations by Mr. Turner.
-------------------------------------------
Annual TransCanada Base Salary (1)
- ------------------------------------------------------- -------- -------------------------------------------
United States Dollar
Name and Principal Position Year Canadian Dollars Equivalent (2)
- ------------------------------------------------------- -------- -------------------- ----------------------
Ronald J. Turner 2001 412,503 259,000
President and Chief Executive Officer 2000 309,660 206,500
- ------------------------------------------------------- -------- -------------------- ----------------------
(1) Annualized base salary paid by parent of general partner. Based on services
provided, approximately 10% of this base salary is allocated 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 December 31, 2001 and
2000 noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes of 0.6279 and 0.6669,
respectively, as reported by the Federal Reserve Bank of New York.
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. 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, to April 25,
2001, and subsequently 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 officer's salaries are determined on a competitive and market basis by
the parent company of the general partner.
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 11, 2002 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.
31
- ------------------------------------------------------------------------------------------------------------------------
Amount and Nature of Beneficial Ownership
----------------------------------------------------
Name and Business Address Common Units Subordinated Units
- ------------------------------------------------------------------------------------------------------ Percentage of
Number of Units Percent Number of Units Percent Interest for
of Class 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) 1,917,494 13.1 - - 11.0
85 Broad Street
New York, New York 10004
- ------------------------------------------------------------------------------------------------------------------------
Robert A. Helman (5) 10,653 * - - *
190 S. LaSalle Street
Chicago, Illinois 60603
- ------------------------------------------------------------------------------------------------------------------------
Jack F. Jenkins-Stark (6) 2,653 * - - *
1010 Atlantic Avenue
Alameda, California 94501
- ------------------------------------------------------------------------------------------------------------------------
David L. Marshall (7) 2,253 * - - *
450 1st Street SW
Calgary, Alberta T2P 5H1
- ------------------------------------------------------------------------------------------------------------------------
Ronald J. Turner - - - - -
450 1st Street SW
Calgary, Alberta T2P 5H1
- ------------------------------------------------------------------------------------------------------------------------
Directors and Executive Officers as a 15,559 * - - *
Group (8)(9) (12 persons)
- ------------------------------------------------------------------------------------------------------------------------
(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.
(4) As reported on a schedule 13G/A filed on February 14, 2002, the Goldman
Sachs Group, Inc. (GS Group) and Goldman, Sachs & Co. (Goldman Sachs) each
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) 10,000 units are held by Bank of Oklahoma N.A., trustee for Mayer, Brown,
Rowe & Maw Savings Plan FBO Robert A. Helman and 653 units are held
directly by Mr. Helman.
(6) 2,653 units are held by the Jenkins-Stark Family Trust dated June 16, 1995.
(7) 2,253 units are held directly by Mr. Marshall.
(8) With the exception of the 3 named directors above, none of the other
directors and executive officers hold any units of TC PipeLines.
(9) Ronald J. Turner holds 188,931 options and 13,684 shares of TransCanada;
Russell K. Girling holds 212,662 options and 7,665 shares of TransCanada;
Albrecht W.A. Bellstedt holds 173,750 options and 10,574 shares of
TransCanada and Dennis J. McConaghy holds 128,624 options and 8,179 shares
of TransCanada. The directors and executive officers as a group hold
923,700 options and 48,178 shares of TransCanada.
* 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 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.
32
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, 2001 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. The Form 3 required to be filed by Mr. Stephen Clark within 10
days of his appointment as an officer of the general partner on January 25, 2001
and the Form 4 confirming his resignation as of October 1, 2001 were filed late
on March 5, 2001 and March 15, 2002, respectively, due to a clerical error.
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.
33
The Partnership does not have any employees. The management and operating
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 $0.5 million for the year ended
December 31, 2001. Such costs include, (i) personnel costs (such as salaries and
employee benefits), (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, 2001, the Partnership renewed its $40.0 million unsecured two-year
revolving credit facility (TransCanada Credit Facility) with TransCanada
PipeLine USA Ltd., an affiliate of the general partner. The TransCanada Credit
Facility bears interest at LIBOR 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, Tuscarora and any other
entity in which the Partnership directly or indirectly acquires an interest, to
fund working capital and for other general business purposes, including
temporary funding of cash distributions to partners, if necessary. At December
31, 2001, the Partnership had no amount outstanding under the TransCanada 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.
Mr. Helman, a director of the general partner of the Partnership, is a partner
of the law firm of Mayer, Brown, Rowe & Maw, which provides legal services on
U.S. related matters to TransCanada, the parent of the general partner. Mayer,
Brown, Rowe & Maw also provides limited legal services to the general partner on
behalf of the Partnership solely relating to matters arising from Enron's
voluntary petition for bankruptcy protection.
34
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.
(3) 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, 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).
*4.3 Indenture dated September 17, 2001, between Northern Border
Pipeline Company and Bank One Trust Company, N.A. (Exhibit 4.2 to
Northern Border Pipeline Company, Form S-4 Registration Statement,
Registration No. 333-73282).
*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).
35
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).
*10.3.3 Ninth Supplement Amending Northern Border Pipeline Company General
Partnership Agreement dated July 16, 2001 by and among Northern
Border Intermediate Limited Partnership and TC PipeLines
Intermediate Limited Partnership (Exhibit 10.37 to Northern Border
Pipeline Company, Form S-4 Registration Statement, Registration No.
333-73282).
*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 Renewal of U.S. $40,000,000 Two Year Revolving Credit Facility
between TC PipeLines, LP, as borrower, and TransCanada PipeLines
USA Ltd., as lender dated May 28, 2001 (Exhibit 1 to TC PipeLines,
LP's Form 10-Q, June 30, 2001).
*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).
36
EXHIBIT NO. DESCRIPTION
*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).
*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).
37
EXHIBIT NO. DESCRIPTION
*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).
*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).
38
EXHIBIT NO. DESCRIPTION
*10.39 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron North America
Corp., dated October 29, 2001 (Exhibit 10.38 to Northern Border
Pipeline Company, Form S-4 Registration Statement, Registration No.
333-73282).
*10.40 Northern Border Pipeline Company U.S. Shippers Service Agreement
between Northern Border Pipeline Company and Enron North America
Corp., dated October 29, 2001 (Exhibit 10.35 to Northern Border
Pipeline Company, 2001 Form 10-K, Registration No. 333-88577).
21.1 Subsidiaries of the Registrant
*Indicates exhibits incorporated by reference.
(b) The Registrant filed the following reports on Form 8-K during the
fourth quarter of 2001:
A report on Form 8-K was filed on December 3, 2001 stating that based
on currently available information, the recent downgrading of Enron's
credit ratings and other events involving Enron, should not have a
material adverse impact on the Partnership's financial condition.
(c) None.
(d) None.
39
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
2002.
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, 2002
/s/ Russell K. Girling
- ----------------------------
Russell K. Girling Chief Financial Officer
and Director (Principal Financial Officer) March 29, 2002
/s/ Theresa Jang
- ----------------------------
Theresa Jang Controller (Principal Accounting Officer) March 29, 2002
/s/ Albrecht W. A. Bellstedt
- ----------------------------
Albrecht W. A. Bellstedt Director March 29, 2002
/s/ Dennis J. McConaghy
- ----------------------------
Dennis J. McConaghy Director March 29, 2002
/s/ Robert A. Helman
- ----------------------------
Robert A. Helman Director March 29, 2002
/s/ Jack F. Jenkins-Stark
- ----------------------------
Jack F. Jenkins-Stark Director March 29, 2002
/s/ David L. Marshall
- ----------------------------
David L. Marshall Director March 29, 2002
40
TC PIPELINES, LP
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
FINANCIAL STATEMENTS OF TC PIPELINES, LP
Independent Auditors' Report F-2
Balance Sheet - December 31, 2001 and 2000 F-3
Statement of Income - Years Ended December 31, 2001 and 2000
and Period Ended December 31, 1999 F-3
Statement of Comprehensive Income - Years Ended December 31, 2001
and 2000 and Period Ended December 31, 1999 F-4
Statement of Cash Flows - Years Ended December 31, 2001 and 2000
and Period Ended December 31, 1999 F-4
Statement of Changes in Partners' Equity - Years Ended
December 31, 2001 and 2000 and Period Ended December 31, 1999 F-5
Notes to Financial Statements F-6
FINANCIAL STATEMENTS OF NORTHERN BORDER PIPELINE COMPANY
Independent Auditors' Report F-13
Report of Independent Public Accountants F-14
Balance Sheet - December 31, 2001 and 2000 F-15
Statement of Income - Years Ended December 31, 2001, 2000 and 1999 F-16
Statement of Comprehensive Income - Years Ended
December 31, 2001, 2000 and 1999 F-16
Statement of Cash Flows - Years Ended December 31, 2001, 2000 and 1999 F-17
Statement of Changes in Partners' Equity - Years Ended
December 31, 2001, 2000 and 1999 F-18
Notes to Financial Statements F-19
FINANCIAL STATEMENTS SCHEDULE OF NORTHERN BORDER PIPELINE COMPANY
Independent Auditors' Report on Schedule S-1
Report of Independent Public Accountants on Schedule S-2
Schedule II - Valuation and Qualifying Accounts S-3
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, 2001 and 2000 and the related statements
of income, comprehensive income, cash flows and changes in partners' equity
for the years ended December 31, 2001 and 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 of America. 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, 2001 and 2000 and the results of its operations and its cash flows for the
years ended December 31, 2001 and 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 of America.
/s/ KPMG LLP
Calgary, Canada
March 8, 2002
F-2
TC PIPELINES, LP
BALANCE SHEET
DECEMBER 31 (THOUSANDS OF DOLLARS) 2001 2000
- ------------------------------------------------------------ ---------------- -----------------
ASSETS
Current Assets
Cash 9,194 1,566
Investment in Northern Border Pipeline Company 250,078 248,098
Investment in Tuscarora Gas Transmission Company 29,297 27,881
Deferred Amounts 119 -
---------------- -----------------
288,688 277,545
---------------- -----------------
---------------- -----------------
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Accounts payable 426 499
Accrued interest 58 141
---------------- -----------------
484 640
---------------- -----------------
Long-Term Debt 21,500 21,500
Partners' Equity
Common units 218,935 212,253
Subordinated units 39,229 37,951
General partner 5,532 5,201
Other comprehensive income 3,008 -
---------------- -----------------
266,704 255,405
---------------- -----------------
288, 688 277,545
---------------- -----------------
---------------- -----------------
STATEMENT OF INCOME
Year ended December 31,
---------------------------------- May 28 (1) -
(THOUSANDS OF DOLLARS, EXCEPT PER UNIT AMOUNTS) 2001 2000 December 31, 1999
- ------------------------------------------------------------ ---------------- ----------------- -------------------
EQUITY INCOME FROM INVESTMENT IN
NORTHERN BORDER PIPELINE COMPANY 42,138 38,119 20,923
EQUITY INCOME FROM INVESTMENT IN
TUSCARORA GAS TRANSMISSION COMPANY 3,608 943 -
GENERAL AND ADMINISTRATIVE EXPENSES (1,251) (1,337) (699)
FINANCIAL CHARGES (973) (501) -
---------------- ----------------- -------------------
NET INCOME 43,522 37,224 20,224
---------------- ----------------- -------------------
---------------- ----------------- -------------------
NET INCOME PER UNIT $2.40 $2.08 $1.13
---------------- ----------------- -------------------
---------------- ----------------- -------------------
UNITS OUTSTANDING (THOUSANDS) 17,500 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 COMPREHENSIVE INCOME
Year ended December 31, May 28 (1) -
---------------------------------
(THOUSANDS OF DOLLARS) 2001 2000 December 31, 1999
- ------------------------------------------------------------- --------------- ---------------- ------------------
NET INCOME 43,522 37,224 20,224
OTHER COMPREHENSIVE INCOME
Transition adjustment from adoption of SFAS No. 133 3,104 - -
Change associated with current period hedging transactions (96) - -
--------------- ---------------- ------------------
TOTAL COMPREHENSIVE INCOME 46,530 37,224 20,224
--------------- ---------------- ------------------
--------------- ---------------- ------------------
STATEMENT OF CASH FLOWS
Year ended December 31, May 28 (1) -
---------------------------------
(THOUSANDS OF DOLLARS) 2001 2000 December 31, 1999
- ------------------------------------------------------------- ----------------- --------------- -------------------
CASH GENERATED FROM OPERATIONS
Net income 43,522 37,224 20,224
Add/(Deduct):
Equity income (in excess of)/less than distributions
received (388) 2,909 (8,799)
(Decrease)/increase in accounts payable (73) 92 407
(Decrease)/increase in accrued interest (83) 141 -
----------------- --------------- -------------------
42,978 40,366 11,832
----------------- --------------- -------------------
INVESTING ACTIVITIES
Investment in Tuscarora Gas Transmission Company - (28,438) -
Deferred amounts (119) - -
----------------- --------------- -------------------
(119) (28,438) -
----------------- --------------- -------------------
FINANCING ACTIVITIES
Distributions paid (35,231) (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)
----------------- --------------- -------------------
(35,231) (11,157) (11,037)
----------------- --------------- -------------------
INCREASE IN CASH 7,628 771 795
CASH, BEGINNING OF PERIOD 1,566 795 -
----------------- --------------- -------------------
CASH, END OF PERIOD 9,194 1,566 795
----------------- --------------- -------------------
----------------- --------------- -------------------
(1) Commencement of operations.
The accompanying notes are an integral part of these financial statements.
F-4
TC PIPELINES, LP
STATEMENT OF CHANGES IN PARTNERS' EQUITY
Other
Subordinated Units General Comprehensive
Common Units Partner Income Partners' Equity
---------------------- -------------------- ---------- -------------- ----------------------
(thousands (thousands (thousands (thousands (thousands (thousands (thousands (thousands
of units) of dollars) of units) of dollars)of dollars) of dollars) of units) of 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' Equity 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' Equity at December 31, 2000 14,691 212,253 2,809 37,951 5,201 17,500 255,405
NET INCOME 35,329 6,756 1,437 43,522
DISTRIBUTIONS PAID (28,647) (5,478) (1,106) (35,231)
OTHER COMPREHENSIVE INCOME - - - 3,008 3,008
-------- ----------- ---------- --------- ---------- -------------- ---------- -----------
PARTNERS' EQUITY AT DECEMBER 31, 2001 14,691 218,935 2,809 39,229 5,532 3,008 17,500 266,704
-------- ----------- ---------- --------- ---------- -------------- ---------- -----------
-------- ----------- ---------- --------- ---------- -------------- ---------- -----------
The accompanying notes are an integral part of these financial statements.
F-5
TC PIPELINES, LP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION
TC PipeLines, LP, and its subsidiary limited partnerships, TC PipeLines
Intermediate Limited Partnership, and TC Tuscarora Intermediate Limited
Partnership, all Delaware limited partnerships, 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 1,249-mile United States interstate pipeline
system that transports natural gas from the Montana-Saskatchewan border to
markets in the midwestern United States.
TC PipeLines also owns a 49% general partner interest in Tuscarora Gas
Transmission Company (Tuscarora), a Nevada general partnership. Tuscarora owns a
229-mile United States interstate pipeline system that transports natural gas
from Oregon, where it interconnects with facilities of PG&E National Energy
Group, Gas Transmission Northwest, to northern Nevada.
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, 2001.
TransCanada indirectly holds 2,800,000 common units representing an effective
15.7% limited partner interest in the Partnership at December 31, 2001.
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, 2001 and 2000 and the results of
its operations, comprehensive income, cash flows and changes in partners'
equity for the years ended December 31, 2001 and 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. Other comprehensive income recorded by TC PipeLines
arises through its equity investments, Northern Border Pipeline and Tuscarora
and relates to cash flow hedges transacted by Northern Border Pipeline and
Tuscarora. 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' EQUITY
Costs incurred in connection with the issuance of units are deducted from the
proceeds received.
(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.
F-6
NOTE 3 INVESTMENT IN NORTHERN BORDER PIPELINE COMPANY
The Partnership owns a 30% general partner interest in Northern Border Pipeline.
The remaining 70% partnership 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. The general partners of Northern Border
Partners, L.P. are controlled by Enron Corp. (Enron) and The Williams Companies,
Inc. (Williams). As a result, TC PipeLines has one member and controls 30% of
the voting power of the Northern Border Pipeline management committee, Enron has
two members and controls 57.75% of the voting power, and Williams has one member
and controls 12.25% of the voting power of the Northern Border Pipeline
management committee. The Northern Border pipeline system is operated by
Northern Plains Natural Gas Company, a wholly owned subsidiary of Enron.
Northern Border Pipeline is regulated by the Federal Energy Regulatory
Commission (FERC).
The Northern Border pipeline system serves more than 50 firm
transportation shippers with diverse operations and financial profiles. As of
December 31, 2001, Enron North America (ENA) an affiliate of Enron holds firm
contracts representing approximately 3.5% of Northern Border Pipeline's
contracted capacity. Northern Border Pipeline recorded a bad debt expense of
approximately $1.3 million representing ENA's unpaid November and December
2001 transportation. Through October 31, 2002, ENA has temporarily released
1.1% of this capacity to a third party. This third party has filed a
complaint with the FERC requesting, in effect, that its contract be deemed
terminated as a consequence of ENA's filing for bankruptcy protection.
Northern Border Pipeline believes this shipper's contract will remain in
effect until October 31, 2002. Northern Border Pipeline estimates that it has
aggregate financial exposure over the next 12 months of approximately $9
million of revenues under its firm transportation contracts with ENA (TC
PipeLines' share equates to approximately $2.7 million). Northern Border
Pipeline believes that failure by ENA to perform its obligations under the
firm transportation contracts will not have a material adverse impact on its
financial condition and results of operations.
TC PipeLines' equity income amounted to $42.1 million, $38.1 million and
$20.9 million for the years ended December 31, 2001 and 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. Undistributed earnings of
Northern Border Pipeline amounted to $5.7 million and $6.4 million for the
years ended December 31, 2001 and 2000, respectively.
The following sets out summarized financial information for Northern Border
Pipeline as at December 31, 2001 and 2000 and for the years ended December 31,
2001, 2000 and 1999. TC PipeLines has held its general partner interest since
May 28, 1999.
December 31 (millions of dollars) 2001 2000
- -------------------------------------------------- ------------ ------------
NORTHERN BORDER PIPELINE
BALANCE SHEET
ASSETS
Cash and cash equivalents 11.0 29.0
Other current assets 36.3 38.1
Plant, property and equipment, net 1,685.7 1,687.0
Other assets 18.9 14.4
------------ ------------
1,751.9 1,768.5
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS'
EQUITY
Current liabilities 399.0 114.3
Reserves and deferred credits 5.6 4.9
Long-term debt 513.7 822.3
Partners' Equity
Partners' capital 824.4 827.0
Accumulated other comprehensive income 9.2 -
------------ ------------
1,751.9 1,768.5
------------ ------------
------------ ------------
Year ended December 31 (millions of dollars) 2001 2000 1999
- -------------------------------------------------- ------------ ------------ ----------
NORTHERN BORDER PIPELINE INCOME STATEMENT
Revenues 313.1 311.0 298.3
Costs and expenses (59.3) (69.5) (69.0)
Depreciation (57.5) (57.3) (51.9)
Financial charges (55.4) (65.2) (60.2)
Other (expense)/income (0.4) 8.1 1.4
------------ ------------ ----------
Net income 140.5 127.1 118.6
------------ ------------ ----------
------------ ------------ ----------
F-7
NOTE 4 INVESTMENT IN TUSCARORA GAS TRANSMISSION COMPANY
TC PipeLines completed its acquisition of a 49% general partner interest in
Tuscarora on September 1, 2000. The remaining 50% and 1% interests in Tuscarora
are indirectly held by Sierra Pacific Resources Company and TransCanada,
respectively. The Partnership acquired its interest in Tuscarora 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. Tuscarora is regulated by the
FERC.
TC PipeLines' equity income from Tuscarora for the year ended December 31,
2001 and the period September 1, to December 31, 2000 amounted to $3.6 million
and $0.9 million, respectively, representing 49% of the net income of Tuscarora
for the same periods. Undistributed earnings of Tuscarora amounted to $0.6
million and nil for the years ended December 31, 2001 and 2000, respectively.
The following sets out summarized financial information for Tuscarora as at
and for the years ended December 31, 2001 and 2000. TC PipeLines has held its
general partner interest since September 1, 2000.
December 31 (millions of dollars) 2001 2000
- -------------------------------------------------- ------------ ------------
TUSCARORA BALANCE SHEET
ASSETS
Cash and cash equivalents 1.1 7.1
Other current assets 2.1 3.2
Plant, property and equipment, net 121.3 115.7
Other assets 1.6 2.5
------------ ------------
126.1 128.5
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS'
EQUITY
Current liabilities 7.7 8.9
Reserves and deferred credits - 12.0
Long-term debt 80.0 84.2
Partners' Equity
Partners' capital 37.9 23.4
Accumulated other comprehensive income 0.5 -
------------ ------------
126.1 128.5
------------ ------------
------------ ------------
Year ended December 31 (millions of dollars) 2001 2000
- -------------------------------------------------- ------------ ------------
TUSCARORA INCOME STATEMENT
Revenues 21.3 19.4
Costs and expenses (2.6) (2.4)
Depreciation (4.6) (4.4)
Financial charges (6.1) (6.0)
Other income 0.3 0.2
------------ ------------
Net income 8.3 6.8
------------ ------------
------------ ------------
NOTE 5 CREDIT FACILITIES AND LONG-TERM DEBT
On August 22, 2000, the Partnership entered into an unsecured three-year credit
facility (Revolving Credit Facility) with Bank One, NA, as agent 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
F-8
$24.5 million under the Revolving Credit Facility to fund a portion of the
purchase price of the 49% general partner interest in Tuscarora. At December 31,
2001 and 2000, the Partnership had borrowings of $21.5 million outstanding under
the Revolving Credit Facility. The fair value of the Revolving Credit Facility
approximates its carrying value because the interest rate is a floating rate.
The interest rate on the Revolving Credit Facility averaged 5.19% for the year
(2000 - 7.57%; 1999- nil) and was 3.02% at the end of the year (2000 - 7.62%;
1999- nil). Interest paid during the years ended December 31, 2001 and 2000 and
the period May 28 to December 31, 1999 was $1.2 million, $0.5 million and nil,
respectively.
On May 28, 2001, the Partnership renewed its $40.0 million unsecured
two-year revolving credit facility (TransCanada Credit Facility), with
TransCanada PipeLine USA Ltd., an affiliate of the General Partner. The
TransCanada 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, Tuscarora and any other entity in which the Partnership directly or
indirectly acquires an interest, to fund working capital and for other general
business purposes, including temporary funding of cash distributions to
partners, if necessary. At December 31, 2001 and 2000, the Partnership had no
amount outstanding under the TransCanada Credit Facility.
NOTE 6 PARTNERS' CAPITAL AND CASH 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 cash 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. 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 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. The
incremental incentive distributions payable to the General Partner are 15%, 25%,
and 50% of all quarterly distributions of Available Cash that exceed target
levels of $0.45, $0.5275, $0.69, respectively, per unit. For the years ended
December 31, 2001 and 2000 and the period May 28 to December 31, 1999, the
Partnership distributed $1.975 , $1.85 and $1.068, respectively, per unit. The
distributions for the year ended December 31, 2001 and 2000 and the period May
28 to December 31, 1999 included incentive distributions to the General Partner
in the amount of $0.6 million, $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
F-9
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 December 31,
------------------------------ May 28 (1) -
(thousands of dollars, except per unit amounts) 2001 2000 December 31, 1999
- --------------------------------------------------------------- --------------- -------------- --------------------
Net income 43,522 37,224 20,224
--------------- -------------- --------------------
Net income allocated to General Partner (870) (745) (405)
Adjustment to reflect incentive distribution income allocation (567) (159) -
--------------- -------------- --------------------
(1,437) (904) (405)
--------------- -------------- --------------------
Net income allocable to units 42,085 36,320 19,819
Weighted average units outstanding (thousands) 17,500 17,500 17,500
--------------- -------------- --------------------
Net income per unit $2.40 $2.08 $1.13
--------------- -------------- --------------------
--------------- -------------- --------------------
(1) Commencement of operations.
NOTE 8 RELATED PARTY TRANSACTIONS
The Partnership does not have any employees. The management and operating
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 $0.5 million, $0.7
million and $0.2 million for the years ended December 31, 2001 and 2000 and for
the period from May 28 to December 31, 1999, respectively. Such costs include
(i) personnel costs (such as salaries and employee benefits), (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.
NOTE 9 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth selected financial data for the four quarters of 2001
and 2000.
F-10
Quarter ended
(thousands of dollars, except per unit amounts) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- ---------------- --------------- -----------------
2001
Equity Income 11,678 10,357 11,503 12,208
Net Income 10,963 9,793 10,972 11,794
Net Income per Unit $0.61 $0.54 $0.60 $0.65
Cash Distributions (1) 8,550 9,066 9,066 9,066
2000
Equity Income 8,623 8,824 10,514 11,101
Net Income 8,344 8,533 9,980 10,367
Net Income per Unit $0.47 $0.48 $0.55 $0.58
Cash Distributions (1) 8,036 8,036 8,550 8,550
(1) Cash distributions are paid within 45 days after the end of each quarter.
NOTE 10 ACCOUNTING PRONOUNCEMENTS
In the third quarter of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 141 requires all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. The Partnership did not enter into
any business combinations subsequent to June 30, 2001.
SFAS No. 142 modifies the accounting and reporting of goodwill and intangible
assets. It requires entities to discontinue the amortization of goodwill,
reallocate goodwill among its reporting segments and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Subsequent to the initial adoption, goodwill shall be tested for
impairment annually or more frequently if circumstances indicate a possible
impairment. For goodwill and intangible assets on the balance sheet at June 30,
2001, the provisions of SFAS No. 142 must be applied to fiscal years beginning
after December 15, 2001. At December 31, 2001, the Partnership's balance sheet
does not include any goodwill.
SFAS No. 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for fiscal years beginning after June
15, 2002, with earlier application encouraged. The Partnership is in the process
of evaluating the impact of the application of this pronouncement on its
investments in Northern Border Pipeline and Tuscarora.
SFAS No. 144 establishes one accounting model to be used for long-lived assets
to be disposed of by sale, and broadens the presentation of discontinued
operations to include more disposal transactions. SFAS No. 144 supercedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB Opinion No. 30. This standard is effective for fiscal years
beginning after December 15, 2001. The Partnership is in the process of
evaluating the application of this pronouncement on its investments in Northern
Border Pipeline and Tuscarora.
F-11
NOTE 11 SUBSEQUENT EVENTS
On January 18, 2002, the Board of Directors of the General Partner declared a
cash distribution of $0.50 per unit related to the three months ended December
31, 2001. The $9.1 million distribution is payable on February 14, 2002 in the
following manner: $7.3 million to the holders of common units as of the close of
business on January 31, 2001, $1.4 million to the General Partner as holder of
the subordinated units, and $0.3 million to the General Partner as holder of
incentive distribution rights and in respect of its 2% general partner interest.
F-12
INDEPENDENT AUDITORS' REPORT
To Northern Border Pipeline Company:
We have audited the accompanying balance sheet of Northern Border Pipeline
Company (a Texas partnership) as of December 31, 2001, and the related
statements of income, comprehensive income, cash flows and changes in partners'
equity for the year then ended. 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 audit. The accompanying
financial statements of Northern Border Pipeline Company as of December 31, 2000
and for the years ended December 31, 2000 and 1999 were audited by other
auditors whose report thereon dated January 22, 2001 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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, 2001 and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 6 to the financial statements, Northern Border Pipeline
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which was subsequently amended by SFAS no. 137 and SFAS No. 138.
KPMG LLP
Omaha, Nebraska,
March 8, 2002
F-13
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 the related
statements of income, comprehensive income, cash flows and changes in partners'
equity for each of the two 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 the results of its operations and its cash
flows for each of the two 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-14
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
-------------------------------
ASSETS 2001 2000
- ------ ---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 11,003 $ 29,046
Accounts receivable (net of allowance for
doubtful accounts of $1,925 and $0 in
2001 and 2000, respectively) 29,249 27,128
Related party receivables (net of allowance
for doubtful accounts of $1,251 and $0 in
2001 and 2000, respectively) 455 6,008
Materials and supplies, at cost 4,873 4,710
Prepaid expenses and other 1,731 247
---------- ----------
Total current assets 47,311 67,139
---------- ----------
NATURAL GAS TRANSMISSION PLANT
In service 2,429,662 2,364,487
Construction work in progress 2,891 14,405
---------- ----------
Total property, plant and equipment 2,432,553 2,378,892
Less: Accumulated provision for
depreciation and amortization 746,888 691,900
---------- ----------
Property, plant and equipment, net 1,685,665 1,686,992
---------- ----------
OTHER ASSETS 18,893 14,374
---------- ----------
Total assets $1,751,869 $1,768,505
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 350,000 $ 41,000
Accounts payable 3,089 26,087
Related party payables 2,204 --
Accrued taxes other than income 27,167 28,137
Accrued interest 16,526 14,401
Accumulated provision for rate refunds -- 4,726
---------- ----------
Total current liabilities 398,986 114,351
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 513,666 822,267
---------- ----------
RESERVES AND DEFERRED CREDITS 5,623 4,892
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' EQUITY
Partners' capital 824,421 826,995
Accumulated other comprehensive income 9,173 --
---------- ----------
Total partners' equity 833,594 826,995
---------- ----------
Total liabilities and partners' equity $1,751,869 $1,768,505
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
F-15
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
-------- -------- --------
OPERATING REVENUES
Operating revenues $315,145 $334,978 $300,664
Provision for rate refunds (2,057) (23,956) (2,317)
-------- -------- --------
Operating revenues, net 313,088 311,022 298,347
-------- -------- --------
OPERATING EXPENSES
Operations and maintenance 33,695 41,548 38,708
Depreciation and amortization 57,516 57,328 51,908
Taxes other than income 25,636 27,979 30,320
-------- -------- --------
Operating expenses 116,847 126,855 120,936
-------- -------- --------
OPERATING INCOME 196,241 184,167 177,411
-------- -------- --------
INTEREST EXPENSE
Interest expense 56,262 65,489 60,312
Interest expense capitalized (911) (328) (98)
-------- -------- --------
Interest expense, net 55,351 65,161 60,214
-------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for equity funds used
during construction 925 305 101
Other income, net (1,357) 7,753 1,262
-------- -------- --------
Other income (expense) (432) 8,058 1,363
-------- -------- --------
NET INCOME TO PARTNERS $140,458 $127,064 $118,560
-------- -------- --------
-------- -------- --------
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Net income to partners $140,458 $127,064 $118,560
Other comprehensive income:
Transition adjustment from
adoption of SFAS No. 133 10,347 -- --
Change associated with current
period hedging transactions (1,174) -- --
-------- -------- --------
Total comprehensive income $149,631 $127,064 $118,560
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
F-16
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income to partners $ 140,458 $ 127,064 $ 118,560
--------- --------- ---------
Adjustments to reconcile net income to
partners to net cash provided by
operating activities:
Depreciation and amortization 57,881 57,682 51,962
Provision for rate refunds 2,036 25,082 2,317
Rate refunds paid (6,762) (22,673) --
Allowance for equity funds used
during construction (925) (305) (101)
Reserves and deferred credits 736 (5,806) 880
Changes in components of working capital 4,583 (3,002) (2,112)
Other (685) (2,075) (40)
--------- --------- ---------
Total adjustments 56,864 48,903 52,906
--------- --------- ---------
Net cash provided by operating activities 197,322 175,967 171,466
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment, net (54,659) (15,523) (101,678)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (143,032) (134,904) (127,163)
Issuance of long-term debt, net 385,400 75,000 289,026
Retirement of long-term debt (374,000) (111,000) (263,000)
Increase (decrease) in bank overdrafts (22,437) 22,437 --
Proceeds received (paid) upon termination of
derivatives (4,070) -- 12,896
Long-term debt financing costs (2,567) (241) (1,626)
--------- --------- ---------
Net cash used in financing activities (160,706) (148,708) (89,867)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (18,043) 11,736 (20,079)
Cash and cash equivalents-beginning of year 29,046 17,310 37,389
--------- --------- ---------
Cash and cash equivalents-end of year $ 11,003 $ 29,046 $ 17,310
--------- --------- ---------
--------- --------- ---------
- -------------------------------------------------------------------------------------------------
Changes in components of working capital:
Accounts receivable $ 3,432 $ (6,087) $ (8,145)
Materials and supplies (163) (1,767) (10)
Prepaid expenses and other (1,484) 455 (275)
Accounts payable 1,643 1,585 (4,598)
Accrued taxes other than income (970) 1,847 6,462
Accrued interest 2,125 (2,103) 4,741
Over/under recovered cost of service -- 3,068 (287)
--------- --------- ---------
Total $ 4,583 $ (3,002) $ (2,112)
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
F-17
NORTHERN BORDER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
TC NORTHERN
TRANSCANADA PIPELINES BORDER ACCUMULATED
BORDER TRANSCAN INTERMEDIATE INTERMEDIATE OTHER TOTAL
PIPELINE NORTHERN LIMITED LIMITED COMPREHENSIVE PARTNERS'
LTD. LTD. PARTNERSHIP PARTNERSHIP INCOME EQUITY
----------- -------- ------------ ------------ ------------- ---------
Partners' Equity 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' Equity 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' Equity at
December 31, 2000 -- -- 248,098 578,897 -- 826,995
Net income to
partners -- -- 42,138 98,320 -- 140,458
Transition adjustment
from adoption of
SFAS No. 133 -- -- -- -- 10,347 10,347
Change associated
with current period
hedging transactions -- -- -- -- (1,174) (1,174)
Distributions paid -- -- (42,910) (100,122) -- (143,032)
-------- --------- -------- --------- ------- ---------
Partners' Equity at
December 31, 2001 $ -- $ -- $247,326 $ 577,095 $ 9,173 $ 833,594
-------- --------- -------- --------- ------- ---------
-------- --------- -------- --------- ------- ---------
The accompanying notes are an integral part of these financial statements.
F-18
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
Northern Border Pipeline Company (Northern Border Pipeline) is a Texas
general partnership formed in 1978. The ownership percentages of the
partners in Northern Border Pipeline (Partners) at December 31, 2001 and
2000, 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 1,249-mile natural gas transmission
pipeline system extending from the United States-Canadian border near Port
of Morgan, Montana, to a terminus near North Hayden, Indiana.
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. (Williams), 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. 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, 2001, 2000, and 1999,
Northern Border Pipeline's charges from the Operator totaled approximately
$29.5 million, $31.7 million and $29.7 million, respectively. Additionally,
Northern Border Pipeline has utilized Enron affiliates for management on
pipeline expansion and extension projects. See Note 10 for a discussion of
Northern Border Pipeline's relationships with Enron and developments
involving Enron.
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 of America 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.
F-19
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 accounting principles generally accepted in the United States of
America for nonregulated entities. At December 31, 2001 and 2000,
Northern Border Pipeline has reflected regulatory assets of
approximately $11.5 million and $12.4 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 five to 44 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.
(D) 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 $336 million and $326 million at December 31, 2001 and
2000, respectively, and are primarily related to accelerated
depreciation and other plant-related differences.
(E) 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-20
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION AND
AMORTIZATION
Property, plant and equipment is stated at original cost. During
periods of construction, Northern Border Pipeline is permitted to
capitalize an allowance for funds used during construction, which
represents the estimated costs of funds used for construction
purposes. 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 2001, 2000 and 1999 were
2.25%, 2.25% and 2.0%, respectively. Composite rates are applied to
all other functional groups of property having similar economic
characteristics.
(G) 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. Northern Border Pipeline does not use these
instruments for trading purposes. See Note 6 for a discussion of
Northern Border Pipeline's accounting for derivative instruments and
hedging activities.
(H) RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements
for prior years to conform with the current year presentation.
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 1999 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.
F-21
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. RATES AND REGULATORY ISSUES (CONTINUED)
RATE CASE (CONTINUED)
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 1999
rate case. The settlement was approved by the FERC in December 2000. Under
the approved settlement, effective December 1, 1999, shippers began paying
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, based on the volumes of gas actually transported on the system.
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. During the first quarter of
2001, Northern Border Pipeline paid the remaining refund obligation to its
shippers totaling approximately $6.8 million, which related to periods
through January 2001.
CERTIFICATE APPLICATION
On March 16, 2000, the FERC issued an order granting Northern Border
Pipeline's application for a certificate to construct and operate an
expansion and extension of its pipeline system into Indiana (Project 2000).
The facilities for Project 2000 were placed into service on October 1,
2001. The capital expenditures for the project are expected to be
approximately $63 million, of which $60.5 million had been incurred through
December 31, 2001.
4. TRANSPORTATION SERVICE AGREEMENTS
Operating revenues are collected pursuant to the FERC tariff through
firm transportation service agreements. The firm service agreements
extend for various terms with termination dates that range from March
2002 to December 2013. Northern Border Pipeline also has interruptible
service agreements with numerous other shippers. Under the approved
settlement of the rate case discussed in Note 3, 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. Northern Border Pipeline is permitted to
retain revenue from interruptible transportation service to offset any
decontracted firm service. After October 31, 2003, all revenues from
interruptible transportation service will be retained by Northern Border
Pipeline.
Under the capacity release provisions of Northern Border Pipeline's FERC
tariff, shippers are allowed to release all or part of their capacity
F-22
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. TRANSPORTATION SERVICE AGREEMENTS (CONTINUED)
either permanently for the full term of the contract or temporarily. A
temporary capacity release does not relieve the original contract
shipper from its payment obligations if the replacement shipper fails to
pay for the capacity temporarily released to it.
At December 31, 2001, Northern Border Pipeline's largest shipper, Mirant
Americas Energy Marketing, LP (Mirant) is obligated for approximately 33.7%
of the contracted firm capacity, which consists of the following: 24.4%
from temporary releases of firm capacity from Pan-Alberta Gas (U.S.) Inc.
(PAGUS) and 9.3% from permanent releases of firm capacity from TransCanada
Energy Marketing USA, Inc. (TransCanada Energy), an affiliate of TC
PipeLines. The PAGUS firm service agreements expire in October 2003. The
permanent release to Mirant commenced in December 2001 and the firm service
agreements expire in October 2006 and December 2008. The obligations of
Mirant and PAGUS are supported by various credit support arrangements,
including among others, letters of credit and escrow accounts and an
upstream capacity transfer agreement. Operating revenues from the Mirant
and PAGUS firm service agreements and interruptible service agreements for
the years ended December 31, 2001, 2000 and 1999 were $80.7 million, $78.2
million and $76.6 million, respectively.
Some of Northern Border Pipeline's shippers are affiliated with its general
partners. Enron North America (ENA), a wholly-owned subsidiary of Enron,
has firm service agreements representing 3.5% of capacity, a portion of
which (1.1%) has been temporarily released to a third party until October
31, 2002 (see Note 10). Transcontinental Gas Pipe Line Corporation, a
subsidiary of Williams, holds a firm service agreement representing 0.7% of
capacity. The firm service agreements with affiliates extend for various
terms with termination dates that range from October 2002 to May 2009.
Operating revenues from the affiliated firm service agreements and
interruptible service agreements, including revenues from TransCanada
Energy when it held capacity on Northern Border Pipeline, were $52.1
million, $58.5 million and $52.5 million for the years ended December 31,
2001, 2000 and 1999, respectively.
5. CREDIT FACILITIES AND LONG-TERM DEBT
Detailed information on long-term debt is as follows:
December 31,
(Thousands of dollars) 2001 2000
------------------------------------------ -------- --------
1992 Pipeline Senior Notes - average 8.53%
and 8.49% at December 31, 2001 and 2000,
respectively, due from 2000 to 2003 $143,000 $184,000
Pipeline Credit Agreement
Term loan - average 2.46% and 6.95% at
December 31, 2001 and 2000, respectively,
due 2002 272,000 424,000
Five-year revolving credit facility -
average 6.87% at December 31, 2000 -- 45,000
1999 Pipeline Senior Notes - 7.75%, due 2009 200,000 200,000
2001 Pipeline Senior Notes - 7.50%, due 2021 250,000 --
Unamortized proceeds from termination
of interest rate forward agreements -- 11,107
Unamortized debt discount (1,334) (840)
-------- --------
Total 863,666 863,267
Less: Current maturities of long-term debt 350,000 41,000
-------- --------
Long-term debt $513,666 $822,267
-------- --------
-------- --------
F-23
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
5. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
In September 2001, Northern Border Pipeline completed a private offering of
$250 million of 7.50% Senior Notes due 2021, which notes were subsequently
exchanged in a registered offering for notes with substantially identical
terms (2001 Pipeline Senior Notes). The proceeds from the 2001 Pipeline
Senior Notes were used to reduce indebtedness outstanding under the
Pipeline Credit Agreement.
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 Pipeline Senior Notes). Also in August 1999, Northern Border
Pipeline received approximately $12.9 million from the termination of
interest rate forward agreements, which is being amortized against interest
expense over the life of the 1999 Pipeline 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 the Pipeline Credit Agreement.
In June 1997, Northern Border Pipeline entered into a credit agreement
(Pipeline Credit Agreement) with certain financial institutions, which is
comprised of a $100 million five-year revolving credit facility and a $272
million term loan, both 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 aggregate principal commitment amount of $372
million.
Interest paid, net of amounts capitalized, during the years ended December
31, 2001, 2000 and 1999 was $53.9 million, $68.0 million and $55.5 million,
respectively.
Aggregate required repayments of long-term debt are as follows: $350
million and $65 million for 2002 and 2003, respectively. There are no
required repayment obligations for either 2004, 2005 or 2006.
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,
2001 and 2000, respectively, $110 million and $136 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 Pipeline Senior Notes, 1999 Pipeline Senior Notes and 2001
Pipeline Senior Notes was approximately $623 million and $404 million at
December 31, 2001 and 2000, respectively. Northern Border Pipeline
F-24
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
5. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
presently intends to maintain the current schedule of maturities for the
1992 Pipeline Senior Notes, 1999 Pipeline Senior Notes and the 2001
Pipeline Senior Notes, 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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
requires 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.
Northern Border Pipeline adopted SFAS No. 133 beginning January 1, 2001.
As a result of the adoption of SFAS No. 133, Northern Border Pipeline
reclassified approximately $11.1 million from long-term debt to accumulated
other comprehensive income related to unamortized proceeds from the
termination of interest rate swap agreements. Also upon adoption of SFAS
No. 133, Northern Border Pipeline recorded a non-cash loss in accumulated
other comprehensive income of approximately $0.8 million, related to its
outstanding interest rate swap agreement with a notional amount of $40
million, which terminated in November 2001.
In March 2001, Northern Border Pipeline entered into forward starting
interest rate swaps with notional amounts totaling $200 million related to
the planned issuance of 10-year and 30-year fixed rate debt. Upon issuance
of the 2001 Pipeline Senior Notes in September 2001, Northern Border
Pipeline paid approximately $4.1 million to terminate the swaps, which was
recorded in accumulated other comprehensive income. The swaps were
designated as cash flow hedges as they were entered into to hedge the
fluctuations in Treasury rates and spreads between the execution date of
the swaps and the issuance of the 2001 Pipeline Senior Notes.
During the year ended December 31, 2001, Northern Border Pipeline amortized
approximately $1.2 million related to the terminated interest rate swap
agreements as a reduction to interest expense from accumulated other
comprehensive income. Northern Border Pipeline expects to amortize a
comparable amount in 2002.
In November 2001, Northern Border Pipeline entered into forward starting
interest rate swaps with notional amounts totaling $150 million related
to the planned issuance of five-year senior notes. The swaps have been
designated as cash flow hedges as they were entered into to hedge the
fluctuations in Treasury rates and spreads between the execution date of
the swaps and the issuance date of the senior notes, which is expected
to occur in the second quarter of 2002. At December 31, 2001, Northern
Border Pipeline recognized a non-cash gain in accumulated other
F-25
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
comprehensive income of approximately $3.4 million, with a corresponding
amount reflected in other assets on the accompanying balance sheet.
7. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
Total capital expenditures for 2002 are estimated to be $12 million. This
includes approximately $2.5 million for Project 2000 (see Note 3). Funds
required to meet the capital expenditures for 2002 are anticipated to be
provided primarily from debt borrowings and operating cash flows.
ENVIRONMENTAL MATTERS
Northern Border Pipeline is not aware of any material contingent
liabilities with respect to compliance with applicable environmental laws
and regulations.
OTHER
On July 31, 2001, the Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation (Tribes) filed a lawsuit in Tribal Court against Northern
Border Pipeline to collect more than $3 million in back taxes, together
with interest and penalties. The lawsuit relates to a utilities tax on
certain of Northern Border Pipeline's properties within the Fort Peck
Reservation. Based on recent decisions by the federal courts and other
defenses, Northern Border Pipeline believes that the Tribes do not have the
authority to impose the tax and that the lawsuit will not have a material
adverse impact on Northern Border Pipeline.
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.
8. QUARTERLY FINANCIAL DATA (Unaudited)
Operating Operating Net Income
(In thousands) Revenues, Net Income to Partners
-------------- ------------- --------- -----------
2001
First Quarter $77,040 $50,318 $35,889
Second Quarter 76,950 46,706 31,632
Third Quarter 77,932 48,083 35,537
Fourth Quarter 81,166 51,134 37,400
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
F-26
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
9. ACCOUNTING PRONOUNCEMENTS
In the third quarter of 2001, the Financial Accounting Standards Board
issued SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, with earlier application encouraged.
Northern Border Pipeline is in the process of evaluating the application of
this pronouncement.
SFAS No. 144 establishes one accounting model to be used for long-lived
assets to be disposed of by sale and broadens the presentation of
discontinued operations to include more disposal transactions. SFAS No. 144
supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30. This standard is effective for
fiscal years beginning after December 15, 2001. Northern Border Pipeline
adopted SFAS No. 144 effective January 1, 2002. Northern Border Pipeline
does not expect the adoption of SFAS No. 144 to have a material impact on
its financial position or results of operations.
10. RELATIONSHIPS WITH ENRON
In December 2001, Enron and certain of its subsidiaries filed voluntary
petitions for Chapter 11 reorganization with the U.S. Bankruptcy Court.
Northern Plains was not included in the bankruptcy filing and management
believes that Northern Plains will continue to be able to meet its
operational and administrative service obligations under the existing
operating agreement. ENA, a subsidiary of Enron, was included in the
bankruptcy filing. As indicated in Note 4, ENA has firm service agreements
representing approximately 3.5% of contracted capacity, a portion of which
(1.1%) has been temporarily released to a third party until October 31,
2002. Northern Border Pipeline recorded a bad debt expense of approximately
$1.3 million representing ENA's unpaid November and December 2001
transportation, which is included in operations and maintenance expense on
the statement of income. ENA has not assumed or rejected these contracts,
but its ability to use the capacity has been suspended until ENA provides
adequate assurance of credit support and payment. The third party that
holds the 1.1% of capacity through October 31, 2002 has filed a complaint
with the FERC requesting, in effect, that its contract be deemed
terminated as a consequence of ENA's filing for bankruptcy protection.
Management believes this shipper's contract will remain in effect until
October 31, 2002. For 2002, the estimated financial exposure for ENA's
firm service agreement is approximately $9 million. Management believes
that even if ENA continues to fail to perform its obligations under the
firm service agreements, it will not have a material adverse impact on
Northern Border Pipeline's financial condition and results of operations.
Management plans to continue to monitor developments at Enron, to continue
to assess the impact on Northern Border Pipeline of its existing agreements
and relationships with Enron and to take appropriate action to protect the
interests of Northern Border Pipeline.
11. 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 2001 of approximately $39.2 million was paid
February 1, 2002.
F-27
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To Northern Border Pipeline Company:
We have audited in accordance with auditing standards generally accepted in the
United States of America, the financial statements of Northern Border Pipeline
Company included in this Form 10-K and have issued our report thereon dated
March 8, 2002. Our audit was 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.
KPMG LLP
Omaha, Nebraska,
March 8, 2002
S-1
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 as of December 31, 2000, and for each of
the two years in the period ended December 31, 2000, 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
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SCHEDULE II
NORTHERN BORDER PIPELINE COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(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
2001 $1,800 $ 731 $-- $ -- $2,531
2000 $7,376 $1,800 $-- $7,376 $1,800
1999 $6,726 $ 650 $-- $ -- $7,376
Allowance for
doubtful accounts
2001 $ -- $3,176 $-- $ -- $3,176
S-3