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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
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F O R M 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file number: 000-26091
TC PIPELINES, LP
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2135448
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FOUR GREENSPOINT PLAZA
16945 NORTHCHASE DRIVE
HOUSTON, TEXAS 77060
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(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 281-873-7774
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLES OF EACH CLASS NAME OF EACH EXCHANGE ON
-------------------- WHICH REGISTERED
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None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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TITLE OF EACH CLASS
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COMMON UNITS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to be the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on March 10, 2000, was
approximately $188.6 million.
As of March 10, 2000, there were 14,690,694 of the registrant's common
units outstanding.
TC PIPELINES, LP
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business 2
Item 2. Properties 11
Item 3. Litigation 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Units and Related
Security Holder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Officers of the General Partner 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 25
FORWARD-LOOKING INFORMATION
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Certain written and oral statements made or incorporated by reference from
time to time by TC PipeLines, LP, its general partner, or their
representatives in this Form 10-K and other reports and filings made with the
Securities and Exchange Commission, press releases, conferences or otherwise,
are forward-looking and relate to, among other things, anticipated financial
performance, business prospects, strategies, market forces and commitments.
Much of this information appears in the Management's Discussion and Analysis
found herein. By its nature, such forward-looking information is subject to
various risks and uncertainties, including those discussed below, which could
cause TC PipeLines' actual results and experience to differ materially from
the anticipated results or other expectations expressed. Readers are
cautioned not to place undue reliance on this forward-looking information,
which is as of the date of this Form 10-K, and TC PipeLines undertakes no
obligation to update publicly or revise any forward-looking information,
whether as a result of new information, future events or otherwise.
Forward-looking information typically contains statements with words such as
"anticipate," "believe," "estimate," "expect," "plan," "target" or similar
words suggesting future outcomes. The following discussion is intended to
identify certain factors, though not necessarily all factors, which could
cause future outcomes to differ materially from those set forth in the
forward-looking information.
The risks and uncertainties that may affect the operations, performance,
development and results of TC PipeLines' business and its ability to make
cash distributions to unitholders include, but are not limited to, the
following factors:
- regulatory decisions, particularly those of the Federal Energy
Regulatory Commission ("FERC");
- cost of acquisitions, including related debt service payments;
- tariff and transportation charges to be collected by Northern
Border Pipeline Company for transportation services on the Northern
Border pipeline system;
- the amount of cash distributed to TC PipeLines by Northern Border
Pipeline;
- the inability of Northern Border Pipeline to maintain or increase
its rate base by successfully completing FERC approved projects;
- a decline in the availability of western Canadian natural gas;
- majority control of the Northern Border Pipeline management
committee by Northern Border Partners, L.P.;
- the amount of cash required to be contributed by TC PipeLines to
Northern Border Pipeline to fund its operations;
- competitive factors and pricing pressures;
- overcapacity in the natural gas transportation industry;
- shifts in market demand;
- changes in laws and regulations, including environmental and
regulatory laws;
- increases in maintenance and operating costs that are not recovered
by increased transportation rates;
- uncertainties of litigation;
- prevailing economic conditions, particularly conditions of the capital
and equity markets;
- the effects of required compliance with debt covenants;
- timing of completion of capital or maintenance projects;
- the availability of adequate levels of insurance;
- currency and interest rate fluctuations;
- the potential that the Internal Revenue Service could treat TC
PipeLines as a corporation;
- various events which could disrupt operations (including explosions,
fires, and severe weather conditions); and
- dependence on TransCanada's management expertise.
---------------------------
All amounts are stated in United States dollars unless otherwise indicated.
1
PART I
ITEM 1. BUSINESS
BUSINESS OF TC PIPELINES, LP
TC PipeLines, LP and its subsidiary limited partnership, TC PipeLines
Intermediate Limited Partnership, collectively referred to herein as "TC
PipeLines" or "the Partnership," were formed by TransCanada PipeLines Limited
to acquire, own and participate in the management of United States based
pipeline assets. A wholly-owned subsidiary of TransCanada, TC PipeLines GP,
Inc., serves as the general partner of the Partnership.
On May 28, 1999, the Partnership issued 14,300,000 common units (11,500,000
to the public and 2,800,000 to an affiliate of the general partner) through
its initial public offering for net proceeds of $274.6 million. The
Partnership used the net proceeds from this offering, along with 3,200,000
subordinated units, an aggregate 2% general partner interest and incentive
distribution rights, to acquire the collective 30% general partner interest
in Northern Border Pipeline Company previously held by TransCanada Border
PipeLine Ltd. and TransCan Northern Ltd. (collectively, the predecessor
companies), affiliates of the general partner. The remaining 70% general
partner interest in Northern Border Pipeline is held by Northern Border
Partners, L.P., a publicly traded limited partnership that is not affiliated
with TC PipeLines.
Subsequent to the initial public offering, the underwriters exercised a
portion of their over-allotment option and purchased 390,694 additional
common units for net proceeds of $7.5 million. The Partnership used these
proceeds to redeem an equal number of subordinated units held by the general
partner.
The general partner holds an aggregate 2% general partner interest in the
Partnership. The general partner also owns 2,809,306 subordinated units and
is entitled to incentive distribution rights if quarterly cash distributions
on the units exceed specified levels.
For the period ended December 31, 1999, the Partnership's 30% general partner
interest in Northern Border Pipeline represents its only material asset.
BUSINESS OF NORTHERN BORDER PIPELINE COMPANY
GENERAL
Northern Border Pipeline Company is a general partnership formed in 1978. The
general partners are TC PipeLines, LP and Northern Border Partners, L.P.,
both of which are publicly traded partnerships. Each of TC PipeLines and
Northern Border Partners holds its interest in Northern Border Pipeline
Company, 30% and 70% of voting power, respectively, through a subsidiary
limited partnership. The general partner of TC PipeLines and its subsidiary
limited partnership is TC PipeLines GP, Inc., a subsidiary of TransCanada.
The general partners of Northern Border Partners and its subsidiary limited
partnership are Northern Plains Natural Gas Company and Pan Border Gas
Company, both subsidiaries of Enron Corp., and Northwest Border Pipeline
Company, a subsidiary of The Williams Companies, Inc.
Northern Border Pipeline owns a 1,214-mile United States interstate pipeline
system that transports natural gas from the Montana-Saskatchewan border to
natural gas markets in the midwestern United States. The Northern Border
pipeline system connects with multiple pipelines, which provides shippers
with access to the various natural gas markets served by those pipelines.
The Northern Border pipeline system was initially constructed in 1982 and was
expanded and/or extended in 1991, 1992 and 1998. The most recent expansion
and extension, called The Chicago Project, was completed in late 1998, and
increased the pipeline system's ability to receive natural gas by 42% to its
current capacity of 2,373 million cubic feet per day. In the year ended
December 31, 1999, TC PipeLines estimates that Northern Border Pipeline
transported approximately 23% of the total amount of natural gas imported
from Canada to the United States. Over the same period, approximately 91% of
the natural gas Northern Border Pipeline transported was produced in the
western Canadian sedimentary basin located in the provinces of Alberta,
British Columbia and Saskatchewan.
Northern Border Pipeline transports natural gas for shippers under a tariff
regulated by the Federal Energy Regulatory Commission. Northern Border
Pipeline generates revenues from individual transportation contracts with
shippers that provide for the receipt and delivery of natural gas at points
along the Northern Border pipeline
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system. The tariff allows Northern Border Pipeline an opportunity to recover
from shippers its cost of service, including operations and maintenance
costs, taxes other than income taxes, interest, depreciation and
amortization, an allowance for income taxes and a regulated return on equity.
Shippers contract to pay for a proportionate share of those costs through a
mileage-based charge for the amount of capacity contracted. The shippers are
obligated to pay the charge regardless of the amount of natural gas they
transport. Northern Border Pipeline does not own the natural gas that it
transports and therefore Northern Border Pipeline does not assume any natural
gas commodity price risk.
The management of Northern Border Pipeline is overseen by a four-member
management committee. TC PipeLines controls 30% of the voting power of the
Northern Border Pipeline management committee and designates one member.
Northern Border Partners controls 70% of the voting power of the Northern
Border Pipeline management committee and designates three members.
Under the Northern Border Pipeline partnership agreement, voting power on the
Northern Border Pipeline management committee is presently allocated among
Northern Border Partners' three general partners in proportion to their
general partner interests in Northern Border Partners. As a result, the 70%
voting power of Northern Border Partners' three representatives on the
management committee is allocated as follows: 35% to the representative
designated by Northern Plains, 22.75% to the representative designated by Pan
Border and 12.25% to the representative designated by Northwest Border.
Northern Plains and Pan Border are subsidiaries of Enron Corp. Therefore,
Enron controls 57.75% of the voting power of the management committee and has
the right to select two of the members of the management committee.
The Northern Border pipeline system is operated by Northern Plains pursuant
to an operating agreement. As of December 31, 1999, Northern Plains employed
approximately 190 individuals located at its headquarters in Omaha, Nebraska
and at locations along the pipeline route. Northern Plains' employees are not
represented by any labor union and are not covered by any collective
bargaining agreements.
THE NORTHERN BORDER PIPELINE SYSTEM
With the completion of The Chicago Project in December 1998, Northern Border
Pipeline owns a 1,214-mile United States interstate pipeline system that
transports natural gas from the Montana-Saskatchewan border near Port of
Morgan, Montana, to interconnecting pipelines in the upper Midwest of the
United States. Construction of the Northern Border pipeline system was
initially completed in 1982 and was expanded and/or extended in 1991, 1992
and 1998.
The Northern Border pipeline system has pipeline access to natural gas
reserves in the western Canadian sedimentary basin in the provinces of
Alberta, British Columbia and Saskatchewan in Canada, as well as the
Williston Basin in the United States. The Northern Border pipeline system
also has access to synthetic gas produced at the Dakota Gasification plant in
North Dakota. For the year ended December 31, 1999, of the natural gas
transported on the Northern Border pipeline system, approximately 91% was
produced in Canada, approximately 5% was produced by the Dakota Gasification
plant, and approximately 4% was produced in the Williston Basin.
The Northern Border pipeline system consists of 822 miles of 42-inch diameter
pipe designed to transport 2,373 million cubic feet per day from the Canadian
border to Ventura, Iowa; 30-inch diameter pipe and 36-inch diameter pipe,
each approximately 147 miles in length, designed to transport 1,300 million
cubic feet per day in total from Ventura, Iowa to Harper, Iowa; and 226 miles
of 36-inch diameter pipe and 19 miles of 30-inch diameter pipe designed to
transport 645 million cubic feet per day from Harper, Iowa to a terminus near
Manhattan, Illinois (Chicago area). Along the pipeline there are 15
compressor stations with total rated horsepower of 476,500 and measurement
facilities to support the receipt and delivery of gas at various points.
Other facilities include four field offices and a microwave communication
system with 51 tower sites.
At its northern end, the Northern Border pipeline system is connected to
TransCanada's majority-owned Foothills Pipe Lines (Sask.) Ltd. system in
Canada, which is connected to the Alberta System, owned by TransCanada, and
the pipeline system owned by Transgas Limited in Saskatchewan. The Alberta
System gathers and transports approximately 19% of the total North American
natural gas production and approximately 77% of the natural gas produced in
the western Canadian sedimentary basin. The Northern Border pipeline system
also connects
3
with facilities of Williston Basin Interstate Pipeline at Glen Ullin and
Buford, North Dakota, facilities of Amerada Hess Corporation at Watford City,
North Dakota and facilities of Dakota Gasification Company at Hebron, North
Dakota in the northern portion of the Northern Border pipeline system.
INTERCONNECTS
The Northern Border pipeline system connects with multiple pipelines, which
provides its shippers with access to the various natural gas markets served
by those pipelines. The Northern Border pipeline system interconnects with
pipeline facilities of:
- Northern Natural Gas Company, an Enron subsidiary, at Ventura, Iowa as
well as multiple smaller interconnections in South Dakota, Minnesota
and Iowa;
- Natural Gas Pipeline Company of America at Harper, Iowa;
- MidAmerican Energy Company at Iowa City and Davenport, Iowa;
- Alliant Power Company at Prophetstown, Illinois;
- Northern Illinois Gas Company at Troy Grove and Minooka, Illinois;
- Midwestern Gas Transmission Company near Channahon, Illinois;
- ANR Pipeline Company near Manhattan, Illinois; and
- The Peoples Gas Light and Coke Company near Manhattan, Illinois at the
terminus of the Northern Border pipeline system.
The Ventura, Iowa interconnect with Northern Natural Gas Company functions as a
large market center, where natural gas transported on the Northern Border
pipeline system is sold, traded and received for transport to significant
consuming markets in the Midwest and to interconnecting pipeline facilities
destined for other markets.
SHIPPERS
The Northern Border pipeline system serves more than 40 shippers with diverse
operating and financial profiles. Based upon shippers' cost of service
obligations, as of December 31, 1999, 93% of the firm capacity is contracted
by producers and marketers. The remaining firm capacity is contracted to
local distribution companies (5%) and interstate pipelines (2%). As of
December 31, 1999, the termination dates of these contracts ranged from
October 31, 2001 to December 21, 2013 and the weighted average contract life,
based upon annual cost of service obligations was slightly under seven years
with at least 97% of capacity contracted through mid-September 2003.
Based on their proportionate shares of the cost of service, as of December
31, 1999, the five largest shippers are: Pan-Alberta Gas (U.S.) Inc. (25.7%),
TransCanada PipeLines Limited (10.8%), PanCanadian Energy Services Inc.
(7.0%), Enron North America Corp. (formerly Enron Capital & Trade Resources
Corp.) (5.7%) and PetroCanada Hydrocarbons Inc. (4.9%). The 20 largest
shippers, in total, are responsible for an estimated 88.4% of Northern Border
Pipeline's cost of service.
As of December 31, 1999, Northern Border Pipeline's largest shipper,
Pan-Alberta holds firm capacity of 690 million cubic feet per day under three
contracts with terms to October 31, 2003. An affiliate of Enron provides
guaranties for 300 million cubic feet per day of Pan-Alberta's contractual
obligations through October 31, 2001. In addition, Pan-Alberta's remaining
capacity is supported by various credit support arrangements, including,
among others, a letter of credit, a guaranty from an interstate pipeline
company through October 31, 2001
4
for 132 million cubic feet per day, an escrow account and an upstream
capacity transfer agreement. In January 2000, it was announced that Southern
Company Energy Marketing has agreed in principle to manage the assets of
Pan-Alberta Gas Ltd., which would include Pan-Alberta's contracts with
Northern Border Pipeline. Subject to the necessary approvals, this
arrangement is expected to go into effect in the second quarter of 2000.
Some of Northern Border Pipeline's shippers are affiliated with the general
partners of TC PipeLines and Northern Border Partners. TransCanada holds
contracts representing 10.8% of the cost of service. Enron North America
Corp., a subsidiary of Enron, holds contracts representing 5.3% of the cost
of service, which was 5.7% at 1999 year end. Transcontinental Gas Pipe Line
Corporation, a subsidiary of Williams, holds a contract representing 0.8% of
the cost of service. See Item 13. "Certain Relationships and Related
Transactions."
DEMAND FOR TRANSPORTATION CAPACITY
Northern Border Pipeline's long-term financial condition is dependent on the
continued availability of economic western Canadian natural gas for import
into the United States. Natural gas reserves may require significant capital
expenditures by others for exploration and development drilling and the
installation of production, gathering, storage, transportation and other
facilities that permit natural gas to be produced and delivered to pipelines
that interconnect with the Northern Border pipeline system. Low prices for
natural gas, regulatory limitations or the lack of available capital for
these projects could adversely affect the development of additional reserves
and production, gathering, storage and pipeline transmission and import and
export of natural gas supplies. Additional pipeline export capacity also
could accelerate depletion of these reserves.
Northern Border Pipeline's business depends in part on the level of demand
for western Canadian natural gas in the markets the Northern Border pipeline
system serves. The volumes of natural gas delivered to these markets from
other sources affect the demand for both western Canadian natural gas and use
of the Northern Border pipeline system. Demand for western Canadian natural
gas to serve other markets also influences the ability and willingness of
shippers to use the Northern Border pipeline system to meet demand in the
market that Northern Border Pipeline serves.
A variety of factors could affect the demand for natural gas in the markets
that the Northern Border pipeline system serves. These factors include:
- economic conditions;
- fuel conservation measures;
- alternative energy requirements and prices;
- climatic conditions;
- government regulation; and
- technological advances in fuel economy and energy generation devices.
TC PipeLines cannot predict whether these or other factors will have an
adverse effect on demand for use of the Northern Border pipeline system or
how significant that adverse effect could be.
FUTURE DEMAND AND COMPETITION
In October 1998, Northern Border Pipeline applied to the FERC for approval of
Project 2000 to expand and extend its pipeline system into Indiana. If
constructed, Project 2000 will strategically position Northern Border
Pipeline to move natural gas east of Chicago and will place Northern Border
Pipeline in direct contact with major industrial natural gas consumers.
Project 2000 would afford shippers on the expanded/extended pipeline system
access to the northern Indiana industrial zone. The proposed pipeline
extension will interconnect with Northern Indiana Public Service Company, a
major midwest local distribution company with a large industrial load
requirement, at the terminus near North Hayden, Indiana.
5
Permanent reassignments of contracted transportation capacity, or "capacity
releases," were negotiated between several existing and project shippers
originally included in the October 1998 application. On March 25, 1999,
Northern Border Pipeline amended its application to the FERC to reflect these
changes. Numerous parties filed to intervene in this proceeding. Several
parties protested this application asking that the FERC deny Northern Border
Pipeline's request for rolled-in rate treatment for the new facilities and
that Northern Border Pipeline be required to solicit indications of interest
from existing shippers for capacity releases that would possibly eliminate
the construction of certain new facilities. "Rolled-in rate treatment" is the
combining of the cost of service of the existing system with the cost of
service related to the new facilities for purposes of calculating a
system-wide transportation charge.
On September 15, 1999, the FERC issued a policy statement on certification
and pricing of new construction projects. The policy statement indicated a
preference for establishing the transportation charge for newly constructed
facilities on a separate, stand-alone basis, also known as "incremental
pricing." This reversed the existing presumption in favor of rolled-in
pricing when the impact of the new capacity is not more than a 5% increase to
existing rates and results in system-wide benefits. As set forth above,
Northern Border Pipeline's amended application to construct facilities to
expand its system was filed based upon rolled-in rate treatment. On December
17, 1999, Northern Border Pipeline filed an amendment to the March 25, 1999
certificate application to support rolled-in rate treatment in light of the
FERC's new policy statement, and to modify the proposed facilities. Several
parties renewed their protests of Northern Border Pipeline's application. On
March 16, 2000, the FERC issued an order granting Northern Border Pipeline's
application for a certificate to construct and operate the proposed
facilities and finding that Northern Border Pipeline's project meets the
requirements of the new policy statement. The FERC approved Northern Border
Pipeline's request for rolled-in-rate treatment based upon Northern Border
Pipeline's proposed project costs. Upon acceptance of Northern Border
Pipeline's certificate and completion of acquisition of necessary
right-of-way, permits and equipment construction will proceed. The revised
capital expenditures for Project 2000 are estimated to be approximately $94
million. Proposed facilities include approximately 34.4 miles of 30-inch
pipeline, new equipment and modifications at three compressor stations
resulting in a net increase of 22,500 compressor horsepower, and at one meter
station.
As a result of the proposed Project 2000 expansion, the Northern Border
pipeline system will have the ability to transport 1,484 million cubic feet
per day from Ventura to Harper, Iowa, 844 million cubic feet per day from
Harper to Manhattan, Illinois, and 544 million cubic feet per day on the new
extension from Manhattan to North Hayden, Indiana.
Under precedent agreements, five project shippers have agreed to take all of
the transportation capacity, subject to the satisfaction of specific
conditions. With the issuance of the certificate, Northern Border Pipeline is
negotiating with the project shippers to resolve those conditions and execute
transportation contracts. The Project 2000 shippers are: Bethlehem Steel
Corporation, El Paso Energy Marketing Company, Northern Indiana Public
Service Company, Peoples Energy Services Corporation and The Peoples Gas
Light and Coke Company.
Northern Border Pipeline competes with other pipeline companies that
transport natural gas from the western Canadian sedimentary basin or that
transport natural gas to markets in the midwestern United States. The
competitors for the supply of natural gas include six pipelines, one of which
is under construction and is described below, and the Canadian domestic users
in the western Canadian sedimentary basin region. Northern Border Pipeline's
competitive position is affected by the availability of Canadian natural gas
for export, the prices of natural gas in alternative markets, the cost of
producing natural gas in Canada, and demand for natural gas in the United
States.
The Alliance Pipeline, which will transport natural gas from the western
Canadian sedimentary basin to the midwestern United States, has received
Canadian and United States regulatory approvals and is under construction.
Its sponsors have announced their plans for the Alliance Pipeline to be in
service by late 2000. Upon its completion, Northern Border Pipeline will
compete directly with the Alliance Pipeline.
6
TC PipeLines expects that the Alliance Pipeline would transport for its
shippers gas containing high-energy liquid hydrocarbons. Additional
facilities to extract the natural gas liquids are being constructed near the
Alliance Pipeline's terminus in Chicago to permit Alliance to transport
natural gas with the liquids-rich element.
As a consequence of the Alliance Pipeline, there may be a large increase in
natural gas moving from the western Canadian sedimentary basin to Chicago.
There are several additional projects proposed to transport natural gas from
the Chicago area to growing eastern markets that would provide access to
additional markets for Northern Border Pipeline's shippers. The proposed
projects currently being pursued by third parties and TransCanada are
targeting markets in eastern Canada and the northeast United States. These
proposed projects are in various stages of regulatory approval. One such
project, Vector Pipeline L.P., has commenced construction.
Williams has a minority interest (14.6%) in the Alliance Pipeline.
TransCanada and other unaffiliated companies own and operate pipeline
systems, which transport natural gas from the same natural gas reserves in
western Canada that supply Northern Border Pipeline's customers.
Natural gas is also produced in the United States and transported by
competing pipeline systems to the same destinations as the Northern Border
pipeline system.
FERC REGULATION
GENERAL
Northern Border Pipeline is subject to extensive regulation by the FERC as a
"natural gas company" under the Natural Gas Act. Under the Natural Gas Act
and the Natural Gas Policy Act, the FERC has jurisdiction with respect to
virtually all aspects of Northern Border Pipeline's business, including:
- transportation of natural gas;
- rates and charges;
- construction of new facilities;
- extension or abandonment of services and facilities;
- accounts and records;
- depreciation and amortization policies;
- the acquisition and disposition of facilities; and
- the initiation and discontinuation of services.
Where required, Northern Border Pipeline holds certificates of public
convenience and necessity issued by the FERC covering its facilities,
activities and services. Under Section 8 of the Natural Gas Act, the FERC has
the power to prescribe the accounting treatment for items for regulatory
purposes. Northern Border Pipeline's books and records are periodically
audited under Section 8.
The FERC regulates Northern Border Pipeline's rates and charges for
transportation in interstate commerce. Natural gas companies may not charge
rates exceeding rates judged just and reasonable by the FERC. In addition,
the FERC prohibits natural gas companies from unduly preferring or
unreasonably discriminating against any person with respect to pipeline rates
or terms and conditions of service. Some types of rates may be discounted
without further FERC authorization.
7
COST OF SERVICE TARIFF
Northern Border Pipeline's firm transportation shippers contract to pay for a
proportionate share of the pipeline system's cost of service. During any
given month, each of these shippers pays a uniform mileage-based charge for
the amount of capacity contracted, calculated under a cost of service tariff.
The shippers are obligated to pay their proportionate share of the cost of
service regardless of the amount of natural gas they actually transport. The
cost of service tariff is regulated by the FERC and provides an opportunity
to recover operations and maintenance costs of the Northern Border pipeline
system, taxes other than income taxes, interest, depreciation and
amortization, an allowance for income taxes and a return on equity approved
by the FERC. Northern Border Pipeline may not charge or collect more than its
cost of service under its tariff on file with the FERC.
Northern Border Pipeline's investment in its pipeline system is reflected in
various accounts referred to collectively as its regulated "rate base." The
cost of service includes a return, with related income taxes, on the rate
base. Over time, the rate base declines as a result of, among other things,
monthly depreciation and amortization. Northern Border Pipeline's rate base
currently includes, as an additional amount, a one-time ratemaking adjustment
to reflect the receipt of a financial incentive on the original construction
of the pipeline. Since inception, the rate base adjustment, called an
incentive rate of return, has been amortized through monthly additions to the
cost of service. The amortization continues until November 2001 when the
incentive rate of return will be fully amortized.
Northern Border Pipeline bills the cost of service on an estimated basis for
a six-month cycle. Any net excess or deficiency between the cost of service
determined for that period according to the FERC tariff and the estimated
billing is accumulated, including carrying charges. This amount is then
either billed to or credited back to the shippers' accounts.
Northern Border Pipeline also provides interruptible transportation service.
Interruptible transportation service is transportation in circumstances when
surplus capacity is available after satisfying firm service requests. The
maximum rate charged to interruptible shippers is calculated from cost of
service estimates on the basis of contracted capacity. Except for certain
limited situations, Northern Border Pipeline credits all revenue from the
interruptible transportation service to the cost of service for the benefit
of its firm shippers.
In Northern Border Pipeline's 1995 rate case, it reached a settlement that
was filed in a stipulation and agreement. Although it was contested, the
settlement was approved by the FERC on August 1, 1997. In the settlement, the
depreciation rate was established at 2.5% from January 1, 1997 through the
in-service date of The Chicago Project and, at that time, it was reduced to
2.0%. Starting in the year 2000, the depreciation rate is scheduled to
increase gradually on an annual basis until it reaches 3.2% in 2002.
The settlement also determined several other cost of service parameters. In
accordance with the effective tariff, Northern Border Pipeline's allowed
equity rate of return is 12.0%. For at least seven years from the date The
Chicago Project was completed, under the terms of the settlement, Northern
Border Pipeline may continue to calculate its allowance for income taxes as a
part of its cost of service in the manner it has historically used. In
addition, a settlement adjustment mechanism of $31 million was implemented,
which effectively reduces the allowed return on rate base.
Also as agreed to in the settlement, Northern Border Pipeline implemented a
project cost containment mechanism for The Chicago Project. The purpose of
the project cost containment mechanism was to limit Northern Border
Pipeline's ability to include cost overruns for The Chicago Project in their
rate base and to provide incentives for cost underruns. The settlement
agreement required the budgeted cost for The Chicago Project, which had been
initially filed with the FERC for approximately $839 million, to be adjusted
for the effects of inflation and for costs attributable to changes in project
scope, as defined in the settlement agreement.
In the determination of The Chicago Project cost containment mechanism, the
actual cost of the project is compared to the budgeted cost. If there is a
cost overrun of $6 million or less, the shippers will bear the actual cost of
the project through its inclusion in Northern Border Pipeline's rate base. If
there is a cost savings of $6 million or less, the full budgeted cost will be
included in Northern Border Pipeline's rate base. If there is a cost overrun
or cost savings of more than $6 million but less than 5% of the budgeted
cost, the $6 million plus 50% of the excess will be included in Northern
Border Pipeline's rate base. All cost overruns exceeding 5% of the budgeted
cost are excluded from Northern Border Pipeline's rate base.
8
Northern Border Pipeline has determined the budgeted cost of The Chicago
Project, as adjusted for the effects of inflation and project scope changes,
to be $897 million, with the final construction cost estimated to be $894
million. Northern Border Pipeline's notification to the FERC and its shippers
in June 1999 in its final report reflects the conclusion that there will be a
$3 million addition to its rate base related to the project cost containment
mechanism.
The stipulation required the calculation of the project cost containment
mechanism to be reviewed by an independent national accounting firm. The
independent accountants completed their examination of Northern Border
Pipeline's calculation of the project cost containment mechanism in October
1999. The independent accountants concluded Northern Border Pipeline had
complied in all material respects with the requirements of the stipulation
related to the project cost containment mechanism.
Although TC PipeLines believes that the computations in the final report have
been properly completed under the terms of the stipulation, TC PipeLines is
unable to predict at this time whether any adjustments will be required.
Later developments in the pending rate case, discussed below, may prevent
recovery of amounts originally calculated under the project cost containment
mechanism, which may result in a non-cash charge to write down Northern
Border Pipeline's balance sheet transmission plant line item, and that charge
could be material to Northern Border Pipeline's operating results.
In May 1999, Northern Border Pipeline filed a rate case wherein it proposed,
among other things, to increase its allowed equity rate of return to 15.25%.
The total annual cost of service increase due to Northern Border Pipeline's
proposed changes is approximately $30 million. A number of Northern Border
Pipeline's shippers and competing pipelines have filed interventions and
protests. In June 1999, the FERC issued an order in which the proposed
changes were suspended until December 1, 1999, after which they were
implemented with subsequent billings subject to refund. The order set for
hearing not only Northern Border Pipeline's proposed changes but also several
issues raised by intervenors including the appropriateness of the cost of
service tariff, Northern Border Pipeline's depreciation schedule and its
creditworthiness standards. Several parties, including Northern Border
Pipeline, asked for clarification or rehearing of various aspects of the June
order. On August 31, 1999, the FERC issued an order that provided that the
issue of rolled-in rate treatment of The Chicago Project may be examined in
this proceeding. Also, since the amount of The Chicago Project costs to be
included in rate base is governed by the settlement in Northern Border
Pipeline's previous rate case, the FERC consolidated that proceeding with
this case and directed that the presiding Administrative Law Judge conduct
any further proceedings that may be appropriate. Under the order issued
August 31, 1999, Northern Border Pipeline filed its June 1999 final report
and independent accountants' report on the calculation of the project cost
containment mechanism. While Northern Border Pipeline had not proposed in
this case to change the depreciation rates approved in its last rate case,
the order also provided that Northern Border Pipeline has the burden of
proving that its depreciation rates are just and reasonable. Testimony filed
by FERC staff and intervenors has advocated positions on among other things,
rate of return on equity ranging from 9.85% to 11.5%, a depreciation straight
line rate ranging from 2.34% to 2.5%, a reduction in rate base under the
project cost containment mechanism ranging from $31.8 million to $43.1
million, and modification of the cost of service form of tariff to adoption
of a stated rate form of tariff with various rate designs. A procedural
schedule has been established which calls for the hearing to commence in July
2000. At this time, TC PipeLines can give no assurance as to the outcome on
any of these issues.
9
OPEN ACCESS REGULATION
Beginning on April 8, 1992, the FERC issued a series of orders, known as
Order 636, which required pipeline companies to unbundle their services and
offer sales, transportation, storage, gathering and other services
separately, to provide all transportation services on a basis that is equal
in quality for all shippers and to implement a program to allow firm holders
of pipeline capacity to resell or release their capacity to other shippers.
Since Northern Border Pipeline has been a transportation only pipeline since
inception, implementation was easily met. Capacity release provisions were
adopted which allowed Northern Border Pipeline's shippers to release all or
part of their capacity either permanently or temporarily. If a shipper
temporarily releases part or all of its firm capacity to a third party, then
that releasing shipper receives credit against amounts due under its firm
transportation contract for revenues received by Northern Border Pipeline as
a result of the temporary release. The releasing shipper is not relieved of
its obligations under its contract. Shippers on the Northern Border pipeline
system have temporarily released capacity as well as permanently released
capacity to other shippers who have agreed to comply with the underlying
contractual and regulatory obligations associated with that capacity.
Order 636 adopted "right of first refusal" procedures, imposed by the FERC as
a condition to the pipeline's right to abandon long-term transportation
service, to govern a shipper's continuing rights to transportation services
when its contract with the pipeline expires. The FERC's rules require
existing shippers to match any bid of up to five years in order to renew
those contracts. As discussed below, the FERC narrowed the
scope of this right.
Beginning in 1996, the FERC issued a series of orders, referred to together
as Order 587, amending its open access regulations to standardize business
practices and procedures governing transactions between interstate natural
gas pipelines, their customers, and others doing business with the pipelines.
The intent of Order 587 was to assist shippers that deal with more than one
pipeline by establishing standardized business practices and procedures.
These business standards, developed by the Gas Industry Standards Board,
govern important business practices including shipper supplied service
nominations, allocation of available capacity, accounting and invoicing of
transportation service, standardized internet business transactions and
capacity release. Northern Border Pipeline has implemented the necessary
changes to its tariff and internal systems so it can fully comply with the
business standards as required by these orders.
In 1998, the FERC initiated a number of proceedings to further amend its open
access regulations. In a Notice of Proposed Rulemaking issued on July 29,
1998, the FERC proposed changes to its regulations governing short-term
transportation services. In the resulting order, Order 637, issued February
9, 1999, the FERC revised the short-term transportation regulations by (i)
waiving the maximum rate ceiling in its capacity release regulations until
September 30, 2002 for short-term releases of capacity of less than one year;
(ii) permitting value-oriented peak/off-peak rates to better allocate revenue
responsibility between short-term and long-term markets; (iii) permitting
term-differentiated rates to better allocate risks between shippers and the
pipelines; (iv) revising the regulations related to scheduling procedures,
capacity segmentation, imbalance management and penalties; (v) retaining the
right of first refusal and the five-year matching cap but limiting the right
to customers with maximum rate contracts for twelve or more consecutive
months of service; and (vi) adopting new reporting requirements to take
effect September 1, 2000 that include reporting daily transactional data on
all firm and interruptible contracts, daily reporting of scheduled quantities
at points or segments, and the posting of corporate and pipeline
organizational charts, names and functions.
10
On September 15, 1999, the FERC issued a policy statement on certification
and pricing of new construction projects. The policy statement announces a
preference for pricing new construction incrementally. This reverses the
existing presumption in favor of rolled-in pricing when the impact of the new
capacity is not more than a 5% increase to existing rates and results in
system-wide benefits. Also, in examining new projects, the FERC will evaluate
the efforts by the applicant to minimize adverse impact to its existing
customers, to competitor pipelines and their captive customers, and to
landowners and communities affected by the proposed route of the pipeline. If
the public benefits outweigh any residual adverse effects, the FERC will
proceed with the environmental analysis of the project. This policy is to be
applied on a case-by-case basis. In an order issued February 9, 2000, the
FERC addressed requests for rehearing of the policy statement and generally
affirmed the policy statement with a few changes and clarifications.
TC PipeLines does not believe that these regulatory initiatives will have a
material adverse impact to Northern Border Pipeline's operations.
ENVIRONMENTAL AND SAFETY MATTERS
Northern Border Pipeline's operations are subject to federal, state and local
laws and regulations relating to safety and the protection of the environment
which include the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, the Compensation and Liability Act of 1980, the Clean
Air Act, the Clean Water Act, the Natural Gas Pipeline Safety Act of 1969,
and the Pipeline Safety Act of 1992. Although TC PipeLines believes that
Northern Border Pipeline's operations and facilities comply in all material
respects with applicable environmental and safety regulations, risks of
substantial costs and liabilities are inherent in pipeline operations, and TC
PipeLines cannot provide any assurances that Northern Border Pipeline will
not incur these costs and liabilities. Northern Border Pipeline has ongoing
environmental and safety audit programs.
ITEM 2. PROPERTIES
TC PipeLines does not hold the right, title or interest in any properties.
Northern Border Pipeline holds the right, title and interest in its pipeline
system. Northern Border Pipeline owns all of its material equipment and
personal property and leases office space in Omaha, Nebraska. With respect to
real property, Northern Border Pipeline's ownership falls into two basic
categories: (i) parcels which it owns in fee, including nearly all of the
compressor stations, meter stations and pipeline field office sites; and (ii)
parcels where its interest derives from leases, easements, rights-of-way,
permits or licenses from landowners or governmental authorities permitting
the use of the land for the construction and operation of its pipeline
system. The right to construct and operate the pipeline across some property
was obtained through exercise of the power of eminent domain. Northern Border
Pipeline continues to have the power of eminent domain in each of the states
in which it operates its pipeline system, although Northern Border Pipeline
may not have the power of eminent domain with respect to Native American
tribal lands.
Approximately 90 miles of the pipeline is located on fee, allotted and tribal
lands within the exterior boundaries of the Fort Peck Indian Reservation in
Montana. Tribal lands are lands owned in trust by the United States for the
Fort Peck Tribes and allotted lands are lands owned in trust by the United
States for an individual Indian or Indians. While it is unclear if Northern
Border Pipeline has the right of eminent domain over tribal lands, it has the
right of eminent domain over allotted lands.
In 1980, Northern Border Pipeline entered into a pipeline right-of-way lease
with the Fort Peck Tribal Executive Board, for and on behalf of the
Assiniboine and Sioux Tribes of the Fort Peck Indian Reservation. This
pipeline right-of-way lease, which was approved by the Department of the
Interior in 1981, granted the right and privilege to construct and operate
the Northern Border pipeline on certain tribal lands, for a term of 15 years,
renewable for an additional 15-year term at Northern Border Pipeline's option
without additional rental. Northern Border Pipeline continues to operate this
portion of the pipeline located on tribal lands in accordance with its
renewal rights.
11
In conjunction with obtaining a pipeline right-of-way lease across tribal
lands located within the exterior boundaries of the Fort Peck Indian
Reservation, Northern Border Pipeline also obtained a right-of-way across
allotted lands located within the reservation boundaries. This right-of-way,
granted by the Bureau of Indian Affairs on March 25, 1981, for and on behalf
of individual Indian owners, expired on March 31, 1996. Before the
termination date, Northern Border Pipeline undertook efforts to obtain
voluntary consents from individual Indian owners for a new right-of-way, and
Northern Border Pipeline filed applications with the Bureau of Indian Affairs
for new right-of-way grants across those tracts of allotted lands where a
sufficient number of consents from the Indian owners had been obtained.
During 1999, the Bureau of Indian Affairs issued formal right-of-way grants
for those tracts for which sufficient landowners' consents were obtained.
Also, a condemnation action was filed in Federal Court in the District of
Montana concerning those remaining tracts of allotted land for which a
majority of consents were not received on a timely basis. An order was
entered on March 18, 1999 condemning permanent easements in Northern Border
Pipeline's favor on the tracts in question.
ITEM 3. LITIGATION
TC PipeLines is not currently a party to any legal proceedings.
In addition to the condemnation actions and matters related to FERC regulation,
various legal actions that have arisen in the ordinary course of business are
pending with respect to Northern Border Pipeline. In TC PipeLines' opinion, none
of these proceedings would reasonably be expected to have a material adverse
impact on TC PipeLines' financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during 1999.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON UNITS AND RELATED SECURITY
HOLDER MATTERS
The common units, representing limited partner interests in the Partnership,
were issued pursuant to an initial public offering at a price of $20.50 per
common unit. The common units are quoted on the Nasdaq National Market and
trade under the symbol TCLPZ. The common units began trading on May 28, 1999.
The following table sets forth, for the periods indicated, the high and low
sale prices per common unit, as reported by the Nasdaq National Market, and
the amount of cash distributions per common unit paid with respect to the
corresponding periods.
Price Range Cash Distributions
High Low Paid per Unit
1999
Second Quarter (1) $21.000 $20.375 $0.1681
Third Quarter $20.625 $17.625 $0.4500
Fourth Quarter $18.500 $13.875 $0.4500
(1) The Partnership commenced operations on May 28, 1999.
As of March 10, 2000, there were approximately 55 record holders of common
units and approximately 5,351 beneficial owners of the common units,
including common units held in street name.
The Partnership currently has 14,690,694 common units outstanding, of which
11,890,694 are held by the public and 2,800,000 are held by an affiliate of
the general partner. The Partnership also has 2,809,306 subordinated units
outstanding, all of which are held by the general partner, for which there is
no established public trading market. The common units and the subordinated
units represent an aggregate 98% limited partner interest and the general
partner interest represents an aggregate 2% general partner interest in the
Partnership.
In general, the general partner is entitled to 2% of all cash distributions
and the holders of common units and subordinated units (collectively referred
to as unitholders) are entitled to the remaining 98% of all cash
distributions. The Partnership will make quarterly distributions to its
partners (including holders of subordinated units), comprising all of its
Available Cash. Available Cash is defined in the partnership agreement and
generally means, with respect to any quarter of the Partnership, all cash on
hand at the end of such quarter less the amount of cash reserves that is
necessary or appropriate in the reasonable discretion of the general partner
to (i) provide for the proper conduct of the business of the Partnership
(including reserves for future capital expenditures and for anticipated
credit needs), (ii) comply with applicable law or any Partnership debt
instrument or agreement, or (iii) provide funds for distributions to
unitholders and the general partner in respect of any one or more of the next
four quarters. Distributions of Available Cash to the holder of subordinated
units are subject to the prior rights of the holders of common units to
receive the minimum quarterly distribution for each quarter while the
subordinated units are outstanding (subordination period), and to receive any
arrearages in the distribution of minimum quarterly distributions on the
common units for prior quarters during the subordination period. The
partnership agreement defines the minimum quarterly distribution as $0.45 for
each full fiscal quarter (prorated for the initial partial fiscal quarter
commencing May 28, 1999, the closing date of the initial public offering,
through June 30, 1999). The subordination period will generally not end
before June 30, 2004. Upon expiration of the subordination period, all
subordinated units will be converted on a one-for-one basis into common units
and will participate pro rata with all other common units in future
distributions of Available Cash. Under certain circumstances, up to 66.7% of
the subordinated units may convert into common units prior to the expiration
of the subordination period.
The general partner is entitled to incentive distributions if the amount
distributed with respect to any quarter exceeds $0.45 per common unit ($1.80
annualized). Under the incentive distribution provisions, the general partner
is entitled to 15% of amounts distributed in excess of $0.45 per common unit,
25% of amounts distributed in excess of $0.5275 per common unit, and 50% of
amounts distributed in excess of $0.69 per common unit. The amounts that
trigger incentive distributions at various levels are subject to adjustment
in certain events, as described in the partnership agreement.
In 1999, the Partnership made cash distributions to the limited partners and
the general partner which amounted to $11.0 million, including a prorated
minimum quarterly distribution for the initial period of May 28, 1999 to June
30, 1999, and the minimum quarterly distribution for the three months ending
September 30, 1999. On February 14, 2000, the Partnership paid a cash
distribution of $8.0 million to the limited partners and the general partner,
representing the minimum quarterly distribution for the three months ending
December 31, 1999.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with the financial
statements, including the notes thereto, and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
TC PIPELINES, LP
(thousands of dollars, except per unit amount)
MAY 28 -
DECEMBER 31, 1999
-----------------
INCOME DATA:
Equity income from investment
in Northern Border Pipeline 20,923
General and administrative
expenses 699
--------
Net income 20,224
--------
--------
Basic and fully diluted
net income per unit $1.13
Units outstanding (thousands) 17,500
CASH FLOW DATA:
Net cash provided by
operating activities 11,832
Distributions paid 11,037
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in
Northern Border Pipeline 250,450
Total assets 251,245
Partners' capital 250,838
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussions of the financial condition and results of
operations for the Partnership and Northern Border Pipeline should be read in
conjunction with the financial statements and notes thereto of the
Partnership and Northern Border Pipeline included elsewhere in this report.
For more detailed information regarding the basis of presentation for the
following financial information, see the notes to the financial statements of
the Partnership and Northern Border Pipeline. All amounts are stated in
United States dollars.
RESULTS OF OPERATIONS OF TC PIPELINES, LP
Currently, the only material asset of the Partnership is its 30% general
partner interest in Northern Border Pipeline. TC PipeLines accounts for its
interest in Northern Border Pipeline using the equity method of accounting.
The Partnership's initial investment in Northern Border Pipeline was recorded
at $241.7 million, the combined carrying values of the investment in Northern
Border Pipeline as reflected in the accounts of the predecessor companies as
at May 28, 1999. This amount equated to 30% of Northern Border Pipeline's
partners' capital as at May 28, 1999.
Since the general partner interest in Northern Border Pipeline is currently
the Partnership's only source 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.
14
PERIOD MAY 28 TO DECEMBER 31, 1999
TC PipeLines recorded $20.9 million of equity income from Northern Border
Pipeline for the period May 28 to December 31, 1999 and incurred general and
administrative expenses of $0.7 million, resulting in net income of $20.2
million for the same period.
LIQUIDITY AND CAPITAL RESOURCES OF TC PIPELINES, LP
CASH DISTRIBUTION POLICY OF TC PIPELINES, LP
During the subordination period, which generally cannot end before June 30,
2004, the Partnership will make distributions of Available Cash as defined in
the partnership agreement in the following manner:
- First, 98% to the common units, pro rata, and 2% to the general
partner, until there has been distributed for each outstanding common
unit an amount equal to the minimum quarterly distribution for that
quarter;
- Second, 98% to the common units, pro rata, and 2% to the general
partner, until there has been 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;
- Third, 98% to the subordinated units, pro rata, and 2% to the general
partner, until there has been distributed for each outstanding
subordinated unit an amount equal to the minimum quarterly distribution
for that quarter; and
- Thereafter, in a manner whereby the general partner has rights
(referred to as incentive distribution rights) to receive increasing
percentages of excess quarterly distributions over specified
distribution thresholds.
PERIOD MAY 28 TO DECEMBER 31, 1999
The May 24, 1999 initial public offering prospectus states that the initial
cash distribution of the Partnership would be adjusted to reflect the actual
number of days from the closing of the offering to June 30, 1999. On August
12, 1999, TC PipeLines paid a cash distribution of $0.1681 per unit for the
period May 28 to June 30, 1999, to unitholders of record as of July 30, 1999.
This cash distribution of $3.0 million was paid out in the following manner:
$2.5 million to common unitholders and $0.5 million to the general partner as
holder of the subordinated units and in respect of its 2% general partner
interest.
The Partnership funded this cash distribution with its share of Northern
Border Pipeline's second quarter cash distribution.
On November 12, 1999, TC PipeLines paid a cash distribution $0.45 per unit
for the three months ended September 30, 1999, to unitholders of record as of
October 29, 1999. This was the Partnership's first distribution for a full
quarter. This cash distribution, totaling $8.0 million, was paid out in the
following manner: $6.6 million to common unitholders, $1.2 million to the
general partner as holder of the subordinated units, and $0.2 million to the
general partner in respect of its 2% general partner interest.
The Partnership funded this cash distribution with its share of Northern
Border Pipeline's third quarter cash distribution.
On January 19, 2000, the Board of Directors of the general partner declared a
cash distribution of $0.45 per unit for the three months ended December 31,
1999. This distribution was paid on February 14, 2000 to unitholders of
record as of January 31, 2000. This cash distribution amounted to $8.0
million, which was paid out in the following manner: $6.6 million to common
unitholders, $1.2 million to the general partner as holder of the
subordinated units, and $0.2 million to the general partner in respect of its
2% general partner interest.
The Partnership funded this cash distribution with its share of Northern
Border Pipeline's fourth quarter cash distribution.
15
NORTHERN BORDER PIPELINE CASH DISTRIBUTION POLICY
The payment of distributions to the general partners of Northern Border
Pipeline is restricted under the terms of its 1997 Pipeline Credit Agreement
and the 1992 Note Purchase Agreement. See Note 4, "Credit Facilities and
Long-Term Debt," in the Notes to Financial Statements of Northern Border
Pipeline referred to in Item 8. "Financial Statements and Supplementary
Data." Under the most restrictive covenants, approximately $132 million of
Northern Border Pipeline's partners' capital could be distributed as of
December 31, 1999.
In accordance with Northern Border Pipeline's cash distribution policy, a
distribution was made to its general partners on August 3, 1999, for the
second quarter ending June 30, 1999. As stated in the amended general
partnership agreement for Northern Border Pipeline, the predecessor companies
received their proportionate share of this cash distribution for the period
April 1 to May 27, 1999. TC PipeLines received $3.3 million, representing 30%
of Northern Border Pipeline's cash distribution for the period May 28 to June
30, 1999.
In accordance with Northern Border Pipeline's cash distribution policy, a
distribution for the third quarter ending September 30, 1999 was paid on
November 2, 1999. TC PipeLines received $8.8 million, representing 30% of
that cash distribution.
In accordance with Northern Border Pipeline's cash distribution policy, a
distribution for the fourth quarter ending December 31, 1999 was paid on
February 2, 2000. TC PipeLines received $9.3 million, representing 30% of
that cash distribution.
CREDIT FACILITY AND SHORT-TERM BORROWINGS
On May 28, 1999, the Partnership entered into a $40 million unsecured
two-year revolving credit facility with TransCanada PipeLine USA Ltd., an
affiliate of the general partner. The credit facility bears interest at a
London Interbank Offered Rate plus 1.25%. The purpose of the revolving credit
facility is to provide borrowings to fund capital expenditures, to fund
capital contributions to Northern Border Pipeline and for working capital and
other general business purposes, including funding cash distributions to
partners, if necessary. At December 31, 1999, the Partnership had no amount
outstanding under this credit facility.
On June 28, 1999, the Partnership received a short-term, non-interest bearing
working capital advance in the amount of $0.3 million from its general
partner. The Partnership repaid this advance in December 1999.
CAPITAL REQUIREMENTS
The Partnership does not expect to have any capital requirements with respect
to its investment in Northern Border Pipeline in 2000. To the extent TC
PipeLines makes acquisitions in 2000, TC PipeLines expects to finance these
acquisitions with debt and/or equity.
RESULTS OF OPERATIONS OF NORTHERN BORDER PIPELINE
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Operating revenues, net increased $101.7 million (52%) for the year ended
December 31, 1999, as compared to the same period in 1998, due primarily to
additional revenue from the operation of The Chicago Project facilities.
Additional receipt capacity of 700 million cubic feet per day, a 42%
increase, and new firm transportation agreements with 27 shippers resulted
from The Chicago Project. Northern Border Pipeline's FERC tariff provides an
opportunity to recover operations and maintenance costs of the pipeline,
taxes other than income taxes, interest, depreciation and amortization, an
allowance for income taxes and a regulated return on equity. Northern Border
Pipeline is generally allowed an opportunity to collect from its shippers a
return on unrecovered rate base as well as recover that rate base through
depreciation and amortization. The return amount Northern Border Pipeline
collects from its shippers declines as the rate base is recovered. The
Chicago Project increased Northern Border Pipeline's rate base, which
increased return for the year ended December 31, 1999. Also reflected in the
increase in 1999 revenues are recoveries of increased pipeline operating
expenses due to the new facilities.
16
Operations and maintenance expense increased $9.3 million (31%) for the year
ended December 31, 1999, from the same period in 1998, due primarily to
operations and maintenance expenses for The Chicago Project facilities and
increased employee payroll and benefit expenses.
Depreciation and amortization expense increased $10.9 million (27%) for the
year ended December 31, 1999, as compared to the same period in 1998, due
primarily to The Chicago Project facilities placed into service. The impact
of the additional facilities on depreciation and amortization expense was
partially offset by a decrease in the depreciation rate applied to
transmission plant from 2.5% to 2.0%. Northern Border Pipeline agreed to
reduce the depreciation rate at the time The Chicago Project was placed into
service as part of a previous rate case settlement.
Taxes other than income increased $8.9 million (42%) for the year ended
December 31, 1999, as compared to the same period in 1998, due primarily to
ad valorem taxes attributable to the facilities placed into service for The
Chicago Project.
For the year ended December 31, 1998, Northern Border Pipeline recorded a
regulatory credit of $8.9 million. During the construction of The Chicago
Project, Northern Border Pipeline placed new facilities into service in
advance of the December 1998 project in-service date to maintain gas flow at
firm contracted capacity while existing facilities were being modified. The
regulatory credit deferred the cost of service of these new facilities.
Northern Border Pipeline is allowed to recover from its shippers the
regulatory asset that resulted from the cost of service deferral over a
ten-year period commencing with the in-service date of The Chicago Project.
Interest expense, net increased $34.7 million (136%) for the year ended
December 31, 1999, as compared to the same period in 1998, due to an increase
in interest expense of $15.8 million and a decrease in interest expense
capitalized of $18.9 million. Interest expense increased due primarily to an
increase in Northern Border Pipeline's average debt outstanding, reflecting
amounts borrowed to finance a portion of the capital expenditures for The
Chicago Project. The impact of the increased borrowings on interest expense
was partially offset by a decrease in average interest rates between 1998 and
1999. The decrease in interest expense capitalized is due to the completion
of construction of The Chicago Project in December 1998.
Other income decreased $10.7 million (89%) for the year ended December 31,
1999, as compared to the same period in 1998, primarily due to a decrease in
the allowance for equity funds used during construction. The decrease in the
allowance for equity funds used during construction is due to the completion
of construction of The Chicago Project in December 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Operating revenues, net increased $10.6 million (6%) for the year ended
December 31, 1998, as compared to the results for 1997 due primarily to
returns on higher levels of invested equity.
Depreciation and amortization expense increased $2.3 million (6%) for the
year ended December 31, 1998, as compared to 1997, primarily due to
facilities that were placed in service in 1998.
For the year ended December 31, 1998, Northern Border Pipeline recorded a
regulatory credit of approximately $8.9 million. During the construction of
The Chicago Project, Northern Border Pipeline placed certain new facilities
into service in advance of the December 1998 project in-service date to
maintain gas flow at firm contracted capacity while existing facilities were
being modified. The regulatory credit results in deferral of the cost of
service of these new facilities. Northern Border Pipeline is allowed to
recover from its shippers the regulatory asset that resulted from the cost of
service deferral over a ten-year period commencing with the in-service date
of The Chicago Project.
Interest expense, net decreased $3.8 million (13%) for the year ended
December 31, 1998, as compared to the results for 1997, due to an increase in
interest expense of $11.5 million offset by an increase in the amount of
interest expense capitalized of $15.3 million. The increase in interest
expense was due primarily to an increase in average debt outstanding,
reflecting amounts borrowed to finance a portion of the capital expenditures
for The Chicago Project. The increase in interest expense capitalized
primarily relates to expenditures for The Chicago Project.
17
Other income increased $6.4 million (112%) for the year ended December 31,
1998, as compared to 1997. The increase was primarily due to an $8.8 million
increase in the allowance for equity funds used during construction. The
increase in the allowance for equity funds used during construction primarily
relates to expenditures for The Chicago Project.
Other income for 1997 included $4.8 million received for vacating certain
microwave frequency bands. The amounts received were a one-time occurrence
and Northern Border Pipeline does not expect to receive any material payments
for vacating microwave frequency bands in the future.
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE
GENERAL
In August 1999, Northern Border Pipeline completed a private offering of $200
million of 7.75% Senior Notes due 2009 which notes were subsequently
exchanged in a registered offering for notes with substantially identical
terms (Senior Notes). The indenture under which the Senior Notes were issued
does not limit the amount of unsecured debt Northern Border Pipeline may
incur, but does contain material financial covenants, including restrictions
on incurence of secured indebtedness. The proceeds from the Senior Notes were
used to reduce indebtedness under a June 1997 credit agreement.
In June 1997, Northern Border Pipeline entered into a credit agreement
(Pipeline Credit Agreement) with certain financial institutions to borrow up
to an aggregate principal amount of $750 million. The Pipeline Credit
Agreement is comprised of a $200 million five-year revolving credit facility
maturing in June 2002 to be used for the retirement of Northern Border
Pipeline's prior credit facilities and for general business purposes, and a
$550 million three-year revolving credit facility to be used for the
construction of The Chicago Project. Effective March 31, 1999, the three-year
revolving credit facility converted to a term loan maturing in June 2002. At
December 31, 1999, $439.0 million was outstanding under the term loan. No
funds were outstanding under the five-year revolving credit facility.
At December 31, 1999, Northern Border Pipeline also had outstanding $250
million of senior notes issued in a private placement under a July 1992 note
purchase agreement. The note purchase agreement provides for four series of
notes, Series A through D, maturing between August 2000 and August 2003. The
Series A Notes with a principal amount of $66 million mature in August 2000.
Northern Border Pipeline anticipates borrowing on the Pipeline Credit
Agreement to repay the Series A Notes.
Short-term liquidity needs will be met by internal sources and through the
revolving credit facility discussed above. Long-term capital needs may be met
through the ability to issue long-term indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased $67.7 million to $171.5
million for the year ended December 31, 1999, as compared to the same period
in 1998, primarily attributed to The Chicago Project facilities placed into
service in late December 1998.
Cash flows provided by operating activities decreased $11.6 million to $103.8
million for the year ended December 31, 1998 as compared to 1997 primarily
related to a $25.4 million reduction for changes in accounts payable,
exclusive of accruals for The Chicago Project. In addition, for the year
ended December 31, 1998, there was a $7.4 million reduction for changes in
over/under recovered cost of service. These reductions were partially offset
by the effect of the refund activity of 1997 discussed below. The over/under
recovered cost of service is the difference between estimated billings to
Northern Border Pipeline's shippers, which are determined on a six-month
cycle, and the actual cost of service determined in accordance with the FERC
tariff. The difference is either billed to or credited back to the shippers'
accounts. Cash flows provided by operating activities for the year ended
December 31, 1997 reflected a $52.6 million refund in October 1997 in
accordance with the stipulation approved by the FERC to settle the November
1995 rate case. During 1997, Northern Border Pipeline collected $40.4 million
subject to refund as a result of the rate case.
18
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures of $101.7 million for the year ended December 31, 1999
include $85.5 million for The Chicago Project and $2.5 million for Project
2000. The remaining capital expenditures for 1999 are primarily related to
renewals and replacements of existing facilities. For the same period in
1998, capital expenditures were $651.2 million, which included $638.7 million
for The Chicago Project and $11.7 million for linepack gas purchased from
Northern Border Pipeline's shippers. Linepack gas is the natural gas required
to fill the pipeline system. The cost of the linepack gas is included in
Northern Border Pipeline's rate base. The remaining capital expenditures for
1998 are primarily related to renewals and replacements of existing
facilities.
Total capital expenditures for 2000 are estimated to be $25 million,
including $10 million for Project 2000. The remaining capital expenditures
planned for 2000 are for renewals and replacements of existing facilities.
Northern Border Pipeline currently anticipates funding its 2000 capital
expenditures primarily by using internal sources.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities were $89.9 million for the year ended
December 31, 1999, as compared to cash flows provided by financing activities
of $564.8 million for the same period in 1998. During the year ended December
31, 1998, Northern Border Pipeline's general partners contributed $223.0
million to finance a portion of the capital expenditures for The Chicago
Project. Distributions paid to the general partners increased $66.0 million
to $127.2 million for the year ended December 31, 1999 as compared to the
same period of 1998. The distributions for 1999 were impacted by increased
earnings and included distributions for 13 months' activity, rather than 12
months, resulting from a change in the timing of distribution payments. The
distributions for 1998 were impacted by a rate case refund during the fourth
quarter of 1997 and by the change in the timing of distribution payments.
Financing activities for the year ended December 31, 1999 included $197.4
million from the issuance of the Senior Notes, net of associated debt
discounts and issuance costs, and $12.9 million from the termination of
interest rate forward agreements. Advances under the Pipeline Credit
Agreement, which were primarily used to finance a portion of the capital
expenditures for The Chicago Project, were $90 million for the year ended
December 31, 1999 as compared to advances of $403 million for the same period
in 1998. Payments on Northern Border Pipeline's credit agreement were $263
million for the year ended December 31, 1999.
Cash flows provided by financing activities increased $512.4 million to
$564.8 million for the year ended December 31, 1998, as compared to the same
period in 1997. Financing activities for 1998 include borrowings under the
Pipeline Credit Agreement of $403.0 million and were used primarily for
capital expenditures related to The Chicago Project. Contributions received
from Northern Border Pipeline's general partners increased $142.0 million to
$223.0 million and were used to fund a portion of the capital expenditures.
Distributions to the general partners decreased $38.1 million to $61.2
million primarily due to a change in the timing of distribution payments.
Distributions for 1998 were also reduced due to the impact of the rate case
refund during the fourth quarter of 1997.
YEAR 2000
TC PipeLines and the general partner are not materially dependent upon
computer systems to conduct their businesses. Accordingly, the Year 2000
issue has not had a material adverse effect on the Partnership's business,
financial condition or results of operations. Management does not anticipate
any future interruptions to its operations, except as to any material adverse
effect that may result from any Year 2000 issue affecting Northern Border
Pipeline as discussed below.
Similar to most businesses, Northern Border Pipeline relies heavily on
information systems technology to operate in an efficient and effective
manner. Much of this technology takes the form of computers and associated
hardware for data processing and analysis. In addition, a great deal of
information processing technology is embedded in microelectronic devices. A
Year 2000 issue was anticipated which could result from the use in computer
hardware and software of two digits rather than four digits to define the
applicable year. As a result, computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000.
19
Before January 1, 2000, Northern Border Pipeline identified, inventoried and
assessed computer software, hardware, embedded chips and third-party
interfaces. Where necessary, remediation and replacements were identified and
implemented. All of Northern Border Pipeline's mission-critical and
non-mission-critical systems have operated to date, with no interruption in
business operations. The Year 2000 issue has resulted in no material costs.
Northern Border Pipeline will remain vigilant for Year 2000 related issues
that may yet occur, due to hidden defects in Northern Border Pipeline's
computer hardware or software or at mission-critical external entities. TC
PipeLines anticipates that the Year 2000 issue will not create material
disruptions to Northern Border Pipeline's mission-critical facilities or
operations, and will not result in material costs for TC PipeLines.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137 which deferred the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. See Note 9 to the Financial Statements
of TC PipeLines.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period May 28 to December 31, 1999, TC PipeLines has not entered into
any forms of financial instruments that are market risk sensitive, either for
trading or non-trading purposes. Therefore, TC PipeLines is not exposed to
any interest rate risk, market price risk, or foreign exchange risk, except
to the extent that its 30% general partner interest in Northern Border
Pipeline exposes the Partnership to the market risks disclosed below.
Northern Border Pipeline's interest rate exposure results from variable rate
borrowings from commercial banks. To mitigate potential fluctuations in
interest rates, Northern Border Pipeline attempts to maintain a significant
portion of its debt portfolio in fixed rate debt. Northern Border Pipeline
also uses interest rate swap agreements to increase the portion of fixed rate
debt. As of December 31, 1999, approximately 55% of Northern Border
Pipeline's debt portfolio, after considering the effect of the interest rate
swap agreements, is in fixed rate debt.
If interest rates average one percentage point more than rates in effect as
of December 31, 1999, annual interest expense would increase by approximately
$4.0 million. This amount has been determined by considering the impact of
the hypothetical interest rates on variable rate borrowings and interest rate
swap agreements outstanding as of December 31, 1999. Northern Border
Pipeline's tariff provides the pipeline an opportunity to recover, among
other items, interest expense. TC PipeLines believes that under Northern
Border Pipeline's current tariff it would be allowed to recover any increase
in interest expense, and that there would not be any material impact on its
annual earnings and cash flow from a hypothetical one percentage point
increase in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is included in this report as set forth in
the "Index to Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE GENERAL PARTNER
TC PipeLines is a limited partnership and has no officers, directors or
employees. Set forth below is certain information concerning the directors
and officers of the general partner. Each director holds office for a
one-year term or until his or her successor is earlier appointed. All
officers of the general partner serve at the discretion of the Board of
Directors of the general partner.
AGE AS OF POSITION WITH GENERAL PARTNER
NAME DECEMBER 31, 1999 AS OF DECEMBER 31, 1999
Garry P. Mihaichuk 46 President, Chief Executive Officer and Director
Russell K. Girling 37 Chief Financial Officer and Director
Paul F. MacGregor 42 Vice-President, Business Development
Donald A. Marchand 37 Vice-President and Treasurer
Gary G. Penrose 57 Vice-President, Taxation
Karyn A. Brooks 45 Vice-President
Theresa Jang 35 Controller
Rhondda E.S. Grant 42 Secretary
Robert A. Helman 65 Independent Director
Jack F. Jenkins-Stark 48 Independent Director
David L. Marshall 60 Independent Director
Walentin Mirosh 54 Director
Ronald J. Turner 46 Director
Mr. Mihaichuk was appointed a director of the general partner in August 1999
and in October 1999 also became the President and Chief Executive Officer of
the general partner. Mr. Mihaichuk's principal occupation is Senior
Vice-President and President, Transmission of TransCanada and he has held
that position since August 1999. Mr. Mihaichuk was Senior Vice-President and
President, International of TransCanada from July 1996 to August 1999. Prior
to July 1996, he was Senior Vice-President of Amoco Corporation (oil and gas)
and Chairman of Amoco Orient Company. Mr. Mihaichuk has been a member of
Northern Border Pipeline's management committee since September 1999. Mr.
Mihaichuk is also a director of NOVA Gas Transmission Ltd., an affiliate of
the general partner.
Mr. Girling was appointed Chief Financial Officer and a director of the general
partner in April 1999. Mr. Girling's principal occupation is Senior
Vice-President and Chief Financial Officer of TransCanada and he has held
that position since September 1999. Prior to that time and since January
1999, he was Vice-President, Finance of TransCanada. Prior to January 1999,
he held various management positions with the Power business of TransCanada.
Mr. Girling is a director of the general partners of TransCanada Power, L.P.
and TransCanada Gas Processing, L.P., both of which are Canadian master
limited partnerships. Mr. Girling is also a director of NOVA Gas Transmission.
Mr. MacGregor was appointed Vice-President, Business Development of the
general partner in April 1999. Mr. MacGregor's principal occupation is
Vice-President of North American Pipeline Ventures of TransCanada's
Transmission division and he has held that position since September 1999.
Prior to that time and since July 1998, Mr. MacGregor was Vice-President,
North American Pipeline Investments for TransCanada's Transmission division.
Prior to that time and since 1997, Mr. MacGregor was a Vice-President of
Alberta Natural Gas Company Ltd. (ANG) (energy services), a former subsidiary
of TransCanada which has since amalgamated with TransCanada. In 1996, Mr.
MacGregor was Director of Field Operations of TransCanada. From 1993 to 1995,
Mr. MacGregor was Regional Manager, Field Operations for TransCanada in North
Bay, Ontario.
Mr. Marchand was appointed Vice-President and Treasurer of the general
partner in October 1999. Mr. Marchand's principal occupation is
Vice-President, Finance and Treasurer of TransCanada and he has held that
position since September 1999. Prior to that time and since January 1998 he
was Director, Finance of TransCanada. Prior to that time and since August
1996 he was Manager, Finance and prior to August 1996 he was Assistant
Manager, Finance of TransCanada. Prior to July 1995 he was Senior Financial
Analyst, Finance of TransCanada.
Mr. Penrose was appointed Vice-President, Taxation of the general partner in
April 1999. Mr. Penrose's principal occupation is Vice-President, Taxation of
TransCanada and he has held that position since February 1997. Prior to that
time, Mr. Penrose was General Manager, Taxation for TransCanada.
21
Ms. Brooks was appointed Vice-President of the general partner in April 1999.
Ms. Brooks' principal occupation is Vice-President, Financial Services of
TransCanada's Transmission division and she has held that position since
September 1999. Prior to that time and since February 1997, she was
Vice-President and Controller of TransCanada. Prior to February 1997, Ms.
Brooks was Director of Corporate Accounting and Budgets. Prior to January
1995, she was Manager, Financial Accounting at TransCanada.
Ms. Jang was appointed Controller of the general partner in June 1999. Prior
to that time and since May 1997, Ms. Jang was a Specialist in TransCanada's
Financial Reporting department. Prior to that time and since February 1996,
Ms. Jang was Supervisor, Corporate Accounting of TransCanada. Prior to that
time, Ms. Jang was Senior Financial Analyst, Corporate Accounting of
TransCanada.
Ms. Grant was appointed Secretary of the general partner in April 1999. Ms.
Grant's principal occupation is Vice-President and Corporate Secretary of
TransCanada and she has held that position since September 1999. Prior to
that time and since July 1998, Ms. Grant was Corporate Secretary and
Associate General Counsel, Corporate of TransCanada. Prior to that time and
since October 1994, Ms. Grant was Corporate Secretary and Associate General
Counsel, Corporate of NOVA Corporation (energy services and commodity
chemicals).
Mr. Helman was appointed a director of the general partner in July 1999. Mr.
Helman is and has been a partner of Mayer, Brown & Platt (law firm) since
1967. Mr. Helman also serves as a director on the boards of Brambles USA,
Inc., Dreyers Grand Ice Cream, Inc., The Chicago Stock Exchange and Northern
Trust Corporation and Northern Trust Company.
Mr. Marshall was appointed a director of the general partner in July 1999.
Mr. Marshall was Vice-Chairman of The Pittston Company (diversified energy,
security and transportation services firm) from 1994 to 1998 and was the
Chief Financial Officer and a director of The Pittston Company from 1983 to
1994. Mr. Marshall also serves as a director on the board of M&S Austin One,
LLC.
Mr. Jenkins-Stark was appointed a director of the general partner in July
1999. Mr. Jenkins-Stark is currently Senior Vice-President and Chief
Financial Officer of GATX Capital (commercial finance), a position he has
held since December 1998. Prior to that time and since September 1998 he was
Senior Vice-President, Finance of GATX Capital. Prior to that time and since
May 1987, Mr. Jenkins-Stark was Senior Vice-President of PG&E Corp.
(diversified energy) and President and Chief Executive Officer of PG&E Gas
Transmission Company (natural gas transmission).
Mr. Mirosh has been a director of the general partner since October 1999. Mr.
Mirosh is currently Senior Vice-President, Corporate Strategy and Business
Development of TransCanada, a position he has held since July 1998. Prior to
that time and since April 1996, Mr. Mirosh was President of ANG and prior to
that time, Mr. Mirosh was Executive Vice-President, Operations of ANG. Mr.
Mirosh is also a director of the general partner of TransCanada Gas
Processing, L.P. and a director of NOVA Gas Transmission.
Mr. Turner has been a director of the general partner since April 1999.
Currently, Mr. Turner is Senior Vice-President and President, International
of TransCanada, a position he has held since September 1999. Prior to that
time and since July 1998, Mr. Turner was Senior Vice-President and President,
Alberta Gas Transmission of TransCanada. Prior to that time, Mr. Turner held
various management positions with NOVA Chemicals Ltd. (commodity chemicals)
and NOVA Gas Transmission (natural gas transmission). Mr. Turner is also a
director of NOVA Gas Transmission.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes certain information regarding the annual
salaries of Messrs. Garry P. Mihaichuk and John W. Carruthers for the year
ended December 31, 1999 by TransCanada, parent company of the general
partner. Mr. Mihaichuk is an employee of TransCanada and was appointed
President and Chief Executive Officer of the general partner in October 1999.
Mr. Carruthers was an employee of TransCanada until December 1999 and served
as President and Chief Executive Officer of the general partner from April
1999 to October 1999. Through the general partner, TC PipeLines reimburses
TransCanada for the services contributed by Messrs. Mihaichuk and Carruthers
to its operations. Although TC PipeLines and the general partner were formed
in December 1998, the general partner began compensating its directors and
officers on May 28, 1999.
22
ANNUAL TRANSCANADA SALARY
NAME AND POSITION YEAR CANADIAN DOLLARS UNITED STATES DOLLAR EQUIVALENT (1)
- ----------------- ---- ---------------- --------------------------------
Garry P. Mihaichuk 1999 345,839 232,763
President and
Chief Executive
Officer
John W. Carruthers 1999 178,547 120,169
Former President and
Chief Executive
Officer
(1) United States dollar equivalents have been calculated using the 1999 average
noon spot exchange rate of 0.6730 as reported by the Bank of Canada.
Each director who is not an employee of TransCanada, the general partner or
its affiliates (independent director) is entitled to a directors' retainer
fee of $10,000 per annum and an additional fee of $2,000 per annum for each
committee of the board of which he or she is Chair. These fees are paid by
the Partnership on a semi-annual basis. For the year ended December 31, 1999,
the independent directors were paid half of these annual fees as they were
appointed in July 1999. Each independent director is also paid a fee of
$1,500 for attendance at each meeting of the Board of Directors and a fee of
$750 for attendance at each meeting of a committee of the Board. The
independent directors are reimbursed for out-of-pocket expenses incurred in
the course of attending such meetings. Under a directors' compensation plan
adopted effective July 19, 1999, each independent director receives 50% of
his or her annual board retainer that is payable on the applicable date in
common units of the Partnership. The common units are purchased on the open
market and the number of common units purchased under the directors'
compensation plan is based on the trading price of common units on the day
preceding the applicable payment date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the voting
securities of the Partnership as of March 21, 2000 by the general partner's
directors, officers and certain beneficial owners. Officers of the general
partner own shares of TransCanada which in the aggregate amount to less than
1% of TransCanada's issued and outstanding shares. Other than as set forth
below, no person is known by the general partner to own beneficially more
than 5% of the voting securities of the Partnership.
- -------------------------------------------- ---------------------------- -------------------------- ----------------
Amount and Nature of Amount and Nature of Percentage of
Beneficial Ownership of Beneficial Ownership of Interest for
Name and Business Address Common Units Subordinated Units all Units (1)
- -------------------------------------------- ----------------- ---------- --------------- ---------- ----------------
Percent Number of Percent
Number of Units of Class Units of Class
- -------------------------------------------- ----------------- ---------- --------------- ---------- ----------------
TC PipeLines GP, Inc. (2)(3) 2,809,306 100 16.1
111 5th Avenue, SW
Calgary, Alberta T2P 3Y6
- -------------------------------------------- ----------------- ---------- --------------- ---------- ----------------
TransCan Northern Ltd. (2) 2,800,000 19.1 16.0
111 5th Avenue, SW
Calgary, Alberta T2P 3Y6
- -------------------------------------------- ----------------- ---------- --------------- ---------- ----------------
Robert A. Helman 2,168 * *
190 S. LaSalle Street
Chicago, Illinois 60603
- -------------------------------------------- ----------------- ---------- --------------- ---------- ----------------
Jack F. Jenkins-Stark 2,168 * *
Suite 2200, 4 Embarcadero Center
San Francisco, California 94111
- -------------------------------------------- ----------------- ---------- --------------- ---------- ----------------
David L. Marshall 4,168 * *
111 5th Avenue, SW
Calgary, Alberta T2P 3Y6
- -------------------------------------------- ----------------- ---------- --------------- ---------- ----------------
(1) A total of 17,500,000 common and subordinated units are issued and
outstanding.
(2) TC PipeLines GP, Inc. and TransCan Northern Ltd. are wholly-owned
subsidiaries of TransCanada.
(3) TC PipeLines GP, Inc. owns an aggregate 2% general partner interest of TC
PipeLines and its subsidiary on a combined basis.
* Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An affiliate of the general partner owns 2,800,000 common units and the
general partner owns 2,809,306 subordinated units, representing an aggregate
31.4% limited partner interest in the Partnership. In addition, the general
partner owns an aggregate 2% general partner interest in the Partnership
through which it manages and operates the Partnership.
The general partner is accountable to TC PipeLines and the unitholders as a
fiduciary. Neither the Delaware Act nor case law defines with particularity
the fiduciary duties owed by general partners to limited partners of a
limited partnership. The Delaware Act does provide that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties owed by a general partner to limited partners and the
partnership.
23
In order to induce the general partner to manage the business of TC
PipeLines, the partnership agreement contains various provisions restricting
the fiduciary duties that might otherwise be owed by the general partner. The
following is a summary of the material restrictions of the fiduciary duties
owed by the general partner to the limited partners.
- The partnership agreement permits the general partner to make
a number of decisions in its "sole discretion." This entitles
the general partner to consider only the interests and factors
that it desires and it shall have no duty or obligation to
give any consideration to any interest of, or factors
affecting, TC PipeLines, its affiliates or any limited
partner. Other provisions of the partnership agreement provide
that the general partner's actions must be made in its
reasonable discretion.
- The partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not
involving a required vote of unitholders must be "fair and
reasonable" to TC PipeLines. In determining whether a
transaction or resolution is "fair and reasonable" the general
partner may consider interests of all parties involved,
including its own. Unless the general partner has acted in bad
faith, the action taken by the general partner shall not
constitute a breach of its fiduciary duty.
- The partnership agreement specifically provides that it shall
not be a breach of the general partner's fiduciary duty if its
affiliates engage in business interests and activities in
competition with, or in preference or to the exclusion of, TC
PipeLines. Also, the general partner and its affiliates have
no obligation to present business opportunities to TC
PipeLines.
- The partnership agreement provides that the general partner
and its officers and directors will not be liable for monetary
damages to TC PipeLines, the limited partners or assignees for
errors of judgment or for any acts or omissions if the general
partner and those other persons acted in good faith.
TC PipeLines is required to indemnify the general partner and its officers,
directors, employees, affiliates, partners, members, agents and trustees, to
the fullest extent permitted by law, against liabilities, costs and expenses
incurred by the general partner or these other persons. This indemnification
is required if the general partner or these persons acted in good faith and
in a manner they reasonably believed to be in, or (in the case of a person
other than the general partner) not opposed to, the best interests of TC
PipeLines. Indemnification is required for criminal proceedings if the
general partner or these other persons had no reasonable cause to believe
their conduct was unlawful.
The Partnership does not directly employ any persons to manage or operate its
business. These functions are provided by the general partner. The general
partner does not receive a management fee or other compensation in connection
with its management of the Partnership. The Partnership reimburses the
general partner for all costs of services provided, including the costs of
employee, officer and director compensation and benefits, and all other
expenses necessary or appropriate to the conduct of the business of, and
allocable to the Partnership. The partnership agreement provides that the
general partner will determine the expenses that are allocable to the
Partnership in any reasonable manner determined by the general partner in its
sole discretion. Total costs reimbursed to the general partner by the
Partnership were approximately $0.2 million for the period from May 28, 1999
to December 31, 1999. Such costs include, (i) personnel costs (such as
salaries and employee benefits) of the personnel providing such services,
(ii) overhead costs (such as office space and equipment) and (iii)
out-of-pocket expenses related to the provision of such services.
On May 28, 1999, the Partnership entered into a $40 million unsecured
two-year revolving credit facility with TransCanada PipeLine USA Ltd., an
affiliate of the general partner. The credit facility bears interest at a
London Interbank Offered Rate plus 1.25%. The purpose of the revolving credit
facility is to provide borrowings to fund capital expenditures, to fund
capital contributions to Northern Border Pipeline and for working capital and
other general business purposes, including funding cash distributions to
partners, if necessary. At December 31, 1999, the Partnership had no amount
outstanding under this credit facility.
On June 28, 1999, the Partnership received a short-term, non-interest bearing
working capital advance in the amount of $0.3 million from its general
partner. The Partnership repaid this advance in December 1999.
As of February 1, 2000, TransCanada is one of Northern Border Pipeline's
transportation customers and is currently obligated to pay 10.8% of Northern
Border Pipeline's annual cost of service pursuant to a transportation
contract wherein TransCanada Gas Services Inc. acts as the agent of its
parent, TransCanada. The terms of this transaction are no less favorable to
Northern Border Pipeline than those which Northern Border Pipeline would
expect to negotiate with unrelated third parties on an arm's length basis.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The financial statements filed as part of this report are listed in
the "Index to Financial Statements" on Page F-1.
(b) The Registrant filed the following reports on Form 8-K during the
fourth quarter of 1999:
A report on Form 8-K was filed on October 8, 1999 incorporating the
Northern Border Pipeline Company registration statement on form S-4
relating to the offering of up to $200,000,000 of Northern Border
Pipeline Company's 7.75% Senior Notes due 2009.
A report on Form 8-K was filed on October 21, 1999 announcing changes
to the officers and directors of the general partner of the
Partnership.
(c) Exhibits
EXHIBIT NO. DESCRIPTION
3.1 Amended and Restated Agreement of Limited Partnership of
TC PipeLines, LP dated May 28, 1999.
*3.2 Certificate of Limited Partnership of TC PipeLines, LP
(Exhibit 3.2 to TC PipeLines, LP's Form S-1 Registration
Statement Registration No. 333-69947 ("1999 Form S-1")).
*3.3 Certificate of Limited Partnership of TC PipeLines
Intermediate Limited Partnership (Exhibit 3.3 to the 1999
Form S-1).
*4.1 Indenture, dated as of August 17, 1999 between Northern
Border Pipeline Company and Bank One Trust Company, NA,
successor to The First National Bank of Chicago, as
trustee (Exhibit 4.1 to Northern Border Pipeline
Company's Form S-4 Registration Statement Registration
No. 333-88577).
10.1 Amended and Restated Agreement of Limited Partnership of
TC PipeLines Intermediate Limited Partnership dated May
28, 1999.
10.2 Contribution, Conveyance and Assumption Agreement among TC
PipeLines, LP and certain other parties dated May 28,
1999.
*10.3 Northern Border Pipeline Company General Partnership
Agreement between Northern Border Intermediate Limited
Partnership, TransCanada Border PipeLine Ltd., and
TransCan Northern Ltd., effective March 9, 1978 as
amended (Exhibit 3.2 to Northern Border Partners,
L.P.'s Form S-1 Registration Statement No. 33-66158).
*10.3.1 Seventh Supplement Amending Northern Border Pipeline
Company General Partnership Agreement dated as of
September 23, 1993 Partnership (Exhibit 10.3.1 to the
1999 Form S-1).
10.3.2 Eighth Supplement Amending Northern Border Pipeline
Company General Partnership Agreement dated May 21,
1999 by and among TransCanada Border PipeLine Ltd.,
TransCan Northern Ltd., Northern Border Intermediate
Limited Partnership and TC PipeLines Intermediate
Limited Partnership.
*10.4 Note Purchase Agreement between Northern Border Pipeline
Company and the parties listed therein, dated July 15,
1992 (Exhibit 10.6 to Northern Border Partners, L.P.'s
Form S-1 Registration Statement No. 33-66158).
*10.4.1 Supplemental Agreement to the Note Purchase Agreement
dated as of June 1, 1995 (Exhibit 10.6.1 to Northern
Border Partners, L.P.'s Form S-1 Registration Statement
No. 33-66158).
10.5 U.S. $40,000,000 Two Year Revolving Credit Facility
between TC PipeLines, LP, as borrower, and TransCanada
PipeLine USA Ltd., as lender dated May 28, 1999.
*10.6 Form of Credit Agreement among Northern Border Pipeline
Company, The First National Bank of Chicago, as
Administrative Agent, The First National Bank of
Chicago, Royal Bank of Canada, and Bank of America
National Trust and Savings Association, as Syndication
Agents, First Chicago Capital Markets, Inc., Royal Bank
of Canada, and BancAmerica Securities, Inc. as Joint
Arrangers and Lenders (as defined therein) dated as of
June 16, 1997 (Exhibit 10(c) to Northern Border
Partners, L.P.'s Form S-3 Registration Statement No.
33-40601).
*10.7 Operating Agreement between Northern Border Pipeline
Company and Northern Plains Natural Gas Company, dated
February 28, 1980. (Exhibit 10.3 to Northern Border
Partners, L.P.'s Form S-1 Registration Statement No.
33-66158).
*10.8 Guaranty made by Panhandle Eastern Pipeline Company,
dated October 31, 1992 (Exhibit 10.9 to Northern Border
Partners, L.P.'s Form S-1 Registration Statement No.
33-65158).
25
EXHIBIT NO. DESCRIPTION
*10.9 Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and
Enron Gas Marketing, Inc., dated June 22, 1990 (Exhibit
10.10 to Northern Border Partners, L.P.'s Form S-1
Registration Statement No. 33-66158).
*10.9.1 Amended Exhibit A to Northern Border Pipeline Company
U.S. Shipper Service Agreement effective April 1, 1998.
(Exhibit 10.10.4 to Northern Border Partners, L.P.'s
1997 Form 10-K SEC File No. 1-12202).
*10.10 Amended Exhibit A to Northern Border Pipeline Company
U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Gas Marketing, Inc. (Exhibit
10.10.1 to Northern Border Partners, L.P.'s Form 10-K
for the year ended December 31, 1993, SEC file No.
1-12202).
*10.11 Amended Exhibit A to Northern Border Pipeline U.S.
Shippers Service Agreement between Northern Border
Pipeline Company and Enron Gas Marketing, Inc.,
effective November 1, 1994 (Exhibit 10.10.2 to the
Northern Border Partners, L.P.'s Form 10-K for the year
ended December 31, 1994, SEC File No. 1-12202).
*10.12 Amended Exhibit A's to Northern Border Pipeline Company
U.S. Shipper Service Agreement effective August 1, 1995
and November 1, 1995 (Exhibit 10.10.3 to Northern
Border Partners, L.P.'s Form 10-K for the year ended
December 31, 1995).
*10.13 Amended Exhibit A to Northern Border Pipeline Company
U.S. Shipper Service Agreement effective April 1, 1998
(Exhibit 10.10.4 to Northern Border Partners, L.P.'s
Form 10-K for the year ended December 31, 1997, SEC
File No. 1-12202).
*10.14 Guaranty made by Northern Natural Gas Company, dated
October 7, 1993 (Exhibit 10.11.1 to Northern Border
Partners, L.P.'s 1993 Form 10-K SEC File No. 1-12202).
*10.14.1 Guaranty made by Northern Natural Gas Company, dated
October 7, 1993 (Exhibit 10.11.2 to Northern Border
Partners, L.P.'s 1993 Form 10-K SEC File No. 1-12202).
*10.15 Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and
Western Gas Marketing Limited, as agent for TransCanada
PipeLines Limited, dated December 15, 1980 (Exhibit
10.13 to Northern Border Partners, L.P.'s Form S-1
Registration Statement No. 33-66158).
*10.15.1 Amended Exhibit A to Northern Border Pipeline Company
U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Western Gas Marketing Limited
extending the term effective April 2, 1999 (Exhibit
10.11.1 to 1999 Form S-1).
*10.16 Amendment to Northern Border Pipeline Company Service
Agreement extending the term effective November 1, 1995
(Exhibit 10.13.1 to Northern Border Partners, L.P.'s
Form 10-K for the year ended December 31, 1995).
*10.17 Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and
Transcontinental Gas Pipe Line Corporation, dated July
14, 1983, with Amended Exhibit A effective February 11,
1994 (Exhibit 10.17 to Northern Border Partners, L.P.'s
1995 Form 10-K SEC File No. 1-12202).
*10.18 Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and
Enron Capital & Trade Resources Corp. dated October 15,
1997 (Exhibit 10.21 to Northern Border Partners, L.P.'s
1997 Form 10-K SEC File No. 1-12202).
*10.19 Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and
Enron Capital & Trade Resources Corp. dated October 15,
1997 (Exhibit 10.22 to Northern Border Partners, L.P.'s
1997 Form 10-K SEC File No. 1-12202).
*10.20 Northern Border Pipeline Company U.S. Shippers Service
Agreement between Northern Border Pipeline Company and
Enron Capital & Trade Resources Corp. dated August 5,
1997 with Amendment dated September 25, 1997 (Exhibit
10.25 to Northern Border Partners, L.P.'s 1997 Form
10-K SEC File No. 1-12202).
*10.20.1 Amended Exhibit A to Northern Border Pipeline Company
U.S. Shippers Service Agreement between Northern Border
Pipeline Company and Enron Capital & Trade Resources
Corp. effective November 1, 1998 (Exhibit 10.15.1 to