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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Number)
110 TURNPIKE ROAD, SUITE 203
WESTBOROUGH, MASSACHUSETTS 01581
- --------------------------------------- ----------------------
(Address of principal executive offices) (Zip code)
508-871-7046
----------------------------------------------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes /X/ No / /
As of August 14, 2003 there were 16,563,564 of the registrant's common
units outstanding.
TC PIPELINES, LP
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Income - Three and six months ended
June 30, 2003 and 2002 3
Statement of Comprehensive Income - Three and six months
ended June 30, 2003 and 2002 3
Balance Sheet - June 30, 2003 and December 31, 2002 4
Statement of Cash Flows - Three and six months ended
June 30, 2003 and 2002 4
Notes to Condensed Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations of TC PipeLines, LP 11
Liquidity and Capital Resources of TC PipeLines, LP 14
Results of Operations of Northern Border Pipeline Company 15
Liquidity and Capital Resources of Northern Border
Pipeline Company 21
Results of Operations of Tuscarora Gas Transmission Company 25
Liquidity and Capital Resources of Tuscarora Gas
Transmission Company 28
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 29
ITEM 4. Controls and Procedures 30
PART II. OTHER INFORMATION
ITEM 5. Other Information 31
ITEM 6. Exhibits and Reports on Form 8-K 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TC PIPELINES, LP
STATEMENT OF INCOME
(UNAUDITED) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Equity Income from Investment in Northern Border Pipeline 11.3 11.6 22.3 22.9
Equity Income from Investment in Tuscarora 1.2 1.0 2.5 2.1
General and Administrative Expenses (0.4) (0.3) (0.8) (0.7)
Financial Charges (0.1) (0.1) (0.1) (0.2)
---------------------------------------------------------------
Net Income 12.0 12.2 23.9 24.1
---------------------------------------------------------------
---------------------------------------------------------------
NET INCOME ALLOCATION
Common units 10.3 9.8 20.6 19.5
Subordinated units 1.3 1.9 2.5 3.7
General partner 0.4 0.5 0.8 0.9
---------------------------------------------------------------
12.0 12.2 23.9 24.1
---------------------------------------------------------------
---------------------------------------------------------------
Net Income per Unit $0.66 $0.67 $1.32 $1.33
---------------------------------------------------------------
---------------------------------------------------------------
Units Outstanding (millions) 17.5 17.5 17.5 17.5
---------------------------------------------------------------
---------------------------------------------------------------
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(MILLIONS OF DOLLARS) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Net Income 12.0 12.2 23.9 24.1
Other Comprehensive Income
Change associated with current period hedging transactions (0.2) (0.9) (0.3) (0.7)
---------------------------------------------------------------
Total Comprehensive Income 11.8 11.3 23.6 23.4
---------------------------------------------------------------
---------------------------------------------------------------
See accompanying Notes to Condensed Financial Statements.
3
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TC PIPELINES, LP
BALANCE SHEET
JUNE 30, 2003 December 31, 2002
(MILLIONS OF DOLLARS) (UNAUDITED) (AUDITED)
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash 2.3 6.4
Investment in Northern Border Pipeline 242.7 242.9
Investment in Tuscarora 39.5 36.7
--------------------------------------
284.5 286.0
--------------------------------------
--------------------------------------
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Accounts payable 0.5 0.6
Long-Term Debt 5.5 11.5
Partners' Equity
Common units 243.1 238.9
Subordinated units 27.5 27.0
General partner 6.1 5.9
Other comprehensive income 1.8 2.1
--------------------------------------
278.5 273.9
--------------------------------------
284.5 286.0
--------------------------------------
--------------------------------------
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30 (UNAUDITED)
(MILLIONS OF DOLLARS) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
CASH GENERATED FROM OPERATIONS
Net income 23.9 24.1
Add/(Deduct):
Distributions received in excess of equity income 0.6 1.2
Increase in operating working capital (0.1) (0.1)
--------------------------------------
24.4 25.2
--------------------------------------
INVESTING ACTIVITIES
Investment in Tuscarora (3.3) -
--------------------------------------
FINANCING ACTIVITIES
Distributions paid (19.2) (18.1)
Reduction of long-term debt (6.0) (10.0)
--------------------------------------
(25.2) (28.1)
--------------------------------------
DECREASE IN CASH (4.1) (2.9)
CASH, BEGINNING OF PERIOD 6.4 9.2
--------------------------------------
CASH, END OF PERIOD 2.3 6.3
--------------------------------------
--------------------------------------
See accompanying Notes to Condensed Financial Statements.
4
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TC PIPELINES, LP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
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. The Partnership commenced operations
on May 28, 1999.
The financial statements have been prepared by management in accordance
with accounting principles generally accepted in the United States. Other
comprehensive income recorded by TC PipeLines arises through its equity
investments in Northern Border Pipeline Company (Northern Border Pipeline) and
Tuscarora Gas Transmission Company (Tuscarora) and relates to cash flow hedges
transacted by Northern Border Pipeline and Tuscarora. Amounts are stated in
United States dollars.
Since a determination of many assets, liabilities, revenues and expenses is
dependent upon future events, the preparation of these financial statements
requires the use of estimates and assumptions which have been made using careful
judgment. In the opinion of management, these financial statements have been
properly prepared within reasonable limits of materiality and include all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the results of operations for the three and six months ended June 30,
2003 and 2002, the financial position as at June 30, 2003 and December 31, 2002
and cash flows for the six months ended June 30, 2003 and 2002.
The results of operations for the three and six months ended June 30, 2003
and 2002 are not necessarily indicative of the results that may be expected for
a full fiscal year. The interim financial statements should be read in
conjunction with the Partnership's financial statements and notes included in TC
PipeLines' Annual Report on Form 10-K for the year ended December 31, 2002.
NOTE 2 INVESTMENT IN NORTHERN BORDER PIPELINE COMPANY
The Partnership owns a 30% general partner interest in Northern Border Pipeline,
a partnership which 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. The remaining 70% partnership interest in Northern
Border Pipeline is held by Northern Border Partners, L.P., a publicly traded
limited partnership. The 2% general partnership interest in Northern Border
Partners, L.P. is controlled by affiliates of Enron Corp. (Enron), which hold a
1.65% general partner interest, and TransCanada PipeLines Limited (TransCanada),
which is a subsidiary of TransCanada Corporation, parent of TC PipeLines'
general partner, which holds the remaining 0.35% general partner interest.
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).
TC PipeLines uses the equity method of accounting for its investment in
Northern Border Pipeline. TC PipeLines' equity income for the three and six
months ended June 30, 2003 and 2002 represents 30% of the net income of Northern
Border Pipeline for the same periods. Retained earnings of TC PipeLines at June
30, 2003 and December 31, 2002 include undistributed earnings from Northern
Border Pipeline of $1.1 million and $1.3 million, respectively. The following
sets out summarized financial information representing 100% of the operations of
Northern Border Pipeline for the three and six months ended June 30, 2003 and
2002 and as at June 30, 2003 and December 31, 2002.
5
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TC PIPELINES, LP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(MILLIONS OF DOLLARS) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
NORTHERN BORDER PIPELINE INCOME STATEMENT
Revenues 80.7 80.2 160.6 158.3
Costs and expenses (17.4) (13.7) (34.1) (27.4)
Depreciation (14.4) (14.5) (28.9) (29.0)
Financial charges (11.6) (13.8) (23.4) (26.8)
Other income 0.3 0.3 0.2 1.1
----------------------------------------------------------------------
Net income 37.6 38.5 74.4 76.2
----------------------------------------------------------------------
----------------------------------------------------------------------
Northern Border Pipeline has recorded other comprehensive income of $(0.4)
million and $(2.9) million for the three months ended June 30, 2003 and 2002,
respectively, and $(0.8) million and $(1.6) million for the six months ended
June 30, 2003 and 2002, respectively.
JUNE 30, 2003 December 31, 2002
(MILLIONS OF DOLLARS) (UNAUDITED) (AUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
NORTHERN BORDER PIPELINE BALANCE SHEET
ASSETS
Cash and cash equivalents 27.9 25.4
Other current assets 35.4 40.8
Plant, property and equipment, net 1,609.4 1,636.0
Other assets 40.2 37.8
-------------------------------------------
1,712.9 1,740.0
-------------------------------------------
-------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities 109.4 130.9
Reserves and deferred credits 6.0 15.4
Long-term debt, net of current maturities 788.3 783.9
Partners' Equity
Partners' capital 803.2 803.0
Accumulated other comprehensive income 6.0 6.8
-------------------------------------------
1,712.9 1,740.0
-------------------------------------------
-------------------------------------------
NOTE 3 INVESTMENT IN TUSCARORA GAS TRANSMISSION COMPANY
The Partnership owns a 49% general partner interest in Tuscarora, a partnership
that owns a 240-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. The remaining
general partner interests in Tuscarora are held 50% by Sierra Pacific Resources
and 1% by TransCanada. The Tuscarora pipeline system is operated by Tuscarora
Gas Operating Company, a wholly owned subsidiary of Sierra Pacific Resources.
Sierra Pacific Power Company, a subsidiary of Sierra Pacific Resources, is
Tuscarora's largest shipper, accounting for approximately 68% of Tuscarora's
available capacity. Tuscarora is regulated by the FERC.
The Partnership uses the equity method of accounting for its investment in
Tuscarora. TC PipeLines' equity income for the three and six months ended June
30, 2003 and 2002 represents 49% of the net income of Tuscarora for the
6
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TC PIPELINES, LP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
same periods. Retained earnings of TC PipeLines at June 30, 2003 and December
31, 2002 include undistributed earnings from Tuscarora of $0.2 million and $0.8
million, respectively. The following sets out summarized financial information
representing 100% of the operations of Tuscarora for the three and six months
ended June 30, 2003 and 2002 and as at June 30, 2003 and December 31, 2002.
(UNAUDITED) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(MILLIONS OF DOLLARS) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
TUSCARORA INCOME STATEMENT
Revenues 7.3 5.6 14.7 11.2
Costs and expenses (1.3) (0.7) (2.5) (1.3)
Depreciation (1.6) (1.2) (3.2) (2.4)
Financial charges (1.7) (1.5) (3.3) (3.0)
Other income - 0.2 - 0.3
----------------------------------------------------------------------
Net income 2.7 2.4 5.7 4.8
----------------------------------------------------------------------
----------------------------------------------------------------------
Tuscarora has recorded other comprehensive income of less than $(0.1) million
for each of the three month periods ended June 30, 2003 and June 30, 2002, and
less than $(0.1) million and $(0.4) million for the six month periods ended June
30, 2003 and 2002, respectively.
JUNE 30, 2003 December 31, 2002
(MILLIONS OF DOLLARS) (UNAUDITED) (AUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
TUSCARORA BALANCE SHEET
ASSETS
Cash and cash equivalents 0.5 0.6
Other current assets 2.5 4.3
Plant, property and equipment, net 145.8 148.4
Other assets 1.2 1.2
-------------------------------------------
150.0 154.5
-------------------------------------------
-------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities 6.2 14.6
Long-term debt 83.1 85.3
Partners' Equity
Partners' capital 60.7 54.2
Accumulated other comprehensive income - 0.4
-------------------------------------------
150.0 154.5
-------------------------------------------
-------------------------------------------
NOTE 4 CREDIT FACILITIES AND LONG-TERM DEBT
On September 30, 2002, the Partnership renewed its unsecured credit facility
(Revolving Credit Facility) with Bank One, NA, as administrative agent of the
credit facility. Under the renewed Revolving Credit Facility, the Partnership
may borrow up to an aggregate principal amount of $20.0 million. Loans under the
Revolving Credit Facility bear interest at a floating rate. The Revolving Credit
Facility matures on July 31, 2004. Amounts borrowed may
7
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TC PIPELINES, LP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 business purposes. At June 30, 2003 and December 31, 2002, the
Partnership had borrowings of $5.5 million and $11.5 million, respectively,
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 2.7%
and 2.8% for the three months ended June 30, 2003 and 2002, respectively, 2.7%
and 2.8% for the six months ended June 30, 2003 and 2002, respectively, and was
2.6% and 2.7% at June 30, 2003 and December 31, 2002.
On May 28, 2003, 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
unitholders and the General Partner, if necessary. At June 30, 2003 and December
31, 2002 the Partnership had no amount outstanding under the TransCanada Credit
Facility.
NOTE 5 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:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Net income 12.0 12.2 23.9 24.1
--------------------------------------------------------------
Net income allocated to General Partner
General Partner interest (0.2) (0.2) (0.4) (0.5)
Incentive distribution income allocation (0.2) (0.3) (0.4) (0.4)
--------------------------------------------------------------
(0.4) (0.5) (0.8) (0.9)
--------------------------------------------------------------
Net income allocable to units 11.6 11.7 23.1 23.2
Weighted average units outstanding (MILLIONS) 17.5 17.5 17.5 17.5
--------------------------------------------------------------
Basic and diluted net income per unit $0.66 $0.67 $1.32 $1.33
--------------------------------------------------------------
--------------------------------------------------------------
8
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONCLUDED)
TC PIPELINES, LP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 SUBORDINATED UNIT CONVERSION
On August 1, 2003, 936,435 subordinated units, representing one-third of the
originally issued subordinated units held by the General Partner, upon
satisfaction of the tests set forth in the partnership agreement, automatically
converted into an equal number of common units as provided for in the
partnership agreement of TC PipeLines.
NOTE 7 DISTRIBUTIONS
On July 22, 2003, the Board of Directors of the General Partner declared a cash
distribution of $0.55 per unit for the three months ended June 30, 2003. The
distribution totaling approximately $10.1 million is payable on August 14, 2003
in the following manner: $8.6 million to the holders of common units as of the
close of business on July 31, 2003, $1.0 million to the General Partner as
holder of the subordinated units, $0.3 million to the General Partner as holder
of incentive distribution rights and $0.2 million to the General Partner in
respect of its 2% general partner interest.
NOTE 8 ACCOUNTING PRONOUNCEMENTS
SFAS No. 143, "Accounting for Asset Retirement Obligations," became effective
for the Partnership on January 1, 2003. As the Partnership does not directly own
any long-lived assets, no asset retirement obligation has been recorded on its
balance sheet.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" amends and clarifies accounting for derivative
instruments and for hedging activities under SFAS No. 133. As at June 30,
2003, TC PipeLines does not engage in any hedging activities and is not
affected by the changes resulting from this standard.
9
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TC PIPELINES, LP
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This quarterly report includes forward-looking statements regarding future
events and the future financial performance of TC PipeLines, LP. All
forward-looking statements are based on the Partnership's beliefs as well as
assumptions made by and information currently available to the Partnership.
Words such as "anticipates", "believes", "estimates", "expects", "plans",
"intends", "forecasts", and similar expressions, identify forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act. These statements reflect the Partnership's current views with respect to
future events and are subject to various risks, uncertainties and assumptions
including:
o regulatory decisions, particularly those of the Federal Energy
Regulatory Commission (FERC);
o majority control and operation of Northern Border Pipeline Company by
affiliates of Enron Corp., and as a result, any further developments
in the Enron bankruptcy proceedings, Enron's announcement to create a
new pipeline operating company, and bankruptcy-related regulatory
issues, including the potential denial by the Securities and Exchange
Commission (SEC) of Enron's application for exemption from the Public
Utility Holding Company Act and any impact of such denial on Northern
Border Pipeline Company and the Partnership;
o the failure of a shipper on either one of the Partnership's pipelines
to perform its contractual obligations;
o the ability of Northern Border Pipeline Company to recontract its
capacity;
o cost of acquisitions;
o future demand for natural gas;
o overcapacity in the industry;
o conflicts of interest between TransCanada, the owner of the
Partnership's general partner, on the one hand, and the Partnership,
on the other hand; and
o prevailing economic conditions, particularly conditions of the capital
and equity markets;
and other risks discussed in the Partnership's filings with the SEC,
including the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2002. If one or more of these risks or uncertainties
materialize, or if the underlying assumptions prove incorrect, actual results
may vary materially from those described in the forward-looking statements.
10
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
RESULTS OF OPERATIONS OF TC PIPELINES, LP
TC PipeLines, LP was formed in 1998 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, all Delaware limited
partnerships, are collectively referred to herein as TC PipeLines or the
Partnership. TC PipeLines GP, Inc., a wholly owned subsidiary of TransCanada
PipeLines Limited, which in turn is a subsidiary of TransCanada Corporation,
is the general partner of the Partnership. The Partnership owns a 30% general
partner interest in Northern Border Pipeline and a 49% general partner
interest in Tuscarora.
INVESTMENT IN NORTHERN BORDER PIPELINE COMPANY
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. The Partnership acquired its 30%
interest in Northern Border Pipeline from affiliates of its General Partner. The
Partnership has one member and 30% of the voting power of the Northern Border
Pipeline management committee.
The remaining 70% general partner interest in Northern Border Pipeline is held
by Northern Border Partners, L.P., a publicly traded limited partnership. The
general partners of Northern Border Partners are Northern Plains Natural Gas
Company and Pan Border Gas Company, both Enron affiliates, and Northwest Border
Pipeline Company, a subsidiary of TransCanada. TransCanada has one member and
12.25% of the voting power on the Northern Border Pipeline management committee.
TransCanada and TC PipeLines collectively have two members and an aggregate
42.25% of the voting power of the Northern Border Pipeline management committee.
Northern Plains and Pan Border collectively have two members and 57.75% of the
voting power of the Northern Border Pipeline management committee. Northern
Plains also serves as the operator of the Northern Border pipeline system.
INVESTMENT IN TUSCARORA GAS TRANSMISSION COMPANY
Tuscarora owns a 240-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. The
Partnership owns a 49% general partner interest in Tuscarora. The remaining
general partner interests in Tuscarora are held 50% by Sierra Pacific
Resources and 1% by TCPL Tuscarora Ltd., an indirect subsidiary of
TransCanada. Under the Tuscarora partnership agreement, voting power of the
management committee is allocated among Tuscarora's three general partners in
proportion to their general partner interests in Tuscarora. The Tuscarora
pipeline system is operated by Tuscarora Gas Operating Company, a wholly
owned subsidiary of Sierra Pacific Resources. Sierra Pacific Power Company, a
subsidiary of Sierra Pacific Resources, is Tuscarora's largest shipper,
accounting for approximately 68% of Tuscarora's available capacity.
On December 1, 2002, Tuscarora completed and placed into service an expansion of
its pipeline system. The expansion consisted of the addition of two compressor
stations, located along the Tuscarora mainline, as well as an 11-mile pipeline
extension from Tuscarora's previous terminus near Reno, Nevada to Wadsworth,
Nevada. The expansion increased Tuscarora's capacity to approximately 182
million cubic feet per day. The project had a capital budget of $43.0 million
but was completed at a capital cost of approximately $39.0 million. The new
capacity is contracted under long-term firm
11
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
contracts ranging from ten to fifteen years. Under the terms of these
transportation contracts, approximately 70% of the new contracted capacity came
into effect upon commencement of service. The remaining 30% of new contracted
capacity will come into effect by the end of 2003.
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 two and
three to the condensed financial statements. The equity method of accounting is
appropriate where the investor does not control but 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 interests in Northern Border Pipeline and Tuscarora are currently the
Partnership's only significant 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, respectively.
SECOND QUARTER 2003 COMPARED WITH SECOND QUARTER 2002
Net income decreased $0.2 million, or 2%, to $12.0 million for second quarter
2003, compared to $12.2 million for the same period last year. Net income for
second quarter 2003 reflects a decrease in equity income from Northern Border
Pipeline, partially offset by an increase in equity income from Tuscarora.
Equity income from the Partnership's investment in Northern Border Pipeline
decreased $0.3 million, or 3%, to $11.3 million for second quarter 2003,
compared to $11.6 million for the same period last year. Northern Border
Pipeline's second quarter 2003 revenues were higher than the same period last
year, as second quarter 2002 revenues reflected uncollected revenues associated
with the transportation capacity previously held by Enron North America, an
Enron subsidiary that filed for bankruptcy protection in December 2001 (the
impact on TC PipeLines' equity income was $0.1 million). Also, Northern Border
Pipeline's interest expense was lower during second quarter 2003 compared to the
same period last year due primarily to lower average interest rates and lower
average debt balances outstanding, resulting in an increase of $0.6 million to
the Partnership's equity income. These increases to the Partnership's equity
income were more than offset by increases in Northern Border Pipeline's
operations and maintenance expense as well as taxes other than income. The
increase in second quarter 2003 operations and maintenance expense is due
primarily to higher electric power costs for certain compressor stations (see
"Results of Operations of Northern Border Pipeline Company") as
12
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
compared to the same period last year. Operations and maintenance expense
also includes an increase in employee benefits expense in second quarter 2003
as compared to the same period last year. The increase in second quarter 2003
taxes other than income is due primarily to adjustments to ad valorem taxes.
Northern Border Pipeline periodically reviews and adjusts its estimates of ad
valorem taxes. Reductions to previous estimates in 2002 exceeded reductions
to previous estimates in 2003. The combined effect of these increased
expenses at Northern Border Pipeline during second quarter 2003 is a $1.1
million decrease to the Partnership's equity income.
Equity income from the Partnership's investment in Tuscarora increased $0.2
million, or 20%, to $1.2 million for second quarter 2003, compared to $1.0
million for the same period last year. Tuscarora's revenues increased primarily
due to new transportation contracts from the expansion, increasing the
Partnership's equity income by $0.8 million. This increase was partially
offset by increased operations and maintenance expense and increased
depreciation expense, both resulting from Tuscarora's expansion. The combined
effect of these increases in expenses reduced the Partnership's equity income
by $0.5 million.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Net income decreased $0.2 million, or 1%, to $23.9 million for the first six
months of 2003, compared to $24.1 million for the same period last year. Net
income for the first six months of 2003 reflects a decrease in equity income
from Northern Border Pipeline, partially offset by an increase in equity income
from Tuscarora.
Equity income from the Partnership's investment in Northern Border Pipeline
decreased $0.6 million, or 3%, to $22.3 million for the first six months of
2003, compared to $22.9 million for the same period last year. Northern Border
Pipeline's revenues for the first six months of 2003 were higher than the same
period last year, as the first six months of 2002 reflected uncollected revenues
associated with the transportation capacity previously held by Enron North
America (the impact on TC PipeLines' equity income was $0.5 million). Also,
Northern Border Pipeline's interest expense was lower during the first six
months of 2003 compared to the same period last year due primarily to lower
average interest rates and lower average debt balances outstanding, resulting in
an increase of $1.0 million to the Partnership's equity income. These increases
to the Partnership's equity income were more than offset by increases in
Northern Border Pipeline's operations and maintenance expense and taxes other
than income. The increase in 2003 operations and maintenance expense is
primarily due to higher electric power costs for certain compressor stations
(see "Results of Operations of Northern Border Pipeline Company") as compared
to the same period last year. Operations and maintenance expense also
includes an increase in employee benefits expense in the
13
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
first six months of 2003 as compared to the same period last year. The
increase in 2003 taxes other than income is due primarily to adjustments to
ad valorem taxes. Northern Border Pipeline periodically reviews and adjusts
its estimates of ad valorem taxes. Reductions to previous estimates in 2002
exceeded reductions to previous estimates in 2003. In addition, Northern
Border Pipeline received a fuel tax refund during the first six months of
2002, resulting in lower taxes other than income when compared to the same
period in 2003. The combined effect of these increased expenses at Northern
Border Pipeline during the first six months of 2003 is a $2.0 million
decrease to the Partnership's equity income.
Equity income from the Partnership's investment in Tuscarora increased $0.4
million, or 19%, to $2.5 million for the first six months of 2003, compared to
$2.1 million for the same period last year. Tuscarora's revenues increased
primarily due to new transportation contracts from the expansion, increasing
the Partnership's equity income by $1.7 million. This increase was partially
offset by increased operations and maintenance expense and increased
depreciation expense, both resulting from Tuscarora's expansion. The combined
effect of these increases in expenses reduced the Partnership's equity income
by $0.9 million.
LIQUIDITY AND CAPITAL RESOURCES OF TC PIPELINES, LP
EARLY CONVERSION OF SUBORDINATED UNITS
On August 1, 2003, 936,435 subordinated units, representing one-third of the
originally issued subordinated units held by the General Partner, upon
satisfaction of the tests set forth in the partnership agreement, automatically
converted into an equal number of common units as provided for in the
partnership agreement of TC PipeLines.
CASH DISTRIBUTION POLICY OF TC PIPELINES, LP
During the subordination period, which generally cannot end before June 30,
2004, the Partnership will make distributions of Available Cash as defined in
the partnership agreement 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
14
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
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.
2003 SECOND QUARTER CASH DISTRIBUTION
On July 22, 2003, the Board of Directors of the General Partner declared the
Partnership's 2003 second quarter cash distribution in the amount of $0.55 per
unit, a $0.025 per unit increase from the previous quarterly distribution. As a
result of this distribution increase, the second tier of incentive distributions
has been achieved. This distribution will be paid on August 14, 2003 to
unitholders of record as of July 31, 2003. The second quarter cash distribution,
totaling $10.1 million, will be paid in the following manner: $8.6 million to
common unitholders (including $1.5 million to an affiliate of TransCanada as
holder of 2,800,000 common units and $0.5 million to the General Partner as
holder of 936,435 common units), $1.0 million to the General Partner as holder
of the subordinated units, $0.3 million to the General Partner as holder of
incentive distribution rights, and $0.2 million to the General Partner in
respect of its 2% general partner interest.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities decreased $0.8 million, or 3%, to
$24.4 million for the first six months of 2003, compared to $25.2 million for
the same period last year. For the first six months of 2003 and 2002, the
Partnership received cash distributions of $22.3 million and $24.0 million,
respectively, from its equity investment in Northern Border Pipeline. The
Partnership also received cash distributions of $3.1 million and $2.2 million
from its equity investment in Tuscarora during the first six months of 2003 and
2002, respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
In the first six months of 2003, the Partnership made an equity contribution of
$4.1 million to Tuscarora related to Tuscarora's 2002 expansion project, which
was partially offset by a $0.8 million return of capital from Tuscarora.
CASH FLOWS FROM FINANCING ACTIVITIES
In the first six months of 2003, the Partnership paid $19.2 million in cash
distributions: $16.4 million to common unitholders (including $3.0 million to an
affiliate of TransCanada as holder of 2,800,000 common units and $1.0 million to
the General Partner as holder of 936,435 common units), $2.0 million to the
General Partner as holder of the subordinated units, $0.4 million to the General
Partner, as holder of incentive distribution rights, and $0.4 to the General
Partner in respect of its 2% general partner interest. This compares
15
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
to cash distributions of $18.1 million, which were paid by the Partnership in
the first six months of 2002.
On September 30, 2002, the Partnership renewed its unsecured credit facility
(Revolving Credit Facility) with Bank One, NA, as administrative agent of the
credit facility. Under the renewed Revolving Credit Facility, the Partnership
may borrow up to an aggregate principal amount of $20.0 million. Loans under the
Revolving Credit Facility bear interest, at the option of the Partnership, at a
one-, two-, three-, or six-month London Interbank Offered Rate (LIBOR) plus
1.25% or at a floating rate based on the higher of the federal funds effective
rate plus 0.5% or the prime rate. The Revolving Credit Facility matures on July
31, 2004. 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 business purposes. In the first six months of
2003 the Partnership made principal re-payments on the Revolving Credit Facility
of $6.0 million. At June 30, 2003 and August 14, 2003, the Partnership had
borrowings of $5.5 million outstanding under the Revolving Credit Facility. The
interest rate on the Revolving Credit Facility averaged 2.7% for the three and
six months ended June 30, 2003 and was 2.6% at June 30, 2003.
On May 28, 2003, 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 unitholders and the General Partner,
if necessary. At June 30, 2003 and August 14, 2003, the Partnership had no
amount outstanding under the TransCanada 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
during the remainder of 2003, TC PipeLines expects to fund these requirements
with operating cash flows, debt and/or equity.
RESULTS OF OPERATIONS OF NORTHERN BORDER PIPELINE COMPANY
CRITICAL ACCOUNTING POLICIES
Certain amounts included in or affecting Northern Border Pipeline's Financial
Statements and related disclosures must be estimated, requiring it to make
certain assumptions with respect to values or
16
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
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.
Certain of Northern Border Pipeline's accounting policies are of more
significance in its 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 accounting
principles generally accepted in the United States of America for nonregulated
entities. Northern Border Pipeline continually assesses whether the future
recovery of the regulatory assets is probable by considering such factors as
regulatory changes and the impact of competition. If future recovery ceases to
be probable, Northern Border Pipeline would be required to write-off the
regulatory assets at that time. At June 30, 2003, Northern Border Pipeline has
recorded regulatory assets of $10.0 million, which are being recovered from its
shippers over varying periods of time.
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 retirements or sales of entire
regulated operating units. The original cost of utility property retired is
charged to accumulated depreciation and amortization, net of salvage and cost of
removal.
Northern Border Pipeline's accounting for financial instruments follows SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that every derivative instrument 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. At June 30, 2003, Northern
Border Pipeline's balance sheet reflects a non-cash gain of approximately $24.6
million in derivative financial instruments with a corresponding increase in
long-term debt.
RESULTS OF OPERATIONS
The following sets out summarized financial information for Northern Border
Pipeline for the three and six months ended June 30, 2003 and 2002 and as at
June 30, 2003 and December 31, 2002. Amounts discussed represent 100% of the
operations of Northern Border Pipeline, in which the Partnership has held a 30%
interest since May 28, 1999.
17
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
(UNAUDITED) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(MILLIONS OF DOLLARS) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
NORTHERN BORDER PIPELINE INCOME STATEMENT
Revenues 80.7 80.2 160.6 158.3
Costs and expenses (17.4) (13.7) (34.1) (27.4)
Depreciation (14.4) (14.5) (28.9) (29.0)
Financial charges (11.6) (13.8) (23.4) (26.8)
Other income 0.3 0.3 0.2 1.1
--------------------------------------------------------------
Net income 37.6 38.5 74.4 76.2
--------------------------------------------------------------
--------------------------------------------------------------
JUNE 30, 2003 December 31, 2002
(MILLIONS OF DOLLARS) (UNAUDITED) (AUDITED)
- ---------------------------------------------------------------------------------------------------------------------
NORTHERN BORDER PIPELINE BALANCE SHEET
ASSETS
Cash and cash equivalents 27.9 25.4
Other current assets 35.4 40.8
Plant, property and equipment, net 1,609.4 1,636.0
Other assets 40.2 37.8
----------------------------------------------------
1,712.9 1,740.0
----------------------------------------------------
----------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities 109.4 130.9
Reserves and deferred credits 6.0 15.4
Long-term debt, net of current maturities 788.3 783.9
Partners' Equity
Partners' capital 803.2 803.0
Accumulated other comprehensive income 6.0 6.8
----------------------------------------------------
1,712.9 1,740.0
----------------------------------------------------
----------------------------------------------------
UPDATE ON COMPANY USE GAS FERC FILING
In February 2003, Northern Border Pipeline filed to amend its FERC tariff to
clarify the definition of company use gas, which is gas supplied by its shippers
for its operations, by adding detailed language to the broad categories that
comprise company use gas. Northern Border Pipeline had included in its
collection of company use gas, quantities that were equivalent to the cost of
electric power at its electric-driven compressor stations during the period of
June 2001 through January 2003. On March 27, 2003, the FERC issued an order
rejecting Northern Border Pipeline's proposed tariff sheet revision and
requiring refunds with interest within 90 days of the order. The refunds with
interest amounted to $10.3 million, which Northern Border Pipeline paid to
its shippers in May 2003.
SECOND QUARTER 2003 COMPARED WITH SECOND QUARTER 2002
Net income to partners decreased $0.9 million for the second quarter of 2003, as
compared to the same period in 2002. Northern Border Pipeline's net income was
reduced by higher operating expenses
18
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
partially offset by increases in operating revenues and reductions in interest
expense.
Operating revenues increased $0.5 million for the second quarter of 2003, as
compared to the same period in 2002. The 2002 results were impacted by
uncollected revenues associated with the transportation capacity previously held
by Enron North America Corp., which filed for Chapter 11 bankruptcy protection
in December 2001 (see "Update On The Impact Of Enron's Chapter 11 Filing On
Northern Border Pipeline's Business"). For the second quarter of 2002, the
revenues lost on this capacity totaled approximately $0.3 million.
Costs and expenses consist of operations and maintenance expenses and taxes
other than income. Operations and maintenance expenses increased $3.2 million
for the second quarter of 2003, as compared to the same period in 2002, due
primarily to the cost for electricity to power Northern Border Pipeline's
electric-driven compressors. Previously, Northern Border Pipeline included in
its collection of company-use gas quantities that were equivalent to the cost of
electric power. Operations and maintenance expenses also include an increase in
employee benefits expenses.
Taxes other than income increased $0.5 million for the second quarter of 2003,
as compared to the same period in 2002, due primarily to adjustments to ad
valorem taxes. Northern Border Pipeline periodically reviews and adjusts its
estimates of ad valorem taxes. Reductions to previous estimates in 2002 exceeded
reductions to previous estimates in 2003 by approximately $0.4 million.
Financial charges decreased $2.2 million for the second quarter of 2003, as
compared to the same period in 2002, due to a decrease in Northern Border
Pipeline's average interest rate as well as a decrease in average debt
outstanding.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Net income to partners decreased $1.8 million for the six months ended June 30,
2003, as compared to the same period in 2002. Northern Border Pipeline's net
income was reduced by higher operating expenses and decreases in other income
partially offset by increases in operating revenues and reductions in interest
expense.
Operating revenues increased $2.3 million for the six months ended June 30,
2003, as compared to the same period in 2002. The 2002 results were impacted by
uncollected revenues associated with the transportation capacity previously held
by Enron North America Corp., which filed for Chapter 11 bankruptcy protection
in December 2001 (see "Update On The Impact Of Enron's Chapter 11 Filing On
Northern Border
19
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
Pipeline's Business"). For the six months ended June 30, 2002, the revenues lost
on this capacity totaled approximately $1.8 million.
Costs and expenses consist of operations and maintenance expenses and taxes
other than income. Operations and maintenance expenses increased $4.9 million
for the six months ended June 30, 2003, as compared to the same period in 2002,
due primarily to the cost for electricity to power Northern Border Pipeline's
electric-driven compressors. Previously, Northern Border Pipeline included in
its collection of company-use gas quantities that were equivalent to the cost of
electric power. Operations and maintenance expenses also include an increase in
employee benefits expenses.
Taxes other than income increased $1.8 million for the six months ended June 30,
2003, as compared to the same period in 2002. The 2002 amount included a refund
of use taxes previously paid on exempt purchases. Both 2003 and 2002 also
include adjustments to ad valorem taxes. Northern Border Pipeline periodically
reviews and adjusts its estimates of ad valorem taxes. Reductions to previous
estimates in 2002 exceeded reductions to previous estimates in 2003 by
approximately $0.4 million.
Financial charges decreased $3.4 million for the six months ended June 30, 2003,
as compared to the same period in 2002, due to a decrease in Northern Border
Pipeline's average interest rate as well as a decrease in average debt
outstanding.
Other income decreased $0.9 million for the six months ended June 30, 2003, as
compared to the same period in 2002. The 2003 amount includes $0.3 million of
interest expense for refunds required by the order issued by the Federal Energy
Regulatory Commission on March 27, 2003 (see "Update on Company Use Gas FERC
Filing"). The 2002 amount included $0.6 million of income primarily related to
interest received on the refund of use taxes discussed previously.
20
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE COMPANY
DEBT AND CREDIT FACILITIES
Northern Border Pipeline's debt and credit facilities outstanding at June 30,
2003, are as follows:
Payments Due by Period
-----------------------------------
Current Portion Long-Term
Total (Less Than 1 Year) Portion
--------------------------------------------
(In Millions)
--------------------------------------------
1992 Series D Senior Notes, average 8.57%, due 2003 65.0 65.0 -
$175 million Pipeline Credit Agreement, average 2.18%, due 2005 90.0 - 90.0
6.25% Senior Notes due 2007 225.0 - 225.0
7.75% Senior Notes due 2009 200.0 - 200.0
7.50% Senior Notes due 2021 250.0 - 250.0
--------------------------------------------
Total 830.0 65.0 765.0
--------------------------------------------
--------------------------------------------
At June 30, 2003, Northern Border Pipeline had outstanding $65 million of Series
D Senior Notes issued in a $250 million private placement under a July 1992 note
purchase agreement. The Series D Senior Notes matured in August 2003. Northern
Border Pipeline borrowed under the Pipeline Credit Agreement to repay the Series
D Senior Notes.
Northern Border Pipeline has outstanding interest rate swap agreements with
notional amounts totaling $225 million that expire in May 2007. Under the
interest rate swap agreements, Northern Border Pipeline makes payments to
counterparties at variable rates based on the London Interbank Offered Rate and
in return receives payments based on a 6.25% fixed rate. At June 30, 2003, the
average effective interest rate on Northern Border Pipeline's interest rate swap
agreements was 2.38%.
Short-term liquidity needs will be met by operating cash flows and through the
Pipeline Credit Agreement. 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 were $77.8 million in the six months
ended June 30, 2003 as compared to $103.0 million for the comparable period in
2002. The decrease is primarily due to Northern Border Pipeline's refund to its
shippers for $10.3 million in 2003 and a reduction in prepayments in 2003 that
Northern Border Pipeline had required certain shippers make in 2002 for
transportation service.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $2.1 million for the six months ended June 30, 2003 as
compared to $3.2 million for the comparable period in 2002. The capital
expenditures for 2003 and 2002 were primarily related to renewals and
replacements of existing facilities.
Northern Border Pipeline advises that total capital expenditures for 2003 are
estimated to be $13 million, primarily related to renewals and replacements of
existing facilities. Northern Border Pipeline has also advised that it currently
anticipates funding its 2003 capital expenditures primarily by borrowing on debt
facilities and using operating cash flows.
21
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities were $73.2 million for the six months
ended June 30, 2003 as compared to $105.3 million for the comparable period in
2002. Distributions to partners were $74.2 million and $80.0 million in the six
months ended June 30, 2003 and 2002, respectively. The distributions for 2003
were reduced to reflect the impact of the refunds ordered by the FERC on March
27, 2003 in accordance with the currently approved distribution formula.
For the six months ended June 30, 2003 and 2002, borrowings on long-term debt
totaled $39.0 million and $316.9 million, respectively. The 2002 amount included
proceeds from the $225 million 6.25% Senior Notes, which were primarily used to
repay previously existing indebtedness. Total payments on debt were $38.0
million and $342.0 million in the six months ended June 30, 2003 and 2002,
respectively.
OUTLOOK UPDATE
As of June 30, 2003, approximately 74% of Northern Border Pipeline's capacity
was under contract at least through December 31, 2003. As a result of
commercial activity during July, 2003, essentially all of Northern Border
Pipeline's capacity is under contract at least through December 31, 2003 and,
assuming no extensions of existing contracts or execution of new contracts,
approximately 70% and 59% is under contract at least through December 31,
2004 and 2005, respectively.
On July 15, 2003, Northern Border Pipeline announced that Cargill, Incorporated
had finalized the assignment of all of the firm capacity formerly held by Mirant
Americas Energy Marketing, LP. This represents approximately 10% of Northern
Border Pipeline's contracted firm capacity and extends for terms into 2006 and
2008. Additionally, Cargill assumed the management services of Pan-Alberta Gas,
Ltd., previously performed by Mirant.
UPDATE ON THE IMPACT OF ENRON'S CHAPTER 11 FILING ON NORTHERN BORDER PIPELINE'S
BUSINESS
As more fully discussed in TC PipeLines' Annual Report on Form 10-K for the year
ended December 31, 2002, on December 2, 2001, Enron Corp. and certain of its
wholly-owned subsidiaries filed a voluntary petition for bankruptcy protection
under Chapter 11 of the United States Bankruptcy Code.
Northern Border Partners, L.P. owns a 70% general partner interest in Northern
Border Pipeline and TC PipeLines, LP owns the remaining 30%. Northern Plains
Natural Gas Company and Pan Border Gas Company, subsidiaries of Enron, are two
of the general partners of Northern Border Partners, L.P. Northern Plains is
also the operator of the Northern Border pipeline system. On June 25, 2003,
Enron announced the organization of CrossCountry Energy Corp., a newly formed
holding
22
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
company that will hold, among other things, Enron's ownership interests in
Northern Plains and Pan Border. Enron also announced it had filed a motion with
the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy
Court) to approve the proposed transfer of those ownership interests to
CrossCountry.
On July 11, 2003, Enron announced that Enron and its debtor-in-possession
subsidiaries (collectively with Enron, the Debtors) filed their proposed joint
Chapter 11 plan (the Plan) and related disclosure statement (the Disclosure
Statement) with the Bankruptcy Court. Under the Plan, it is anticipated that if
CrossCountry is not sold to a third party, as permitted by the Plan, its shares
would be distributed directly or indirectly to creditors of the Debtors.
Northern Border Pipeline advises that, at this time, it is unable to predict the
outcome of the Bankruptcy Court's ruling on Enron's motion or whether Enron's
Plan will be approved.
23
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
UPDATE TO POTENTIAL PUBLIC UTILITY HOLDING COMPANY ACT (PUHCA) REGULATION
Further to the discussion and disclosure of potential impacts to Northern
Border Pipeline provided in the Partnership's quarterly report on Form 10-Q
for the period ended March 31, 2003, Northern Border Pipeline advises that
on June 11, 2003, the SEC granted Enron's petition for review of the Initial
Decision by the administrative law judge which denied Enron's application for
exemption under PUHCA and set a briefing schedule that, at present, would be
completed by September 3, 2003. The Initial Decision is stayed pending the
resolution of the SEC's further review.
If Enron's exemption application is denied by the SEC, Northern Border
Pipeline advises that it cannot estimate the amount of time that the SEC will
provide for Enron to register as a holding company under PUHCA at which time
Enron and its holding company system would become subject to PUHCA. Northern
Border Pipeline advises that it intends to seek orders from the SEC that, if
granted, would minimize the impacts previously described of PUHCA on its
operations. Northern Border Pipeline further advises that it also may seek
exemptions for its operations from regulation under PUHCA. Similar orders and
exemptions have been granted by the SEC to other operating subsidiaries of
holding companies under PUHCA. Northern Border Pipeline advises that no
assurance can be given that Northern Border Pipeline will be successful in
obtaining all the orders or exemptions that it intends to seek or that its
operations will not be subject to the full regulatory impact of PUHCA.
24
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
While TC PipeLines currently does not anticipate that the outcome of the
SEC's determination will have a material impact on its ability to conduct its
operations or to meet its obligations, the Partnership cannot guarantee that
further regulatory developments may not have an impact on its operations.
Both Houses of Congress have passed bills that would repeal PUHCA. It is
uncertain whether or when these bills would be enacted into law.
UPDATE ON ENRON GAS PIPELINE EMPLOYEE BENEFIT TRUST (TRUST)
Further to the discussion and disclosure in the Partnership's Annual Report
on Form 10-K for the year ended December 31, 2002, Northern Border Pipeline
advises that on July 22, 2003, Enron filed a motion with the bankruptcy court
requesting authority to terminate the Trust and to apportion the Trust's
assets among certain identified pipeline companies, one being Northern
Plains. In the motion, it states that, as of June 30, 2002, the
asset/liability allocation percentage for Northern Plains was 2.7% with a
liability allocation of $1.89 million and asset allocation of $846,000. If
approved as filed, the assets of the Trust will be transferred to one or more
qualifying trusts maintained for the benefit of the pipeline company retirees
in accordance with the Enron Corp Medical Plan for Inactive Participants.
For risks associated with Enron's Chapter 11 filing, please read the
Partnership's Annual Report on Form 10-K for the year ended December 31, 2002 -
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations of Northern Border Pipeline Company -
Update on the Impact of Enron's Chapter 11 Filing on Northern Border Pipeline's
Business - Possible Effects."
RESULTS OF OPERATIONS OF TUSCARORA GAS TRANSMISSION COMPANY
CRITICAL ACCOUNTING POLICY
Tuscarora's accounting policies conform to 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.
Effective January 1, 2003, Tuscarora adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," which did not have a material impact on its financial
position or results of operations.
25
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
RESULTS OF OPERATIONS
The following sets out summarized financial information for Tuscarora for the
three and six months ended June 30, 2003 and 2002 and as at June 30, 2003 and
December 31, 2002. Amounts discussed represent 100% of the operations of
Tuscarora, in which the Partnership has held a 49% interest since September 1,
2000.
(UNAUDITED) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
(MILLIONS OF DOLLARS) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
TUSCARORA INCOME STATEMENT
Revenues 7.3 5.6 14.7 11.2
Costs and expenses (1.3) (0.7) (2.5) (1.3)
Depreciation (1.6) (1.2) (3.2) (2.4)
Financial charges (1.7) (1.5) (3.3) (3.0)
Other income - 0.2 - 0.3
-------------------------------------------------------------
Net income 2.7 2.4 5.7 4.8
-------------------------------------------------------------
-------------------------------------------------------------
JUNE 30, 2003 December 31, 2002
(MILLIONS OF DOLLARS) (UNAUDITED) (AUDITED)
- ---------------------------------------------------------------------------------------------------------------------
TUSCARORA BALANCE SHEET
ASSETS
Cash and cash equivalents 0.5 0.6
Other current assets 2.5 4.3
Plant, property and equipment, net 145.8 148.4
Other assets 1.2 1.2
----------------------------------------------------
150.0 154.5
----------------------------------------------------
----------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities 6.2 14.6
Long-term debt 83.1 85.3
Partners' Equity
Partners' capital 60.7 54.2
Accumulated other comprehensive income - 0.4
----------------------------------------------------
150.0 154.5
----------------------------------------------------
----------------------------------------------------
26
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TC PIPELINES, LP
SECOND QUARTER 2003 COMPARED WITH SECOND QUARTER 2002
Net income increased $0.3 million, or 13%, to $2.7 million for second quarter
2003, compared to $2.4 million for the same period last year. This increase is
primarily due to higher revenue, partially offset by higher operations and
maintenance expense and higher depreciation expense.
Revenues earned by Tuscarora increased $1.7 million, or 30%, to $7.3 million for
second quarter 2003, compared to $5.6 million for the same period last year.
This increase is due to incremental revenues being generated from new
transportation contracts, including those resulting from the expansion.
Costs and expenses incurred by Tuscarora increased $0.6 million, or 86%, to $1.3
million for second quarter 2003, compared to $0.7 million for the same period
last year. This increase is primarily due to higher operations and maintenance
expenses required to operate the two new compressor stations that were placed
into service December 1, 2002.
Depreciation recorded by Tuscarora increased $0.4 million, or 33%, to $1.6
million for second quarter 2003, compared to $1.2 million for the same period
last year. This increase reflects the larger asset base resulting from the
expansion in December 2002.
Financial charges recorded by Tuscarora increased $0.2 million, or 13%, to $1.7
million for second quarter 2003, compared to $1.5 million for the same period
last year. This increase is primarily due to higher average debt balances in
second quarter 2003.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Net income increased $0.9 million, or 19%, to $5.7 million for the first six
months of 2003, compared to $4.8 million for the same period last year. This
increase is primarily due to higher revenue, partially offset by higher
operations and maintenance expense and higher depreciation expense.
Revenues earned by Tuscarora increased $3.5 million, or 31%, to $14.7 million
for the first six months of 2003, compared to $11.2 million for the same period
last year. This increase is due to incremental revenues being generated from new
transportation contracts, including those resulting from the expansion.
Costs and expenses incurred by Tuscarora increased $1.2 million, or 92%, to $2.5
million for the first six months of 2003, compared to $1.3 million for the same
period last year. The increase is primarily due to higher operations and
maintenance expenses required to operate the two new compressor stations that
were placed into service December 1, 2002.
Depreciation recorded by Tuscarora increased $0.8 million, or 33%, to $3.2
million for the first six months of 2003, compared to $2.4 million for the same
period last year. This increase reflects the larger asset base resulting from
the expansion in December 2002.
Financial charges recorded by Tuscarora increased $0.3 million, or 10%, to $3.3
million for the first six months of 2003, compared to $3.0 million for the same
period last year. The increase is primarily due to higher average debt balances
in the first six months of 2003.
27
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONCLUDED)
TC PIPELINES, LP
LIQUIDITY AND CAPITAL RESOURCES OF TUSCARORA GAS TRANSMISSION COMPANY
DEBT AND CREDIT FACILITIES
Tuscarora's debt and credit facilities outstanding at June 30, 2003, are
as follows:
Payments Due by Period
-----------------------------------------------------
Less Than 1 After 5
Total Year 1-3 Years 4-5 Years Years
------------------------------------------------------------------
(In Millions)
------------------------------------------------------------------
Series A Senior Notes due 2010 $ 70.7 $ 3.7 $ 7.3 $ 8.4 $ 51.3
Series B Senior Notes due 2010 7.3 0.3 0.8 1.2 5.0
Series C Senior Notes due 2012 9.7 0.6 1.5 2.1 5.5
------------------------------------------------------------------
Total $ 87.7 $ 4.6 $ 9.6 $ 11.7 $ 61.8
------------------------------------------------------------------
------------------------------------------------------------------
Short-term liquidity needs will be met by operating cash flows. Long-term
capital needs may be met through the ability to issue long-term indebtedness
and/or partner contributions.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities decreased by $0.6 million to $6.9
million for the first six months of 2003 compared to $7.5 million for the same
period last year primarily due to changes in working capital, partially offset
by increased net income relating to Tuscarora's expansion.
CASH FLOWS FROM INVESTING ACTIVITIES
In the first six months of 2003, Tuscarora used $0.6 million for capital
expenditures primarily related to its 2002 expansion.
In the first six months of 2002, Tuscarora used $10.5 million for capital
expenditures primarily related to the construction of the 2002 expansion
facilities.
CASH FLOWS FROM FINANCING ACTIVITIES
In the first six months of 2003, Tuscarora reported cash flows used in financing
activities of $6.4 million compared to cash flows provided from financing
activities of $3.9 million for the same period last year. In the first six
months of 2003, Tuscarora repaid the $4.6 million balance outstanding on its
revolving credit facility. Tuscarora also repaid $2.3 million of long-term debt
during the first six months of 2003. Tuscarora received contributions from
partners of $8.5 million and paid cash distributions of $6.4 million as well as
a return of capital to its partners of $1.6 million in the first six months of
2003.
In first six months of 2002, Tuscarora received proceeds of $10.0 million from
the issuance of its Series C Secured Notes and repaid $2.1 million of long-term
debt. Tuscarora also received proceeds of $0.7 million from the issuance of
notes payable. Tuscarora paid cash distributions of $4.4 million in the first
six months of 2002.
28
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TC PIPELINES, LP
TC PipeLines' interest rate exposure results from its Revolving Credit Facility,
which is subject to variability in LIBOR interest rates. Since December 31,
2002, there has not been any material change to TC PipeLines' interest rate
exposure.
The Partnership's market risk sensitivity is also influenced by and reflects the
same factors that influence Northern Border Pipeline and Tuscarora. Neither
Northern Border Pipeline nor Tuscarora owns any of the natural gas they
transport, and, therefore, do not assume any of the related natural gas
commodity price risk.
Northern Border Pipeline's interest rate exposure results from variable rate
borrowings from commercial banks. To mitigate potential fluctuations in interest
rates, Northern Border Pipeline attempts to maintain a significant portion of
its debt portfolio in fixed rate debt. Northern Border Pipeline also uses
interest rate swaps as a means to manage interest rate expense by converting a
portion of fixed rate debt into variable rate debt to take advantage of
declining interest rates. Northern Border Pipeline advises that there have not
been any material changes in market risk exposures that would affect the
quantitative and qualitative disclosures presented as of December 31, 2002, in
Item 7A of TC PipeLines' Annual Report on Form 10-K.
29
PART I. FINANCIAL INFORMATION (CONCLUDED)
ITEM 4. CONTROLS AND PROCEDURES
TC PIPELINES, LP
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
of the Partnership's disclosure controls and procedures as of the end of
the period covered by this quarterly report, the President and Chief
Executive Officer and Chief Financial Officer of the general partner of the
Partnership have concluded that the disclosure controls and procedures are
effective.
b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There were no
changes in the Partnership's internal control over financial reporting that
occurred during the Partnership's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Partnership's internal control over financial reporting.
30
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
TC PIPELINES, LP
In TC PipeLines' Annual Report on Form 10-K for the year ended December 31,
2002, it was reported that Northern Border Pipeline was selected for an
industry-wide audit of FERC-assessed annual charges. On April 10, 2003, the FERC
issued its final report finding that Northern Border Pipeline was compliant.
31
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
TC PIPELINES, LP
(a) Exhibits
10.1 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, 2003 (Exhibit 1 to TC PipeLines,
LP's Form 10-Q, June 30, 2001).
31.1 Certification of President and Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of President and Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Consolidated balance sheet at December 31, 2002 of TC PipeLines GP,
Inc., general partner of TC PipeLines, LP.
(b) Reports on Form 8-K
1. Report on Form 8-K dated April 17, 2003 and filed on April 18, 2003
reporting that Northern Border Pipeline filed an 8-K with the SEC
describing the possible effects of the potential denial of Enron's
petition to be exempt from the requirements of the Public Utility
Holding Company Act. If Enron's petition is denied, Northern Border
Pipeline Company would become a subsidiary within the Enron holding
company system.
2. Report on Form 8-K dated April 21, 2003 and filed on April 22, 2003
reporting that TC PipeLines, LP issued a press release announcing
first quarter results for the period ended March 31, 2003.
3. Report on Form 8-K dated July 10, 2003 and filed on July 10, 2003
reporting that Northern Border Pipeline issued a press release
announcing that it has received commitments from several entities for
transportation capacity at the maximum rate available under its
tariff, leaving approximately 11% of the total system capacity
expiring prior to November 1, 2003.
4. Report on Form 8-K dated July 15, 2003 and filed on July 15, 2003
reporting that Northern Border Pipeline issued a press release
announcing that it had made further progress in recontracting and had
nearly sold out the long-haul firm capacity on its pipeline system.
Northern Border Pipeline also announced that Cargill, Incorporated had
finalized the assignment of all of the firm transportation formerly
held by Mirant Americas Energy Marketing, LP, which represents
approximately 10% of Northern Border Pipeline's firm capacity and
extends for terms into 2006 and 2008.
5. Report on Form 8-K dated July 24, 2003 and filed July 24, 2003
reporting that TC PipeLines, LP issued a press release announcing
second quarter results for the period ended June 30, 2003.
32
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TC PIPELINES, LP
(a Delaware Limited Partnership)
By: TC PipeLines GP, Inc., its general partner
By: /s/ Russell K. Girling
------------------------------------
Date: August 14, 2003 Russell K. Girling
Chief Financial Officer
(duly authorized officer)
By: /s/ Theresa Jang
------------------------------------
Date: August 14, 2003 Theresa Jang
Controller (duly authorized officer)
33