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EX-31.2 - EX-31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - TC PIPELINES LPa15-17847_1ex31d2.htm
EX-10.1 - EX-10.1 TERM LOAN AGREEMENT DATED SEPTEMBER 30, 2015 - TC PIPELINES LPa15-17847_1ex10d1.htm
EX-31.1 - EX-31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - TC PIPELINES LPa15-17847_1ex31d1.htm
EX-32.2 - EX-32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 - TC PIPELINES LPa15-17847_1ex32d2.htm
EX-32.1 - EX-32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 - TC PIPELINES LPa15-17847_1ex32d1.htm

Table of Contents

 

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 September 30, 2015

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission File Number:  001-35358

 

TC PipeLines, LP

(Exact name of registrant as specified in its charter)

 

Delaware

52-2135448

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

 

700 Louisiana Street, Suite 700
Houston, Texas

77002-2761

(Address of principle executive offices)

(Zip code)

 

877-290-2772

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x                    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer ¨

 

Non-accelerated filer ¨

(Do not check if a smaller reporting

company)

Smaller reporting company ¨

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                    No x

 

As of November 2, 2015, there were 64,179,181 of the registrant’s common units outstanding.

 




Table of Contents

 

DEFINITIONS

 

The abbreviations, acronyms, and industry terminology used in this quarterly report are defined as follows:

 

2013 Acquisition

 

Acquisition of an additional 45 percent membership interest in each of GTN and Bison by the Partnership to increase ownership to 70 percent on July 1, 2013

2013 Term Loan Facility

 

TC PipeLines, LP’s term loan credit facility under a term loan agreement dated July 1, 2013

2014 Bison Acquisition

 

Partnership’s acquisition of the remaining 30 percent interest in Bison on October 1, 2014

2015 GTN Acquisition

 

Partnership’s acquisition of the remaining 30 percent interest in GTN on April 1, 2015

2015 Term Loan Facility

 

TC PipeLines, LP’s term loan credit facility under a term loan agreement dated September 30, 2015

ASC

 

Accounting Standards Codification

ASU

 

Accounting Standards Update

ATM program

 

At-the-market equity issuance program

Bison

 

Bison Pipeline LLC

Carty Lateral

 

GTN lateral pipeline in north-central Oregon that delivers natural gas to a power plant owned by Portland General Electric Company

Consolidated Subsidiaries

 

GTN, Bison, North Baja and Tuscarora

DOT

 

U.S. Department of Transportation

EBITDA

 

Earnings Before Interest, Tax, Depreciation and Amortization

EPA

 

U.S. Environmental Protection Agency

FASB

 

Financial Accounting Standards Board

FERC

 

Federal Energy Regulatory Commission

GAAP

 

U.S. generally accepted accounting principles

General Partner

 

TC PipeLines GP, Inc.

Great Lakes

 

Great Lakes Gas Transmission Limited Partnership

GTN

 

Gas Transmission Northwest LLC

IDRs

 

Incentive Distribution Rights

LIBOR

 

London Interbank Offered Rate

NGA

 

Natural Gas Act of 1938

North Baja

 

North Baja Pipeline, LLC

Northern Border

 

Northern Border Pipeline Company

Our pipeline systems

 

Our ownership interests in GTN, Northern Border, Bison, Great Lakes, North Baja and Tuscarora

Partnership

 

TC PipeLines, LP including its subsidiaries, as applicable

Partnership Agreement

 

Third Amended and Restated Agreement of Limited Partnership of the Partnership

PHMSA

 

U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration

PNGTS

 

Portland Natural Gas Transmission System

PNGTS Acquisition

 

Partnership’s acquisition of a 49.9 percent interest in PNGTS

SEC

 

Securities and Exchange Commission

Senior Credit Facility

 

TC PipeLines, LP’s senior facility under revolving credit agreement as amended and restated, dated November 20, 2012

Short-Term Loan Facility

 

TC PipeLines, LP’s short-term loan facility under loan agreement dated October 1, 2014

TransCanada

 

TransCanada Corporation and its subsidiaries

Tuscarora

 

Tuscarora Gas Transmission Company

U.S.

 

United States of America

 

Unless the context clearly indicates otherwise, TC PipeLines, LP and its subsidiaries are collectively referred to in this quarterly report as “we,” “us,” “our” and “the Partnership.” We use “our pipeline systems” and “our pipelines” when referring to the Partnership’s ownership interests in Gas Transmission Northwest LLC (GTN), Northern Border Pipeline Company (Northern Border), Bison Pipeline LLC (Bison), Great Lakes Gas Transmission Limited

 

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Table of Contents

 

Partnership (Great Lakes), North Baja Pipeline, LLC (North Baja) and Tuscarora Gas Transmission Company (Tuscarora).

 

4



Table of Contents

 

PART I

 

FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report includes certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words and phrases such as: “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “forecast,” “should,” “predict,” “could,” “will,” “may,” and other terms and expressions of similar meaning. The absence of these words, however, does not mean that the statements are not forward-looking. These statements are based on management’s beliefs and assumptions and on currently available information and include, but are not limited to, statements regarding anticipated financial performance, future capital expenditures, liquidity, market or competitive conditions, regulations, organic or strategic growth opportunities, contract renewals and ability to market open capacity, business prospects, outcome of regulatory proceedings and cash distributions to unitholders.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results predicted. Factors that could cause actual results and our financial condition to differ materially from those contemplated in forward-looking statements include, but are not limited to:

 

·                                 the ability of our pipeline systems to sell available capacity on favorable terms and renew expiring contracts which are affected by, among other factors:

o                 demand for natural gas;

o                 changes in relative cost structures and production levels of natural gas producing basins;

o                 natural gas prices and regional differences;

o                 weather conditions;

o                 availability and location of natural gas supplies in Canada and the United States (U.S.) in relation to our pipeline systems;

o                 competition from other pipeline systems;

o                 natural gas storage levels; and

o                 rates and terms of service;

·                                 the performance by the shippers of their contractual obligations on our pipeline systems;

·                                 the outcome and frequency of rate proceedings or settlement negotiations on our pipeline systems;

·                                 changes in the taxation of master limited partnerships by state or federal governments such as final adoption of proposed regulations narrowing the sources of income qualifying for partnership tax treatment or the elimination of pass-through taxation or tax deferred distributions;

·                                 increases in operational or compliance costs resulting from changes in laws and governmental regulations affecting our pipeline systems, particularly regulations issued by the Federal Energy Regulatory Commission (FERC), the U.S. Environmental Protection Agency (EPA) and U.S. Department of Transportation (DOT);

·                                 the impact of recent significant declines in oil and natural gas prices, including the effects on the creditworthiness of our shippers;

·                                 our ongoing ability to grow distributions through acquisitions, accretive expansions or other growth opportunities, including the timing, structure and closure of further potential acquisitions;

·                                 potential conflicts of interest between TC PipeLines GP, Inc., our general partner (General Partner), TransCanada and us;

·                                 the ability to maintain secure operation of our information technology;

·                                 the impact of any impairment charges;

·                                 cybersecurity threats, acts of terrorism and related disruptions;

·                                 operating hazards, casualty losses and other matters beyond our control; and

·                                 the level of our indebtedness, including the indebtedness of our pipeline systems, and the availability of capital.

 

These are not the only factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Other factors described elsewhere in this document, or factors that are unknown or unpredictable, could also have material adverse effects on future results. These and other risks are described in greater detail in Part I, Item 1A. “Risk Factors” in our Form 10-K for the year ended December 31, 2014. All

 

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forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. All forward-looking statements are made only as of the date made and except as required by applicable law, we undertake no obligation to update any forward-looking statements to reflect new information, subsequent events or other changes.

 

6



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

Item 1.          Financial Statements

 

TC PIPELINES, LP

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three months ended

 

Nine months ended

 

(unaudited)

 

 

September 30,

 

September 30,

 

(millions of dollars, except per common unit amounts)

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Transmission revenues

 

83

 

 

80

 

 

255

 

 

249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings from unconsolidated affiliates (Note 4)

 

17

 

 

15

 

 

63

 

 

66

 

 

Operation and maintenance expenses

 

(12

)

 

(14

)

 

(36

)

 

(38

)

 

Property taxes

 

(5

)

 

(5

)

 

(16

)

 

(17

)

 

General and administrative

 

(1

)

 

(5

)

 

(5

)

 

(8

)

 

Depreciation

 

(21

)

 

(21

)

 

(63

)

 

(64

)

 

Financial charges and other (Note 14)

 

(12

)

 

(11

)

 

(41

)

 

(37

)

 

Net income

 

49

 

 

39

 

 

157

 

 

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

-

 

 

8

 

 

7

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests

 

49

 

 

31

 

 

150

 

 

125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculation of net income attributable to common units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests

 

49

 

 

31

 

 

150

 

 

125

 

 

Less:
Net income attributable to the General Partner, including incentive distributions

 

2

 

 

1

 

 

5

 

 

3

 

 

Net income attributable to the Class B units

 

2

 

 

-

 

 

2

 

 

-

 

 

Net income attributable to common units (Note 8)

 

45

 

 

30

 

 

143

 

 

122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding basic and diluted (millions)

 

64.

0

 

62.

6

 

63.

8

 

62.

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common unit (Note 8)basic and diluted

 

$0.

70

 

$0.

48

 

$2.2

3

 

$1.9

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common units outstanding, end of period (millions)

 

64.

0

 

63.

6

 

64.

0

 

63.

6

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

TC PIPELINES, LP

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three months ended

 

Nine months ended

 

(unaudited)

 

September 30,

 

September 30,

 

(millions of dollars)

 

       2015

 

       2014

 

          2015

 

          2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

49

 

 

39

 

 

157

 

 

151

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges (Note 12)

 

(1

)

 

-

 

 

(2

)

 

(1

)

 

Comprehensive income

 

48

 

 

39

 

 

155

 

 

150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to non-controlling interests

 

-

 

 

8

 

 

7

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to controlling interests

 

48

 

 

31

 

 

148

 

 

124

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

TC PIPELINES, LP

CONSOLIDATED BALANCE SHEETS

 

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

      September 30, 2015

 

     December 31, 2014

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

28

 

 

26

 

 

Accounts receivable and other (Note 13)

 

31

 

 

35

 

 

Inventories

 

7

 

 

7

 

 

 

 

66

 

 

68

 

 

Investments in unconsolidated affiliates (Note 4)

 

1,151

 

 

1,177

 

 

Plant, property and equipment

 

 

 

 

 

 

 

(Net of $790 accumulated depreciation; 2014 - $737)

 

1,953

 

 

1,968

 

 

Goodwill

 

130

 

 

130

 

 

Other assets

 

8

 

 

6

 

 

 

 

3,308

 

 

3,349

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

30

 

 

23

 

 

Accounts payable to affiliates (Note 11)

 

8

 

 

15

 

 

Accrued interest

 

12

 

 

4

 

 

Short-term loan (Note 5)

 

-

 

 

170

 

 

Current portion of long-term debt (Note 5)

 

14

 

 

79

 

 

 

 

64

 

 

291

 

 

Long-term debt (Note 5)

 

1,890

 

 

1,446

 

 

Other liabilities

 

27

 

 

26

 

 

 

 

1,981

 

 

1,763

 

 

Partners’ Equity

 

 

 

 

 

 

 

Common units

 

1,205

 

 

1,325

 

 

Class B units (Notes 6 and 7)

 

97

 

 

-

 

 

General partner

 

29

 

 

29

 

 

Accumulated other comprehensive loss

 

(4

)

 

(2

)

 

Controlling interests

 

1,327

 

 

1,352

 

 

Non-controlling interests

 

-

 

 

234

 

 

 

 

1,327

 

 

1,586

 

 

 

 

3,308

 

 

3,349

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

TC PIPELINES, LP

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

 

Nine months ended

 

(unaudited)

 

September 30,

 

(millions of dollars)

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Cash Generated From Operations

 

 

 

 

 

 

 

Net income

 

157

 

 

151

 

 

Depreciation

 

63

 

 

64

 

 

Amortization of debt issue costs (Note 14)

 

1

 

 

1

 

 

Accruals for costs related to the 2014 Bison Acquisition

 

-

 

 

2

 

 

Change in other liabilities

 

-

 

 

1

 

 

Equity allowance for funds used during construction

 

(1

)

 

-

 

 

Change in operating working capital (Note 10)

 

9

 

 

36

 

 

 

 

229

 

 

255

 

 

Investing Activities

 

 

 

 

 

 

 

Cumulative distributions in excess of equity earnings:

 

 

 

 

 

 

 

Northern Border

 

18

 

 

15

 

 

Great Lakes

 

12

 

 

10

 

 

Investment in Great Lakes

 

(4

)

 

(4

)

 

Adjustment to the 2013 Acquisition (Note 11)

 

-

 

 

(25

)

 

Acquisition of the remaining 30 percent interest in GTN (Note 6)

 

(264

)

 

-

 

 

Capital expenditures

 

(45

)

 

(8

)

 

Other

 

1

 

 

1

 

 

 

 

(282

)

 

(11

)

 

Financing Activities

 

 

 

 

 

 

 

Distributions paid (Note 9)

 

(169

)

 

(157

)

 

Distributions paid to non-controlling interests

 

(9

)

 

(42

)

 

ATM equity issuance, net (Note 7)

 

26

 

 

73

 

 

Equity contribution by the General Partner (Note 6)

 

2

 

 

-

 

 

Long-term debt issued, net of discount

 

598

 

 

15

 

 

Long-term debt repaid

 

(390

)

 

(60

)

 

Debt issuance costs

 

(3

)

 

-

 

 

 

 

55

 

 

(171

)

 

Increase/(decrease) in cash and cash equivalents

 

2

 

 

73

 

 

Cash and cash equivalents, beginning of period

 

26

 

 

25

 

 

Cash and cash equivalents, end of period

 

28

 

 

98

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

TC PIPELINES, LP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ EQUITY

 

 

 

Limited Partners

 

 

 

 

 

 

 

 

 

(unaudited)

 

Common Units

 

 

Class B Units

 

 

General
Partner

 

Accumulated
Other Comprehensive

 

Non-
Controlling
Interest

 

Total
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss (a)

 

 

 

 

 

 

 

(millions of units)

 

(millions
of
dollars)

 

(millions of units)

 

(millions of
dollars)

 

(millions of
dollars)

 

(millions of
dollars)

 

(millions of
dollars)

 

(millions
of
dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Equity at

 

63.6

 

 

1,325

 

 

-

 

 

-

 

 

29

 

 

(2)

 

 

234

 

 

1,586

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Class B Units

 

-

 

 

-

 

 

1.9

 

 

95

 

 

-

 

 

-

 

 

-

 

 

95

 

(Note 6 and 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

 

143

 

 

-

 

 

2

 

 

5

 

 

-

 

 

7

 

 

157

 

Other Comprehensive Loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(2)

 

 

-

 

 

(2)

 

ATM Equity Issuance, net

 

0.4

 

 

25

 

 

-

 

 

-

 

 

1

 

 

-

 

 

-

 

 

26

 

(Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of the remaining

 

-

 

 

(124)

 

 

-

 

 

-

 

 

(3)

 

 

-

 

 

(232)

 

 

(359)

 

30 percent interest in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GTN (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Contribution

 

-

 

 

-

 

 

-

 

 

-

 

 

2

 

 

-

 

 

-

 

 

2

 

(Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

-

 

 

(164)

 

 

-

 

 

-

 

 

(5)

 

 

-

 

 

(9)

 

 

(178)

 

Partners’ Equity at September 30, 2015

 

64.0

 

 

1,205

 

 

1.9

 

 

97

 

 

29

 

 

(4)

 

 

-

 

 

1,327

 

 

 

(a)              Losses related to cash flow hedges reported in Accumulated Other Comprehensive Loss and expected to be reclassified to Net Income in the next 12 months are estimated to be $1 million. These estimates assume constant interest rates over time; however, the amounts reclassified will vary based on actual value of interest rates at the date of settlement.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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TC PIPELINES, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1        ORGANIZATION

 

TC PipeLines, LP and its subsidiaries are collectively referred to herein as the Partnership. The Partnership was formed by TransCanada PipeLines Limited, a wholly-owned subsidiary of TransCanada Corporation (TransCanada Corporation together with its subsidiaries collectively referred to herein as TransCanada), to acquire, own and participate in the management of energy infrastructure assets in North America.

 

NOTE 2        SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying financial statements and related notes have been prepared in accordance with United States generally accepted accounting principles (GAAP) and amounts are stated in U.S. dollars. The results of operations for the three and nine months ended September 30, 2015 and 2014 are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014. That report contains a more comprehensive summary of the Partnership’s significant accounting policies. In the opinion of management, the accompanying financial statements contain all of the appropriate adjustments, all of which are normally recurring adjustments unless otherwise noted, and considered necessary to present fairly the financial position of the Partnership, the results of operations and cash flows for the respective periods. Our significant accounting policies are consistent with those disclosed in Note 2 of the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2014. Certain items from that Note are repeated or updated below as necessary to assist in understanding the accompanying financial statements.

 

(a) Basis of Presentation

The Partnership accounts for business acquisitions between itself and TransCanada and its affiliates as transactions between entities under common control. Using this approach, the assets and liabilities of the acquired entities are recorded at TransCanada’s carrying value. In the event recasting is required, the Partnership’s historical financial information will be recast, except net income per common unit, to include the acquired entities for all periods presented. If the fair market value paid for the acquired entities is greater than the recorded net assets of the acquired entities, the excess purchase price paid is recorded as a reduction in Partners’ Equity. Similarly, if the fair market value paid for the acquired entities is less than the recorded net assets of the acquired entities, the excess of assets acquired is recorded as an increase in Partners’ Equity.

 

The Partnership consolidates its investments in GTN, Bison, North Baja and Tuscarora, over which it is able to exercise control. To the extent there are interests owned by other parties, these interests are included in non-controlling interests. The Partnership uses the equity method of accounting for its investments in Northern Border and Great Lakes, over which it is able to exercise significant influence.

 

(b) Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of 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.

 

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NOTE 3        ACCOUNTING PRONOUNCEMENTS

 

Revenue from contracts with customers

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 “Revenue from Contracts with Customers (Topic 606).” This guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. This new guidance requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also voted to permit early adoption of the standard, but not before the original effective date of December 15, 2016. This new guidance, once effective, allows two methods in which the amendment can be applied: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application. The Partnership is currently evaluating the impact of the adoption of this ASU and has not yet determined the effect on its consolidated financial statements.

 

Consolidation

 

In February 2015, the FASB issued ASU No. 2015-02 “Consolidation (Topic 810),” an amendment of previously issued guidance on consolidation. This updated guidance requires that an entity evaluate whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This guidance is effective from January 1, 2016 and early application is permitted. Application of this amendment could be performed using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. Alternatively, the amendment could be applied retrospectively. The Partnership is currently evaluating the impact of the adoption of this ASU and has not yet determined the effect on its consolidated financial statements.

 

Imputation of interest

 

In April 2015, the FASB issued ASU No. 2015-03 “Interest – Imputation of Interest (Subtopic 835-30),” an amendment of previously issued guidance on imputation of interest. This updated guidance requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liabilities, consistent with debt discount or premiums. The recognition and measurement for debt issuance costs would not be affected. This guidance is effective from January 1, 2016 and early application is permitted. This guidance should be adopted on a retrospective basis, wherein the balance sheet of each individual period presented would be adjusted to reflect the period-specific effects of applying the new guidance. The application of this amendment will result in a reclassification of debt issuance costs currently recorded in Other Assets to an offset of their respective debt liabilities.

 

Earnings Per Share

 

In April 2015, the FASB issued ASU No.2015-06 “Earnings Per Share (Topic 260),” an amendment of previously issued guidance on earnings per share (EPS) as it is being calculated by master limited partnerships. This updated guidance specifies that for purposes of calculating historical EPS under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner interest, and previously reported EPS of the limited partners would not change as a result of a dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs are also required. This guidance is effective from January 1, 2016 and early application is permitted. This guidance should be adopted on a retrospective basis to all financial statements presented. The Partnership is currently evaluating the impact of the adoption of this ASU and has not yet determined the effect on its consolidated financial statements.

 

Business Combinations

 

In September 2015, the FASB issued ASU No. 2015-16 “Business Combinations (Topic 805),” which replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amended guidance

 

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requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The new guidance is effective January 1, 2016 and will be applied prospectively.

 

NOTE 4        INVESTMENTS IN UNCONSOLIDATED AFFILIATES

 

Northern Border and Great Lakes are regulated by FERC and are operated by TransCanada. The Partnership uses the equity method of accounting for its interests in its equity investees.

 

 

 

Ownership

 

Equity Earnings from
Unconsolidated Affiliates

 

Investments in
Unconsolidated Affiliates

 

 

 

Interest at

 

Three months

 

Nine Months

 

 

 

 

 

(unaudited)

 

September 30,

 

ended September 30,

 

ended September 30,

 

September 30,

 

December 31,

 

(millions of dollars)

 

2015

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern Border (a)

 

50%

 

16

 

14

 

50

 

53

 

487

 

505

 

Great Lakes

 

46.45%

 

1

 

1

 

13

 

13

 

664

 

672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

15

 

63

 

66

 

1,151

 

1,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)             Equity earnings from Northern Border is net of the 12-year amortization of a $10 million transaction fee paid to the operator of Northern Border at the time of the Partnership’s additional 20 percent interest acquisition in April 2006.

 

Northern Border

 

The Partnership does not have undistributed earnings from Northern Border for the nine months ended September 30, 2015 and 2014.

 

The summarized financial information for Northern Border is as follows:

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

September 30, 2015 

 

December 31, 2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

40

 

41

 

Other current assets

 

33

 

34

 

Plant, property and equipment, net

 

1,135

 

1,163

 

Other assets

 

18

 

34

 

 

 

1,226

 

1,272

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities

 

50

 

64

 

Deferred credits and other

 

25

 

22

 

Long-term debt, including current maturities

 

411

 

411

 

Partners’ equity

 

 

 

 

 

Partners’ capital

 

742

 

777

 

Accumulated other comprehensive loss

 

(2)

 

(2)

 

 

 

1,226

 

1,272

 

 

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Three months ended

 

Nine months ended

 

 

 

 

 

(unaudited)

 

September 30,

 

September 30,

 

 

 

 

 

(millions of dollars)

 

2015  

 

2014  

 

2015     

 

  2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transmission revenues

 

71  

 

66  

 

215    

 

221    

Operating expenses

 

(17) 

 

(16) 

 

(51)   

 

(50)   

Depreciation

 

(16) 

 

(15) 

 

(45)   

 

(44)   

Financial charges and other

 

(6) 

 

(8) 

 

(17)   

 

(20)   

Net income

 

32   

 

27  

 

102    

 

107    

 

Great Lakes

The Partnership made an equity contribution to Great Lakes of $4 million in the first quarter of 2015. This amount represents the Partnership’s 46.45 percent share of a $9 million cash call from Great Lakes to make a scheduled debt repayment.

 

The Partnership does not have undistributed earnings from Great Lakes for the nine months ended September 30, 2015 and 2014.

 

The summarized financial information for Great Lakes is as follows:

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

September 30, 2015 

 

December 31, 2014 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

67

 

66

 

Plant, property and equipment, net

 

730

 

748

 

 

 

797

 

814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities

 

48

 

38

 

Long-term debt, including current maturities

 

307

 

316

 

Partners’ equity

 

442

 

460

 

 

 

797

 

814

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

 

(unaudited)

 

September 30,

 

September 30,

 

 

 

 

 

(millions of dollars)

 

2015   

 

2014   

 

2015   

 

2014   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transmission revenues

 

29 

 

29 

 

105   

 

106    

Operating expenses

 

(15)

 

(14)

 

(40)  

 

(38)   

Depreciation

 

(7)

 

(7)

 

(21)  

 

(21)   

Financial charges and other

 

(5)

 

(6)

 

(17)  

 

(19)   

Net income

 

 

 

27    

 

28    

 

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NOTE 5        DEBT AND CREDIT FACILITIES

 

(unaudited)

 

 

 

 

(millions of dollars)

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

Senior Credit Facility due 2017

 

190

 

330

2013 Term Loan Facility due 2018

 

500

 

500

Short Term Loan Facility due 2015

 

-

 

170

2015 Term Loan Facility due 2018

 

170

 

-

4.65% Unsecured Senior Notes due 2021, net of discount (2015 and 2014 – nil)

 

350

 

350

4.375% Unsecured Senior Notes due 2025, net of $1 million discount

 

349

 

-

5.09% Unsecured Senior Notes due 2015

 

-

 

75

5.29% Unsecured Senior Notes due 2020

 

100

 

100

5.69% Unsecured Senior Notes due 2035

 

150

 

150

Unsecured Term Loan Facility due 2019

 

75

 

-

3.82% Series D Senior Notes due 2017

 

20

 

20

 

 

1,904

 

1,695

Less: current portion

 

14

 

249

 

 

1,890

 

1,446

 

 

The Partnership’s Senior Credit Facility consists of a $500 million senior revolving credit facility with a banking syndicate, maturing November 20, 2017, under which $190 million was outstanding at September 30, 2015 (December 31, 2014 - $330 million), leaving $310 million available for future borrowing.

 

The London Interbank Offered Rate (LIBOR) based interest rate on the Senior Credit Facility averaged 1.44 percent and  1.43 percent for the three and nine months ended September 30, 2015, respectively (2014 – 1.41 percent). The LIBOR-based interest rate was 1.45 percent at September 30, 2015 (December 31, 2014 – 1.41 percent).

 

The LIBOR-based interest rate on the 2013 Term Loan Facility  averaged 1.44 percent for the both three and nine months ended September 30, 2015 (2014 – 1.41 percent). After hedging activity, the interest rate incurred on the 2013 Term Loan Facility averaged 1.85 percent and 1.84 percent for the three and nine months ended September 30, 2015, respectively (2014 – 1.83 percent). Prior to hedging activities, the LIBOR-based interest rate was 1.45 percent at September 30, 2015 (December 31, 2014 – 1.41 percent).

 

The LIBOR-based interest rate on the Short-Term Loan Facility averaged 1.32 percent and 1.31 percent for the three and nine months ended September 30, 2015, respectively and was 1.32 percent at September 30, 2015 (December 31, 2014 – 1.28 percent).

 

On September 30, 2015, the Partnership entered into an agreement for a $170 million term loan credit facility (2015 Term Loan Facility). The Partnership borrowed $170 million under the 2015 Term Loan Facility to refinance its Short-Term Loan Facility which matured on September 30, 2015.  The 2015 Term Loan Facility matures on October 1, 2018. The LIBOR-based interest rate on the 2015 Term Loan Facility was 3.40 percent at September 30, 2015 and reduced to a LIBOR plus a margin of 1.15 percent on October 5, 2015.

 

The 2013 Term Loan Facility and the 2015 Term Loan Facility (Term Loan Facilities) and the Senior Credit Facility  require the Partnership to maintain a certain leverage ratio (debt to adjusted cash flow [net income plus cash distributions received, extraordinary losses, interest expense, expense for taxes paid or accrued, and depreciation and amortization expense less equity earnings and extraordinary gains]).  In the quarter in which an acquisition has occurred, and the two quarters following the acquisition, the allowable leverage ratio increases to 5.50 to 1.00. Thereafter, the ratio returns to 5.00 to 1.00. The allowable ratio for the quarter ended September 30, 2015 is 5.50 to 1.00. The leverage ratio was 4.71 to 1.00 as of September 30, 2015.

 

On March 13, 2015, the Partnership closed a $350 million public offering of senior unsecured notes bearing an interest rate of 4.375 percent maturing March 13, 2025. The net proceeds of $346 million were used to fund a portion of the acquisition of the remaining 30 percent interest in GTN (refer to Note 6) and to reduce the amount

 

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outstanding under our Senior Credit Facility. The indenture for the notes contains customary investment grade covenants.

 

On June 1, 2015, GTN’s 5.09 percent unsecured Senior Notes matured. Also, on June 1, 2015, GTN entered into a $75 million unsecured variable rate term loan facility (Unsecured Term Loan Facility), which requires yearly principal payments until its maturity on June 1, 2019. The variable interest is based on LIBOR plus an applicable margin. The LIBOR-based interest rate on the Unsecured Term Loan Facility for the three and nine months ended September 30, 2015 averaged 1.14 percent and was 1.15 percent at September 30, 2015. GTN’s Unsecured Senior Notes, along with this new Unsecured Term Loan Facility contain a covenant that limits total debt to no greater than 70 percent of GTN’s total capitalization.  GTN’s total debt to total capitalization ratio at September 30, 2015 is 44 percent.

 

The Series D Senior Notes, which require yearly principal payments until maturity, are secured by Tuscarora’s transportation contracts, supporting agreements and substantially all of Tuscarora’s property. The note purchase agreements contain certain provisions that include, among other items, limitations on additional indebtedness and distributions to partners.

 

At September 30, 2015, the Partnership was in compliance with its financial covenants, in addition to the other covenants which include restrictions on entering into mergers, consolidations and sales of assets, granting liens, material amendments to the Third Amended and Restated Agreement of Limited Partnership (Partnership Agreement), incurring additional debt and distributions to unitholders.

 

The principal repayments required of the Partnership on its debt are as follows:

 

(unaudited)

 

 

 

(millions of dollars)

 

 

 

 

 

 

 

2015

 

4

 

2016

 

14

 

2017

 

212

 

2018

 

690

 

2019

 

35

 

2020

 

100

 

Thereafter

 

849

 

 

 

1,904

 

 

NOTE 6        GTN ACQUISITION

 

On April 1, 2015, the Partnership acquired the remaining 30 percent interest in GTN from a subsidiary of TransCanada (2015 GTN Acquisition), which resulted in GTN being wholly-owned by the Partnership. The total purchase price of the 2015 GTN Acquisition was $446 million plus the final purchase price adjustment of $11 million, for a total of $457 million. The purchase price consisted of $264 million in cash (including the final purchase price adjustment of $11 million), the assumption of $98 million in proportional GTN debt and the issuance of 1,900,000 new Class B units to TransCanada valued at $50 each, representing a limited partner interest in the Partnership with a total value of $95 million.

 

The Partnership funded the cash portion of the transaction using a portion of the proceeds received on our March 13, 2015 debt offering (refer to Note 5). The Class B units entitle TransCanada to a distribution based on 30 percent of GTN’s annual distributions as follows: (i) 100 percent of distributions above $20 million through March 31, 2020; and (ii) 25 percent of distributions above $20 million thereafter. Under the terms of the Partnership Agreement, the Class B distribution will be initially calculated to equal 30 percent of GTN’s distributable cash flow for the nine months ending December 31, 2015, less $15 million.

 

Prior to this transaction, the remaining 30 percent interest held by a subsidiary of TransCanada was reflected as a non-controlling interest in the Partnership’s consolidated financial statements. The 2015 Acquisition of this already-consolidated entity was accounted as a transaction between entities under common control, similar to a pooling of interests, whereby the acquired interest was recorded at TransCanada’s carrying value and the total excess purchase price paid was recorded as a reduction in Partners’ Equity.

 

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The net purchase price was allocated as follows:

 

(millions of dollars)

 

 

 

 

 

 

 

Net Purchase Price (a)

 

359

 

 

 

 

 

Less: TransCanada’s carrying value of non-controlling interest at April 1, 2015

 

232

 

Excess purchase price (b)

 

127

 

 

(a)              Total purchase price of $457 million less the assumption of $98 million of proportional GTN debt by the Partnership.

(b)             The excess purchase price of $127 million was recorded as a reduction in Partners’ Equity.

 

Our General Partner also contributed approximately $2 million to maintain its effective 2 percent interest in the Partnership.

 

NOTE 7        PARTNERS’ EQUITY

 

 

ATM equity issuance program (ATM program)

 

For the nine months ended September 30, 2015, we issued 396,205 common units under our ATM program generating net proceeds of approximately $25 million, plus $1 million from the General Partner to maintain its effective two percent interest. The commissions to our sales agents for the nine months ended September 30, 2015 were approximately $256,000. The net proceeds were used for general partnership purposes.

 

Issuance of Class B units

 

On April 1, 2015, we issued Class B units to TransCanada to finance a portion of the 2015 GTN Acquisition. The Class B units entitle TransCanada to an annual distribution which is an amount based on 30 percent of cash distributions from GTN above certain annual thresholds (refer to Note 6). The Class B units contain no mandatory or optional redemption features and are also non-convertible, non-exchangeable, non-voting and rank equally with common units upon liquidation.

 

The Class B units’ equity account will be increased by the excess of 30 percent of GTN’s distributions over the annual threshold until such amount is declared for distribution and paid in the first quarter beginning 2016 and annually thereafter.

 

NOTE 8        NET INCOME PER COMMON UNIT

 

Net income per common unit is computed by dividing net income attributable to controlling interests, after deduction of amounts attributable to the General Partner and Class B units by the weighted average number of common units outstanding.

 

The amounts allocable to the General Partner equals an amount based upon the General Partner’s effective two percent general partner interest, plus an amount equal to incentive distributions. Incentive distributions are paid to the General Partner if quarterly cash distributions on the common units exceed levels specified in the Partnership Agreement. Incentive distributions allocated to the General Partner for the three and nine months ended September 30, 2015, were $1 million and $2 million, respectively (2014 – nil).

 

The amount allocable to the Class B units in 2015 equals an amount based upon 30 percent of GTN’s distributable cash flow during the nine months ending December 31, 2015  less $15 million (refer to Note 6).

 

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Net income per common unit was determined as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

 

(unaudited)

 

September 30,

 

September 30,

 

 

 

 

 

(millions of dollars, except per common unit amounts)

 

2015  

 

2014  

 

2015  

 

2014  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests

 

49  

 

31  

 

150  

 

125  

Net income attributable to the General Partner

 

(1) 

 

(1) 

 

(3) 

 

(3) 

Incentive distributions attributable to the General Partner (a)

 

(1) 

 

-  

 

(2) 

 

-  

Net income attributable to the Class B units (b)

 

(2) 

 

-  

 

(2) 

 

-  

Net income attributable to common units

 

45   

 

30  

 

143  

 

122  

Weighted average common units outstanding (millions) – basic and diluted

 

64.0 

 

62.6

 

63.8 

 

62.4

Net income per common unit – basic and diluted

 

$0.70 

 

$0.48

 

$2.23

 

$1.96

 

(a)              Under the terms of the Partnership Agreement, for any quarterly period, the participation of the incentive distribution rights (IDRs) is limited to the available cash distributions declared. Accordingly, incentive distributions allocated to the General Partner was based from the Partnership’s available cash during the current reporting period, but declared and paid in the subsequent reporting period.

 

(b)             As discussed in Notes 6 and 7, the Class B units entitle TransCanada to a distribution which is an amount based on 30 percent of GTN’s distributions after achieving certain annual thresholds.  The distribution will be payable in the first quarter with respect to the prior year’s distributions. Consistent with the application of Accounting Standards Codification (ASC) Topic 260 - “Earnings per share,” the Partnership will allocate a portion of net income attributable to controlling interests to the Class B units upon 30 percent of GTN’s total distributable cash flows exceeding $15 million for the nine month period ending December 31, 2015.

 

During the six months ended September 30, 2015, 30 percent of GTN’s total distributable cash flow was $17 million. As a result, $2 million of net income attributable to controlling interests was allocated to the Class B units for both the three and nine months ended September 30, 2015.

 

NOTE 9        CASH DISTRIBUTIONS

 

In the three and nine months ended September 30, 2015, the Partnership distributed $0.89 and $2.57 per common unit, respectively (2014 – $0.84 and $2.46 per common unit) for a total of $59 million and $169 million, respectively (2014 - $54 million and $157 million). The distributions paid in the three and nine months ended September 30, 2015 included an incentive distribution to the General Partner of approximately $0.9 million and $1.5 million, respectively (2014 - $0.3 million).

 

NOTE 10      CHANGE IN OPERATING WORKING CAPITAL

 

(unaudited)

 

Nine months ended September 30,

(millions of dollars)

 

2015

 

2014 

 

 

 

 

 

Change in accounts receivable and other

 

4

 

5

Change in accounts payable and accrued liabilities

 

4(a)

 

10

Change in accounts payable to affiliates

 

(7)

 

13

Change in accrued interest

 

8

 

8

Change in operating working capital

 

9

 

36

 

(a)    Excludes certain non-cash items primarily related to accruals of $3 million for construction of GTN’s Carty Lateral.

 

NOTE 11      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 in connection with its management of the Partnership. The Partnership reimburses the General Partner for all costs of services provided, including the costs of

 

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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. Such costs include (i) overhead costs (such as office space and equipment) and (ii) out-of-pocket expenses related to the provision of such services. The Partnership Agreement provides that the General Partner will determine the costs that are allocable to the Partnership in any reasonable manner determined by the General Partner in its sole discretion. Total costs charged to the Partnership by the General Partner were $1 million and $2 million for the three and nine months ended September 30, 2015, respectively (2014 – $1 million and $2 million).

 

As operator, TransCanada’s subsidiaries provide capital and operating services to our pipeline systems. TransCanada’s subsidiaries incur costs on behalf of our pipeline systems, including, but not limited to, employee salary and benefit costs, and property and liability insurance costs.

 

Capital and operating costs charged to our pipeline systems for the three and nine months ended September 30, 2015 and 2014 by TransCanada’s subsidiaries and amounts payable to TransCanada’s subsidiaries at September 30, 2015 and December 31, 2014 are summarized in the following tables:

 

 

 

 

Three months ended

 

Nine months ended

(unaudited)

 

 

September 30,

 

September 30,

(millions of dollars)

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

Capital and operating costs charged by TransCanada’s subsidiaries to:

 

 

 

 

 

 

 

 

 

Great Lakes (a) 

 

 

7

 

7

 

21

 

22

Northern Border (a)

 

 

10

 

9

 

26

 

26

GTN (a) 

 

 

8

 

8

 

22

 

21

Bison (a)

 

 

1

 

2

 

3

 

4

North Baja

 

 

1

 

1

 

4

 

3

Tuscarora

 

 

1

 

1

 

3

 

3

Impact on the Partnership’s net income:

 

 

 

 

 

 

 

 

 

Great Lakes

 

 

3

 

3

 

9

 

10

Northern Border

 

 

3

 

4

 

10

 

11

GTN (b)

 

 

6

 

5

 

17

 

14

Bison(c)

 

 

1

 

1

 

3

 

3

North Baja

 

 

1

 

1

 

4

 

3

Tuscarora

 

 

1

 

1

 

3

 

3

 

 

 

 

 

 

 

 

 

 

(a)              Represents 100 percent of the costs.

(b)             In April 2015, the Partnership acquired the remaining 30 percent interest in GTN.

(c)              In October 2014, the Partnership acquired the remaining 30 percent interest in Bison.

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Amount payable to TransCanada’s subsidiaries for costs charged in the period by:

 

 

 

 

 

Great Lakes (a)

 

 

5

 

9

Northern Border (a)

 

 

7

 

10

GTN

 

 

5

 

10

Bison

 

 

1

 

2

North Baja

 

 

1

 

1

Tuscarora

 

 

1

 

1

 

 

 

 

 

 

(a)              Represents 100 percent of the costs.

 

Great Lakes’ earns revenues from TransCanada and its affiliates under transportation contracts on multiple paths at various rates. Great Lakes earned $18 million and $65 million of transportation revenues under these contracts for the three and nine months ended September 30, 2015, respectively (2014 - $13 million and $48 million). These amounts represent 62 percent of total revenues earned by Great Lakes for the three and nine months ended

 

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September 30, 2015, respectively (2014 – 46 percent). Great Lakes also earned nil and $1 million of affiliated rental revenue for the three and nine months ended September 30, 2015, respectively (2014 – nil and $1 million).

 

Revenue from TransCanada and its affiliates of $9 million and $31 million are included in the Partnership’s equity earnings from Great Lakes for the three and nine months ended September 30, 2015, respectively (2014 - $6 million and $23 million). At September 30, 2015, $30 million was included in Great Lakes’ receivables in regards to the transportation contracts with TransCanada and its affiliates (December 31, 2014 - $15 million).

 

Effective November 1, 2014, Great Lakes executed contracts with an affiliate, ANR Pipeline Company (ANR), to provide firm service in Michigan and Wisconsin.  These contracts were at the maximum FERC authorized rate and were intended to replace historical contracts.  On December 3, 2014, the FERC accepted and suspended Great Lakes’ tariff records to become effective May 3, 2015, subject to refund.  On February 2, 2015, FERC issued an Order granting a rehearing and clarification request submitted by Great Lakes, which allowed additional time for FERC to consider Great Lakes’ request.  Following extensive discussions with numerous shippers and other stakeholders, on April 20, 2015, ANR filed a settlement with FERC that included an agreement by ANR to pay Great Lakes the difference between the historical and maximum rates (ANR Settlement). Great Lakes provided service to ANR under multiple service agreements and rates through May 3, 2015 when Great Lakes’ tariff records became effective and subject to refund.  Great Lakes deferred an approximate $9 million of revenue related to services performed in 2014 and approximately $14 million of additional revenue related to services performed through May 3, 2015 under such agreements. On October 15, 2015, FERC accepted and approved the ANR Settlement.  As a result, Great Lakes will recognize the deferred transportation revenue of approximately $23 million in the fourth quarter of 2015.

 

In April 2014, the Partnership paid $25 million to a subsidiary of TransCanada as additional consideration on the 2013 Acquisition. The additional consideration paid was due to the transportation service agreement executed by Portland General Electric Company with GTN relating to the Carty Lateral project.

 

NOTE 12                  FAIR VALUE MEASUREMENTS

 

(a) Fair Value Hierarchy

Under ASC 820, Fair Value Measurements and Disclosures, fair value measurements are characterized in one of three levels based upon the inputs used to arrive at the measurement. The three levels of the fair value hierarchy are as follows:

 

·      Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

·      Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

·      Level 3 inputs are unobservable inputs for the asset or liability.

 

When appropriate, valuations are adjusted for various factors including credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

 

(b) Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable and other, accounts payable and accrued liabilities, accounts payable to affiliates and accrued interest approximate their fair values because of the short maturity or duration of these instruments, or because the instruments bear a variable rate of interest or a rate that approximates current rates. The fair value of the Partnership’s debt is estimated by discounting the future cash flows of each instrument at estimated current borrowing rates. The fair value of interest rate derivatives is calculated using the income approach, which uses period-end market rates and applies a discounted cash flow valuation model.

 

The estimated fair value of the Partnership’s debt as at September 30, 2015 and December 31, 2014 are as follows:

 

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(unaudited)

 

September 30, 2015

 

December 31, 2014

 

(millions of dollars)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Senior Credit Facility due 2017

 

190

 

190

 

330

 

330

 

2013 Term Loan Facility due 2018

 

500

 

500

 

500

 

500

 

Short-Term Loan Facility due 2015

 

 -

 

 -

 

170

 

170

 

2015 Term Loan due 2018

 

170

 

170

 

-

 

-

 

4.65% Senior Notes due 2021, net

 

350

 

347

 

350

 

375

 

4.375% Senior Notes due 2025, net

 

349

 

330

 

-

 

-

 

5.09% Unsecured Senior Notes due 2015

 

-

 

-

 

75

 

76

 

Unsecured Term Loan facility due 2019

 

75

 

75

 

-

 

-

 

5.29% Unsecured Senior Notes due 2020

 

100

 

109

 

100

 

111

 

5.69% Unsecured Senior Notes due 2035

 

150

 

158

 

150

 

168

 

3.82% Series D Senior Notes due 2017

 

20

 

21

 

20

 

21

 

 

 

1,904

 

1,900

 

1,695

 

1,751

 

 

Long-term debt is recorded at amortized cost and classified in Level II of the fair value hierarchy for fair value disclosure purposes. Interest rate derivative assets and liabilities are classified in Level II for all periods presented where the fair value is determined by using valuation techniques that refer to observable market data or estimated market prices.

 

Market risk is the risk that changes in market interest rates may result in fluctuations in the fair values or cash flows of financial instruments. The Partnership’s floating rate debt is subject to LIBOR benchmark interest rate risk. The Partnership uses interest rate derivatives to manage its exposure to interest rate risk. We regularly assess the impact of interest rate fluctuations on future cash flows and evaluate hedging opportunities to mitigate our interest rate risk.

 

The interest rate swaps are structured such that the cash flows of the derivative instruments match those of the variable rate of interest on the 2013 Term Loan Facility. The Partnership hedged interest payments on $150 million of the variable-rate 2013 Term Loan Facility with interest rate swaps effective September 3, 2013 and maturing July 1, 2018, at a weighted average fixed interest rate of 2.79 percent. At September 30, 2015, the fair value of the interest rate swaps accounted for as cash flow hedges was a liability of $3 million (both on a gross and net basis) (December 31, 2014 - $1 million). The Partnership did not record any amounts in net income related to ineffectiveness for interest rate hedges for the three and nine months ended September 30, 2015 and 2014. The change in fair value of interest rate derivative instruments recognized in other comprehensive income was a loss of $1 million and $2 million for the three and nine months ended September 30, 2015, respectively (2014 – nil and a loss of $1 million). For the three and nine months ended September 30, 2015, the net realized loss related to the interest rate swaps was $1 million and $2 million, respectively, and was included in financial charges and other (2014 – $1 million and $2 million) (refer to Note 14).

 

The Partnership has no master netting agreements; however, contracts contain provisions with rights of offset. The Partnership has elected to present the fair value of derivative instruments with the right to offset on a gross basis in the balance sheet. Had the Partnership elected to present these instruments on a net basis, there would be no effect on the consolidated balance sheet as of September 30, 2015 and December 31, 2014.

 

NOTE 13                  ACCOUNTS RECEIVABLE AND OTHER

 

(unaudited)

 

 

 

 

 

(millions of dollars)

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Trade accounts receivable, net of allowance of nil

 

 

27

 

30

Accounts receivable from affiliates

 

 

1

 

1

Other

 

 

3

 

4

 

 

 

31

 

35

 

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NOTE 14                  FINANCIAL CHARGES AND OTHER

 

 

 

 

Three months ended

 

Nine months ended

 

(unaudited)

 

 

September 30,

 

September 30,

 

(millions of dollars)

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

15

 

11

 

43

 

35

 

Amortization of debt issue costs

 

 

-

 

-

 

1

 

1

 

Net realized loss related to the interest rate swaps

 

 

1

 

1

 

2

 

2

 

Other Income

 

 

(4)

 

(1)

 

(5)

 

(1)

 

 

 

 

12

 

11

 

41

 

37

 

 

NOTE 15                  CONTINGENCIES

 

Employees Retirement System of the City of St. Louis v. TC PipeLines GP, Inc., et al.  On October 13, 2015, an alleged unitholder of the Partnership filed a class action and derivative complaint in the Delaware Court of Chancery against the General Partner, TransCanada American Investments, Ltd. (TAIL) and TransCanada, and the Partnership as a nominal defendant.   The complaint alleges direct and derivative claims for breach of contract, breach of the duty of good faith and fair dealing, aiding and abetting breach of contract, and tortious interference in connection with the 2015 GTN Acquisition, including the issuance by the Partnership of $95 million in Class B Units and amendments to the Partnership Agreement to provide for the issuance of the Class B Units.   Plaintiff seeks, among other things, to enjoin future issuances of Class B Units to TransCanada or any of its subsidiaries, disgorgement of certain distributions to the General Partner, TransCanada and any related entities, return of some or all of the Class B Units to the Partnership, rescission of the amendments to the Partnership Agreement, monetary damages and attorney fees.   The Partnership intends to defend vigorously against the claims asserted.

 

NOTE 16                  SUBSEQUENT EVENTS

 

Management of the Partnership has reviewed subsequent events through November 6, 2015, the date the financial statements were issued, and concluded there were no events or transactions during this period that would require recognition or disclosure in the consolidated financial statements other than what is disclosed here and/or those already disclosed in the preceding notes.

 

On October 22, 2015, the board of directors of our General Partner declared the Partnership’s third quarter 2015 cash distribution in the amount of $0.89 per common unit payable on November 13, 2015 to unitholders of record as of November 3, 2015.

 

Northern Border declared its third quarter 2015 distribution of $45 million on October 23, 2015, of which the Partnership will receive its 50 percent share or $23 million on November 2, 2015.

 

Great Lakes declared its third quarter 2015 distribution of $7 million on October 23, 2015, of which the Partnership will receive its 46.45 percent share or $3 million on November 2, 2015.

 

On October 9, 2015 Northern Border closed on the renewal and extension of its $200 million revolving credit facility that was to expire in 2016 for an additional five years, maturing October 9, 2020.

 

On November 5, 2015, we entered into an agreement with TransCanada to acquire a 49.9 percent interest in the Portland Natural Gas Transmission System (PNGTS) for $223 million including approximately $35 million in proportionate PNGTS debt (PNGTS Acquisition).  PNGTS is a high-capacity, high-pressure interstate natural gas pipeline which began serving New England’s energy needs in March, 1999. The pipeline connects with the TransQuebec and Maritimes Pipeline at the Canadian border and shares facilities with the Maritimes and Northeast Pipeline from Westbrook, Maine to a connection with the Tennessee Gas Pipeline System near Boston, MA.  The purchase agreement provides for additional payments to TransCanada ranging from $5 million up to a total of $50 million if pipeline capacity is expanded to various thresholds during the fifteen year period following the date of closing.  The transaction is expected to close at the end of 2015.  The Partnership plans to finance the acquisition with a combination of debt and equity.

 

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The transaction was approved by the Board of Directors of the general partner, following approval and recommendation from the Board’s conflicts committee, which is comprised entirely of independent directors.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes included in Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2014.

 

RECENT BUSINESS DEVELOPMENTS

 

Cash Distributions –

 

On April 23, 2015, the board of directors of our General Partner declared the Partnership’s first quarter 2015 cash distribution in the amount of $0.84 per common unit, payable on May 15, 2015 to unitholders of record as of May 5, 2015.

 

On July 23, 2015, the board of directors of our General Partner declared the Partnership’s second quarter 2015 cash distribution in the amount of $0.89 per common unit, payable on August 14, 2015 to unitholders of record as of August 4, 2015. The declared distribution reflected a $0.05 per common unit increase to the first quarter 2015 cash distribution.

 

On October 22, 2015, the board of directors of our General Partner declared the Partnership’s third quarter 2015 cash distribution in the amount of $0.89 per common unit payable on November 13, 2015 to unitholders of record as of November 3, 2014.

 

The first quarter 2015 distribution exceeded the first target of the General Partner’s IDRs by $0.03 per common unit, resulting in an increase in the distribution on the General Partner interest from 2 percent to 15 percent on the incremental distribution in excess of the first target.

 

The second and third quarter 2015 distribution exceeded the first and second targets of the General Partner’s IDRs by $0.07 and $0.01 per common unit, respectively, resulting in an increase in the distribution on the General Partner interest from 2 percent to 15 percent on the incremental distribution in excess of the first target and from 15 percent to 25 percent on the incremental distribution in excess of the second target.

 

Debt Offering – On March 13, 2015, the Partnership closed a $350 million public offering of senior unsecured notes bearing an interest rate of 4.375 percent maturing March 13, 2025. The net proceeds of $346 million were used to fund a portion of the 2015 GTN Acquisition and reduce the amount outstanding under our Senior Credit Facility.

 

GTN Acquisition – On April 1, 2015, the Partnership acquired the remaining 30 percent interest in GTN from a subsidiary of TransCanada. The total purchase price of the 2015 GTN Acquisition was $446 million plus purchase price adjustments. The purchase price consisted of $264 million in cash (including the final purchase price adjustment of $11 million), the assumption of $98 million in proportional GTN debt and the issuance of $95 million of new Class B units to TransCanada. The Class B units entitle TransCanada to a distribution based on 30 percent of GTN’s annual distributions as follows: (i) 100 percent of distributions above $20 million through March 31, 2020; and (ii) 25 percent of distributions above $20 million thereafter. This acquisition is expected to improve the Partnership’s long-term cash flow stability and predictability.

 

GTN Settlement – On June 30, 2015, FERC approved GTN’s rate settlement as filed on April 23, 2015.  The rate settlement satisfies GTN’s obligations from its 2011 rate settlement for new rates to be in effect on January 1, 2016, and the 2015 settlement reduced rates on the mainline by three percent on July 1, 2015.  In January 2016, GTN’s rates will decrease a further 10 percent and will continue in effect through December 31, 2019. Unless superseded by a subsequent rate case or settlement, GTN’s rates will decrease an additional eight percent for the period January 1, 2020 through December 31, 2021 when GTN will be required to establish new rates. We expect any near term impact of the rate reduction to GTN’s revenue will in part be offset by increased contracting and other revenue opportunities on the system as well as revenue from Carty Lateral which was placed in-service in October 2015.

 

2015 Term Loan Facility – On September 30, 2015, the Partnership refinanced its maturing $170 million short-term loan with a three-year term loan maturing on October 1, 2018. The outstanding principal bears interest based on LIBOR plus an applicable margin.

 

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Great Lakes - On October 15, 2015, FERC approved a settlement regarding transportation service rates payable to Great Lakes, from its TransCanada affiliate, ANR Pipeline Company.  As a result of this settlement, Great Lakes will recognize the deferred transportation revenue of approximately $23 million in the fourth quarter of 2015, inclusive of an approximate $9 million of revenue related to services performed in 2014.  Please read Note 11- Related Party Transactions within Item 1.”Financial Statements” of this document for detailed disclosure regarding Great Lakes suspended contracts with ANR.

 

GTN Carty Lateral - In October 2015, GTN placed the Carty Lateral in-service. The lateral was constructed in north-central Oregon to deliver natural gas to an electric generation facility owned by Portland General Electric Company. Portland General Electric Company has a 30-year contract for 100 percent of Carty Lateral’s capacity and a 20-year GTN mainline contract for 75,000 dekatherms/day beginning in May 2016.

 

PNGTS Acquisition - On November 5, 2015, we entered into an agreement with TransCanada to acquire a 49.9 percent interest in the PNGTS for $223 million including approximately $35 million in proportionate PNGTS debt.  PNGTS is a high-capacity, high-pressure interstate natural gas pipeline which began serving New England’s energy needs in March, 1999. The pipeline connects with the TransQuebec and Maritimes Pipeline at the Canadian border and shares facilities with the Maritimes and Northeast Pipeline from Westbrook, Maine to a connection with the Tennessee Gas Pipeline System near Boston, MA.  The purchase agreement provides for additional payments to TransCanada ranging from $5 million up to a total of $50 million if pipeline capacity is expanded to various thresholds during the fifteen year period following the date of closing.  The transaction is expected to close at the end of 2015.  The Partnership plans to finance the acquisition with a combination of debt and equity.

 

The transaction was approved by the Board of Directors of the general partner, following approval and recommendation from the Board’s conflicts committee which is comprised entirely of independent directors.

 

Outlook of Our Business

 

TransCanada, the ultimate parent company of our General Partner, is currently executing a large capital program that includes 12 billion Canadian dollars of near-term growth projects together with a number of other growth initiatives, including 35 billion Canadian dollars of large-scale commercially secured projects. TransCanada’s management has expressed its intent to drop down all of TransCanada’s remaining U.S. natural gas pipeline assets into the Partnership to assist in funding its capital program and increase the size and diversity of the Partnership’s asset base. There can be no assurance when any dropdowns may occur.

 

The Partnership’s financial performance is expected to benefit from acquisitions including the recently announced acquisition of a 49.9 percent interest in PNGTS from TransCanada. Despite uncertainty in energy commodity prices, our portfolio of six FERC-regulated interstate natural gas pipelines, five of which are backed by long-term, ship-or-pay contracts, is expected to deliver generally stable results in the remainder of 2015.

 

HOW WE EVALUATE OUR OPERATIONS

 

We evaluate our business primarily on the basis of the underlying operating results for each of our pipeline systems along with a measure of our earnings before interest, taxes, depreciation and amortization (EBITDA) and distributable cash flow. These measures do not have a standardized meaning prescribed by GAAP. Therefore, these measures are considered to be non-GAAP measures and are unlikely to be comparable to similar measures presented by other entities. Refer to “Non-GAAP Financial Measures” for additional information.

 

RESULTS OF OPERATIONS

 

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions, which cannot be known with certainty, that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ. There were no significant changes to the Partnership’s critical accounting policies and estimates during the three and nine months ended September 30, 2015.

 

Information about our critical accounting policies and estimates is included under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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Net Income Attributable to Controlling Interests

To supplement our financial statements, we have presented a comparison of the earnings contribution components from each of our investments. We have presented net income attributable to controlling interests in this format to enhance investors’ understanding of the way management analyzes our financial performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

 

 

 

Three months ended

 

 

Nine months ended

 

(unaudited)

 

September 30,

 

 

September 30,

 

(millions of dollars)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

GTN

 

21

 

16

 

65

 

53

Bison

 

12

 

12

 

36

 

35

North Baja

 

8

 

6

 

18

 

18

Tuscarora

 

4

 

3

 

13

 

12

Equity earnings:

 

 

 

 

 

 

 

 

Northern Border

 

16

 

14

 

50

 

53

Great Lakes

 

1

 

1

 

13

 

13

Partnership expenses

 

(13)

 

(13)

 

(38)

 

(33)

Net income

 

49

 

39

 

157

 

151

Net income attributable to non-controlling interests

 

-

 

(8)

 

(7)

 

(26)

Net income attributable to controlling interests

 

49

 

31

 

150

 

125

 

Third Quarter 2015 Compared with Third Quarter 2014

 

For the three months ended September 30, 2015, net income attributable to controlling interests increased by $18 million compared to the same period in 2014. The increase was primarily due to:

 

·                  higher net income from GTN mainly due to higher revenues from short-term services sold to customers;

·                  higher equity earnings from Northern Border due to higher revenues from the sale of available capacity; and

·                  the 2015 GTN Acquisition effective April 1, 2015, whereby the Partnership now owns 100 percent of GTN.

 

Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014

 

For the nine months ended September 30, 2015, net income attributable to controlling interests increased by $25 million compared to the same period in 2014. The increase was primarily the net effect of:

 

·                  higher net income from GTN mainly due to higher revenues from short-term services sold to customers;

·                  lower equity earnings from Northern Border mainly due to lower revenues from the sale of short-term services as a result of milder winter weather during 2015 compared to 2014;

·                  the recent acquisitions of the remaining interests in GTN and Bison whereby the Partnership now owns 100 percent of GTN and Bison effective April 1, 2015 and October 1, 2014, respectively; and

·                  higher partnership expenses due to the increase in interest expense related to additional borrowings to fund a portion of the 2014 Bison Acquisition and the 2015 GTN Acquisition.

 

Net Income Attributable to Common Units and Net Income per Common Unit

 

As discussed in “Note 8 Net Income per Common Unit” within Item 1. Financial Statements,  we have allocated $2 million of the Partnership’s net income attributable to common units to the Class B units in the third quarter, representing the excess of 30 percent of GTN’s distribution over the 2015 threshold level of $15 million. This allocation reduced net income per common unit by approximately three cents for both the three and nine months ended September 30, 2015.

 

Additionally, as the threshold level for 2015 has now been exceeded as described above, we expect to allocate 30 percent of GTN’s fourth quarter distributable cash flow to the Class B units.

 

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Please read Notes 6 and 7 within Item 1. “Financial Statements” for more detailed disclosures on the 2015 GTN Acquisition and Issuance of Class B units.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

Our principal sources of liquidity include distributions received from our investments in partially-owned affiliates, operating cash flows from our subsidiaries, public offerings of debt and equity, term loans and our bank credit facility. The Partnership funds its operating expenses, debt service and cash distributions primarily with operating cash flow. Long-term capital needs may be met through the issuance of long-term debt and/or equity.

 

Our pipeline systems’ principal sources of liquidity are cash generated from operating activities, long-term debt offerings, bank credit facilities and equity contributions from their owners. Our pipeline systems have historically funded operating expenses, debt service and cash distributions to their owners primarily with operating cash flow. However, since the fourth quarter of 2010, Great Lakes has funded its debt repayments with cash calls to its owners.

 

Capital expenditures are funded by a variety of sources, including cash generated from operating activities, borrowings under bank credit facilities, issuance of senior unsecured notes or equity contributions from our pipeline systems’ owners. The ability of our pipeline systems to access the debt capital markets under reasonable terms depends on their financial position and general market conditions.

 

The Partnership’s pipeline systems monitor the creditworthiness of their customers and have credit provisions included in their tariffs which, although limited by FERC, allow them to request credit support as circumstances dictate.

 

Our cash flow is based on the distributions from our portfolio of six pipelines. Overall, we believe that our pipeline systems’ ability to obtain financing at reasonable rates, together with a history of consistent cash flow from operating activities, provide a solid foundation to meet future liquidity and capital requirements. We expect to be able to fund our liquidity requirements, including our distributions and required debt repayments, at the Partnership level over the next 12 months utilizing our cash flow and if required, our existing Senior Credit Facility.

 

Issuance of Class B Units to TransCanada

 

The Class B units issued on April 1, 2015 represent limited partner interests in us and entitle TransCanada to an annual distribution which is an amount based on 30 percent of GTN’s annual distributions after achieving certain annual thresholds.

 

Beginning in the first quarter of 2016 and annually thereafter, our cash flows will be impacted by distributions payable to the Class B units.

 

Please read Notes 6 and 7 within Item 1. “Financial Statements” for more detailed disclosures on the 2015 GTN Acquisition and Issuance of Class B units.

 

Non-GAAP Financial Measures

 

To further supplement our financial statements, we have disclosed the following non-GAAP financial measures effective September 30, 2015:

 

·                  EBITDA

·                  Total distributable cash flow

·                  Distributable cash flow

 

EBITDA is an approximate measure of our operating cash flow during the current earnings period and reconciles directly to the net income amount presented. It measures our earnings before deducting interest, depreciation and amortization, net income attributable to non-controlling interests, distributions allocable to the General Partner and Class B units, and it includes earnings from our equity investments.

 

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Total distributable cash flow and distributable cash flow provide measures of distributable cash generated during the current earnings period and reconcile directly to the net income amount presented.

 

Total distributable cash flow includes EBITDA plus:

 

·                  Distributions from our equity investments

 

less:

 

·                  Earnings from our equity investments,

 

·                  Equity allowance for funds used during construction (Equity AFUDC),

 

·                  Interest expense,

 

·                  Distributions to non-controlling interests, and

 

·                  Maintenance capital expenditures

 

Distributable cash flow is computed net of distributions declared to the General Partner and distributions allocable to Class B units. Distributions declared to the General Partner are based on its two percent interest plus an amount equal to incentive distributions. Distributions allocable to the Class B units equal 30 percent of GTN’s distributable cash flow for the six months ending September 30, 2015 less $15 million.

 

Distributable cash flow information and EBITDA are presented to assist investors’ in evaluating our business performance. We believe these measures provide additional meaningful information in evaluating our financial performance and cash distribution capability. As well, management uses these measures as a basis for recommendations to our General Partner’s board of directors regarding the distribution amount to be declared each quarter.

 

The non-GAAP measures described above are provided as a supplement to GAAP financial results and are not meant to be considered in isolation or as substitutes for financial results prepared in accordance with GAAP. Additionally, these measures as presented may not be comparable to similarly titled measures of other companies.

 

The following table represents a reconciliation of our EBITDA, Total distributable cash flow and distributable cash flow to the most directly comparable GAAP financial measures for the periods presented:

 

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Reconciliations of Net Income to Distributable Cash Flow

 

 

 

 

Three months ended

 

 

Nine months ended

 

 

(unaudited)

 

 

September 30,

 

 

September 30,

 

 

(millions of dollars)

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

Net income

 

49

 

39

 

157

 

151

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

Interest expense (a)

 

16

 

12

 

45

 

37

 

Depreciation and amortization (b)

 

21

 

21

 

64

 

65

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

86

 

72

 

266

 

253

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

Distributions from equity investments(c)

 

 

 

 

 

 

 

 

 

Northern Border

 

23

 

19

 

69

 

66

 

Great Lakes

 

3

 

4

 

21

 

22

 

 

 

26

 

23

 

90

 

88

 

Less: