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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
-----------------------
F O R M 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 Commission file number: 000-26091
TC PIPELINES, LP
(Exact name of registrant as specified in its charter)
DELAWARE 52-2135448
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
110 TURNPIKE ROAD, SUITE 203
WESTBOROUGH, MASSACHUSETTS 01581
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 508-871-7046
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON UNITS REPRESENTING LIMITED PARTNER INTERESTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on March 11, 2002, was approximately
$302.8 million.
As of March 11, 2002, there were 14,690,694 of the registrant's common
units outstanding.
TC PIPELINES, LP
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Units and Related
Security Holder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
PART III
Item 10. Directors and Officers of the General Partner 29
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 31
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 35
ALL AMOUNTS ARE STATED IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED.
PART I
ITEM 1. BUSINESS
BUSINESS OF TC PIPELINES, LP
TC PipeLines, LP was formed in 1998 as a Delaware limited partnership to
acquire, own and participate in the management of United States based pipeline
assets. TC PipeLines, LP and its subsidiary limited partnerships, TC PipeLines
Intermediate Limited Partnership and TC Tuscarora Intermediate Limited
Partnership are collectively referred to herein as "TC PipeLines" or "the
Partnership." TC PipeLines GP, Inc., a wholly owned subsidiary of TransCanada
PipeLines Limited, is the general partner of the Partnership.
The Partnership owns a 30% general partner interest in Northern Border Pipeline
Company. The remaining 70% general partner interest in Northern Border Pipeline
is held by Northern Border Partners, L.P., a publicly traded limited partnership
not affiliated with TC PipeLines that is controlled by affiliates of Enron Corp.
As of September 1, 2000, TC PipeLines, also owns a 49% general partner interest
in Tuscarora Gas Transmission Company. The Partnership acquired this asset from
TCPL Tuscarora Ltd., an indirect subsidiary of TransCanada.
The general partner holds an aggregate 2% general partner interest in the
Partnership. The general partner also owns 2,809,306 subordinated units and
is entitled to incentive distribution rights if quarterly cash distributions
on the common and subordinated units exceed levels specified in the
partnership agreement (see Item 5. "Market for Registrant's Common Units and
Related Security Holder Matters").
At December 31, 2001, the Partnership had 14,690,694 common units outstanding,
of which 11,890,694 are held by the public and 2,800,000 are held by an
affiliate of the general partner.
The Partnership's 30% general partner interest in Northern Border Pipeline and
49% general partner interest in Tuscarora represent its only material assets.
BUSINESS OF NORTHERN BORDER PIPELINE COMPANY
GENERAL
Northern Border Pipeline is a general partnership formed in 1978. Northern
Border Pipeline's general partners are TC PipeLines and Northern Border
Partners, both of which are publicly traded limited partnerships. Each of TC
PipeLines and Northern Border Partners holds its interest in Northern Border
Pipeline, representing 30% and 70% of
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voting power, respectively, through a subsidiary limited partnership. The
general partner of TC PipeLines and its subsidiary limited partnerships is TC
PipeLines GP, Inc., a subsidiary of TransCanada. The general partners of
Northern Border Partners and its subsidiary limited partnership are Northern
Plains Natural Gas Company and Pan Border Gas Company, both subsidiaries of
Enron, and Northwest Border Pipeline Company, a subsidiary of The Williams
Companies, Inc.
Northern Border Pipeline owns an interstate pipeline system that transports
natural gas from the Montana-Saskatchewan border to natural gas markets in the
midwestern United States. The Northern Border pipeline system connects with
multiple pipelines that provide shippers with access to the various natural gas
markets served by those pipelines. In the year ended December 31, 2001, TC
PipeLines estimates that Northern Border Pipeline transported approximately 20%
of the total amount of natural gas imported from Canada to the United States.
Over the same period, approximately 90% of the natural gas transported was
produced in the western Canadian sedimentary basin located in the provinces of
Alberta, British Columbia and Saskatchewan.
Northern Border Pipeline transports natural gas for shippers under a tariff
regulated by the Federal Energy Regulatory Commission (FERC). The tariff
specifies the calculation of amounts to be paid by shippers and the general
terms and conditions of transportation service on the Northern Border pipeline
system. Northern Border Pipeline's revenues are derived from agreements for the
receipt and delivery of natural gas at points along the Northern Border pipeline
system as specified in each shipper's individual transportation contract.
Northern Border Pipeline does not own the natural gas that it transports, and
therefore it does not assume the related natural gas commodity risk.
Northern Border Pipeline's management is overseen by a four-member management
committee. One representative is designated by TC PipeLines. Three
representatives are designated by Northern Border Partners, with each of its
general partners selecting one representative. Voting power on the management
committee is allocated among the partners in accordance to their proportional
interest in the general partner interests. As a result, the 70% voting power of
Northern Border Partners' three representatives on the management committee is
allocated as follows: 35% to the representative designated by Northern Plains,
22.75% to the representative designated by Pan Border and 12.25% to the
representative designated by Northwest Border. Northern Plains and Pan Border
are subsidiaries of Enron. Therefore, Enron controls 57.75% of the voting power
of the management committee and has the right to select two of the members. On
December 2, 2001, Enron filed a voluntary petition for Chapter 11 protection
in bankruptcy court. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations Results of Operations of
Northern Border Pipeline Company - Impact of Enron's Chapter 11 Filing on
Northern Border Pipeline's Business."
The Northern Border pipeline system is operated by Northern Plains pursuant to
an operating agreement. As of December 31, 2001, Northern Plains employed
approximately 215 individuals located at Northern Plains' headquarters in Omaha,
Nebraska, and at various locations along the pipeline route. Northern Plains'
employees are not represented by any labor union and are not covered by any
collective bargaining agreements.
THE NORTHERN BORDER PIPELINE SYSTEM
Northern Border Pipeline owns a 1,249-mile interstate pipeline system that
transports natural gas from the Montana-Saskatchewan border near Port of Morgan,
Montana to natural gas markets in the midwestern United States. Construction of
the Northern Border pipeline system was initially completed in 1982. The
Northern Border pipeline system was expanded and/or extended in 1991, 1992, 1998
and 2001. The Northern Border pipeline system connects directly and through
multiple pipelines with various natural gas markets.
The Northern Border pipeline system consists of 822 miles of 42-inch diameter
pipe designed to transport 2,374 million cubic feet per day (mmcfd) from the
Canadian border to Ventura, Iowa; 30-inch diameter pipe and 36-inch diameter
pipe, each approximately 147 miles in length, designed to transport 1,484 mmcfd
in total from Ventura, Iowa to Harper, Iowa; 226 miles of 36-inch diameter pipe
and 19 miles of 30-inch diameter pipe designed to transport 844 mmcfd from
Harper, Iowa to Manhattan, Illinois (Chicago area); and 35 miles of 30-inch
diameter pipe designed to transport 545 mmcfd from Manhattan, Illinois to a
terminus near North Hayden, Indiana. Along the pipeline there are 16 compressor
stations with total rated horsepower of 499,000 and measurement facilities to
support the receipt and delivery of natural gas at various points. Other
facilities include four field offices and a microwave communication system with
51 tower sites.
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On October 1, 2001, Northern Border Pipeline completed construction and began
operation of its Project 2000 facilities. Project 2000 gives shippers access to
industrial natural gas consumers in northern Indiana through an interconnect
with Northern Indiana Public Service Company, a major midwest local distribution
company, at the terminus near North Hayden, Indiana and provides 545 mmcfd of
transportation capacity. Project 2000 also expands Northern Border Pipeline's
delivery capability into the Chicago area by approximately 30%. Capital
expenditures for Project 2000 are approximately $63 million. Project 2000
facilities include approximately 35 miles of 30-inch pipeline, one 13,000
horsepower compressor station in Illinois, additional horsepower at two Iowa
compressor stations and one meter station.
The Northern Border pipeline system has pipeline access to natural gas reserves
in the western Canadian sedimentary basin in the provinces of Alberta, British
Columbia and Saskatchewan in Canada, as well as the Williston Basin in the
United States. The Northern Border pipeline system also has access to synthetic
gas produced at the Dakota Gasification plant in North Dakota. At its northern
end, the Northern Border pipeline system's natural gas supplies are received
through an interconnection with TransCanada's majority-owned Foothills Pipe
Lines (Sask.) Ltd. system in Canada, which is connected to TransCanada's Alberta
System and the pipeline system owned by Transgas Limited in Saskatchewan. The
Northern Border pipeline system also connects with facilities of Williston Basin
Interstate Pipeline at Glen Ullin and Buford, North Dakota, facilities of
Amerada Hess Corporation at Watford City, North Dakota and facilities of Dakota
Gasification Company at Hebron, North Dakota in the northern portion of the
Northern Border pipeline system. For the year ended December 31, 2001, of the
natural gas transported on the Northern Border pipeline system, approximately
90% was produced in Canada, approximately 5% was produced by the Dakota
Gasification plant and approximately 5% was produced in the Williston Basin.
INTERCONNECTS
The Northern Border pipeline system connects with multiple pipelines that
provide its shippers with access to the various natural gas markets served by
those pipelines. The Northern Border pipeline system interconnects with pipeline
facilities of:
o Northern Natural Gas Company, an Enron subsidiary until February 1,
2002, and now a subsidiary of Dynegy, Inc., at Ventura, Iowa as well
as multiple smaller interconnections in South Dakota, Minnesota and
Iowa;
o Natural Gas Pipeline Company of America at Harper, Iowa;
o MidAmerican Energy Company at Iowa City and Davenport, Iowa and
Cordova, Illinois;
o Alliant Power Company at Prophetstown, Illinois;
o Northern Illinois Gas Company at Troy Grove and Minooka, Illinois;
o Midwestern Gas Transmission Company, a wholly owned subsidiary of
Northern Border Partners, near Channahon, Illinois;
o ANR Pipeline Company near Manhattan, Illinois;
o Vector Pipeline L.P. in Will County, Illinois;
o The Peoples Gas Light and Coke Company near Manhattan, Illinois; and
o Northern Indiana Public Service Company near North Hayden, Indiana at
the terminus of the Northern Border pipeline system.
The Ventura, Iowa interconnect with Northern Natural Gas Company functions as a
large market center, where natural gas transported on the Northern Border
pipeline system is sold, traded and received for transport to significant
consuming markets in the Midwest and to interconnecting pipeline facilities
destined for other markets.
SHIPPERS
The Northern Border pipeline system serves more than 50 firm transportation
shippers with diverse operating and financial profiles. Based upon shippers'
contractual obligations, as of December 31, 2001, 91% of the firm capacity is
contracted by producers and marketers. The remaining firm capacity is contracted
to local distribution companies (6%), interstate pipelines (2%) and end-users
(1%). As of December 31, 2001, the termination dates of these contracts ranged
from March 31, 2002 to December 21, 2013, and the weighted average contract
life, based upon annual contractual obligations, was approximately five and
one half years with just under 99% of capacity contracted through
mid-September 2003. Contracts for approximately 42% of the capacity will
expire prior to November 2003. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations of Northern Border Pipeline Company - Outlook."
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Northern Border Pipeline's mix and number of shippers may change throughout the
year as a result of its shippers utilizing Northern Border Pipeline's capacity
release provisions that allow shippers to release all or part of their capacity
to other shippers either permanently for the full term of their contract or
temporarily. Under the terms of Northern Border Pipeline's tariff, a temporary
capacity release does not relieve the original contract shipper from its
payment obligations if the replacement shipper fails to pay for the capacity
temporarily released to it. Shippers on the Northern Border pipeline system
temporarily released capacity during 2001 for varying periods of time. There
were also permanent releases of capacity to other shippers for the full term
of the contracts.
As of December 31, 2001, Northern Border Pipeline's largest shipper, Mirant
Americas Energy Marketing, LP, is obligated for approximately 33.7% of Northern
Border Pipeline's contracted firm capacity. Of this amount, 24.4% of Northern
Border Pipeline's contracted firm capacity was obtained under temporary
releases from Pan-Alberta Gas (U.S.) (Pan Alberta) for a term through October
31, 2002. Pan-Alberta's firm contracts expire October 31, 2003. Mirant
Americas Energy Marketing, LP, manages the assets of Pan-Alberta Gas, Ltd.,
which include Pan-Alberta's contracts with Northern Border Pipeline.
Some of Northern Border Pipeline's shippers are affiliated with Northern
Border Pipeline's general partners. Enron North America Corp. (ENA), a
subsidiary of Enron, which also has filed for bankruptcy protection, holds
firm contracts representing 3.5% of capacity, a portion of which (1.1%) has
been temporarily released to a third party until October 31, 2002. The third
party that holds the 1.1% of capacity has filed a complaint with the FERC
requesting, in effect, that its contract be deemed terminated as a
consequence of ENA's filing for bankruptcy protection. Northern Border
Pipeline believes this shipper's contract will remain in effect until October
31, 2002. ENA's contractual obligations were supported by guarantees from
Enron, which are subject to Enron's filing for bankruptcy protection.
Transcontinental Gas Pipe Line Corporation, a subsidiary of Williams, holds a
contract representing 0.7% of capacity. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations of Northern Border Pipeline Company - Impact of Enron's Chapter 11
Filing on Northern Border Pipeline's Business."
DEMAND FOR TRANSPORTATION CAPACITY
Northern Border Pipeline's long-term financial condition is dependent on the
continued availability of economic western Canadian natural gas supplies for
import into the United States. Natural gas reserves may require significant
capital expenditures by others for exploration and development drilling and the
installation of production, gathering, storage, transportation and other
facilities that permit natural gas to be produced and delivered to pipelines
that interconnect with the interstate pipelines' systems. Low prices for natural
gas, regulatory limitations or the lack of available capital for these projects
could adversely affect the development of additional reserves and production,
gathering, storage and pipeline transmission of western Canadian natural gas
supplies. Additional pipeline export capacity also could accelerate depletion of
these reserves. Furthermore, the availability of export capacity could also
affect the demand or value of the transport on the Northern Border pipeline
system.
Northern Border Pipeline's business also depends on the level of demand for
natural gas in the markets the pipeline system serves. The volumes of natural
gas delivered to these markets from other sources affect the demand for both the
natural gas supplies and the use of the Northern Border pipeline system. Demand
for natural gas to serve other markets also influences the ability and
willingness of shippers to use the Northern Border pipeline system to meet
demand in the markets that Northern Border Pipeline serves.
A variety of factors could affect the demand for natural gas in the markets that
the Northern Border pipeline system serves. These factors include:
o economic conditions;
o fuel conservation measures;
o alternative energy requirements and prices;
o climatic conditions;
o government regulation; and
o technological advances in fuel economy and energy generation devices.
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Interstate pipelines' primary exposure to market risk occurs at the time
existing transportation contracts expire and are subject to renegotiation. A
key determinant of the value that customers can realize from firm
transportation on the pipeline system is the basis differential or market
price spread between two points on the pipeline. The difference in natural
gas prices between the points along the pipeline where natural gas enters and
where natural gas is delivered represents the gross margin that a customer
can expect to achieve from holding transportation capacity at any point in
time. This margin and its variability become important factors in determining
the level of demand charges customers are willing to commit to when they
renegotiate their transportation contracts. The basis differential between
markets can be affected by trends in production, available capacity, storage
inventories, weather, and general market demand in the respective areas.
TC PipeLines cannot predict whether these or other factors will have an adverse
effect on demand for use of the Northern Border pipeline system or how
significant that adverse effect could be.
INTERSTATE PIPELINE COMPETITION
Northern Border Pipeline competes with other pipeline companies that
transport natural gas from the western Canadian sedimentary basin or that
transport natural gas to end-use markets in the midwest. Northern Border
Pipeline's competitive position is affected by the availability of Canadian
natural gas for export, the availability of other sources of natural gas and
demand for natural gas in the United States. Demand for transportation
services on the Northern Border pipeline system is affected by natural gas
prices, the relationship between export capacity from and production in the
western Canadian sedimentary basin and natural gas shipped from producing
areas in the United States. Shippers of natural gas produced in the western
Canadian sedimentary basin also have other options to transport Canadian
natural gas to the United States, including transportation on pipelines
eastward in Canada or to markets on the West Coast.
The Alliance Pipeline, which was placed in service in December 2000, competes
directly with Northern Border Pipeline in the transportation of natural gas from
the western Canadian sedimentary basin to the Chicago area. Williams has a
minority interest (14.6%) in Alliance Pipeline. Because it transports
liquids-rich natural gas, the Alliance Pipeline has no interconnections with
other pipelines upstream of the liquids extraction facilities, which are located
near Chicago. This contrasts with the Northern Border pipeline system, which
serves various markets through interconnections with other pipelines along its
route.
The competitive impact of the Alliance Pipeline has been mitigated by the
continuing development of additional capacity to ship natural gas from the
Chicago area to other markets in the United States. Vector Pipeline L.P., which
interconnects with the Alliance Pipeline and transports natural gas eastward to
a terminus in eastern Canada, commenced operations in December 2000. Guardian
Pipeline proposes to be in service in November 2002 and to interconnect with
Northern Border Pipeline. Guardian Pipeline is targeting markets in northern
Illinois and Wisconsin and could provide access to additional markets for
Northern Border Pipeline's shippers.
TransCanada and other unaffiliated companies own and operate pipeline systems
that transport natural gas from the same natural gas reserves in western Canada
that supply Northern Border Pipeline's shippers.
Natural gas is produced in the United States and is also transported by
competing pipeline systems to the same markets as those served by the Northern
Border pipeline system.
FERC REGULATION
Northern Border Pipeline is subject to extensive regulation by the FERC as a
"natural gas company" under the Natural Gas Act. Under the Natural Gas Act and
the Natural Gas Policy Act, the FERC has jurisdiction with respect to virtually
all aspects of Northern Border Pipeline's business, including:
o transportation of natural gas;
o rates and charges;
o construction of new facilities;
o extension or abandonment of service and facilities;
o accounts and records;
o depreciation and amortization policies;
o the acquisition and disposition of facilities; and
o the initiation and discontinuation of services.
Where required, Northern Border Pipeline holds certificates of public
convenience and necessity issued by the FERC covering the facilities, activities
and services. Under Section 8 of the Natural Gas Act, the FERC has the power to
prescribe the accounting treatment for items for regulatory purposes. Northern
Border Pipeline's books and records may be periodically audited under Section 8.
The FERC regulates the rates and charges for transportation in interstate
commerce. Natural gas companies may not charge rates exceeding rates judged just
and reasonable by the FERC. Generally, rates are based on the cost of
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service including recovery of and a return on the pipeline's actual historical
cost investment. In addition, the FERC prohibits natural gas companies from
unduly preferring or unreasonably discriminating against any person with respect
to pipeline rates or terms and conditions of service. Some types of rates may be
discounted without further FERC authorization and rates may be negotiated
subject to FERC approval. The rates and terms and conditions for Northern Border
Pipeline's service are found in its FERC approved Gas Tariff.
Under Northern Border Pipeline's tariff, Northern Border Pipeline is allowed
to charge for its services on the basis of stated transportation rates
established in Northern Border Pipeline's 1999 rate case. Northern Border
Pipeline also may provide services under negotiated and discounted rates.
Approximately 98% of the agreed upon cost of service or revenue level is
attributed to demand charges. Firm shippers that contract for the stated
transportation rate are obligated to pay a monthly demand charge, regardless
of the amount of natural gas they actually transport, for the term of their
contracts. The remaining 2% of the agreed upon revenue level is attributed to
commodity charges based on the volumes of natural gas actually transported.
Under the terms of settlement in Northern Border Pipeline's 1999 rate case,
neither Northern Border Pipeline's existing shippers nor Northern Border
Pipeline can seek rate changes until November 1, 2005, at which time Northern
Border Pipeline must file a new rate case. Prior to the new rate case,
Northern Border Pipeline will not be permitted to increase rates if costs
increase, nor will Northern Border Pipeline be required to reduce rates based
on cost savings. Northern Border Pipeline's earnings and cash flow will
depend on future costs, contracted capacity, the volumes of natural gas
transported and Northern Border Pipeline's ability to recontract capacity at
acceptable rates.
Until new transportation rates are approved by FERC, Northern Border Pipeline
continues to depreciate its transmission plant at the FERC approved annual
depreciation rate. Northern Border Pipeline's annual depreciation rate on
transmission plant in service is 2.25%. In order to avoid a decline in
transporation rates set in future rate cases as a result of accumulated
depreciation, Northern Border Pipeline must maintain or increase its rate
base by acquiring or constructing assets that replace or add to existing
pipeline facilities or by adding new facilities.
In Northern Border Pipeline's 1995 rate case, the FERC addressed the issue of
whether the federal income tax allowance included in Northern Border Pipeline's
proposed cost of service was reasonable in light of recent FERC rulings. In
those rulings, the FERC held that an interstate pipeline is not entitled to a
tax allowance for income attributable to limited partnership interests held by
individuals. The settlement of Northern Border Pipeline's 1995 rate case
provided that until at least December 2005, Northern Border Pipeline could
continue to calculate the allowance for income taxes in the manner it had
historically used. In addition, a settlement adjustment mechanism of $31
million was implemented, which effectively reduces the return on rate base.
These provisions of the 1995 rate case were maintained in the settlement of
Northern Border Pipeline's 1999 rate case.
Northern Border Pipeline also provides interruptible transportation service.
Interruptible transportation service is transportation in circumstances when
capacity is available after satisfying firm service requests. The maximum rate
that may be charged to interruptible shippers is calculated as the sum of the
firm transportation maximum reservation charge and commodity rate. Under
Northern Border Pipeline's tariff, Northern Border Pipeline shares net
interruptible transportation service revenue and any new services revenue on an
equal basis with Northern Border Pipeline's firm shippers through October 31,
2003. In addition, Northern Border Pipeline is permitted to retain revenue from
interruptible transportation service to offset any decontracted firm capacity.
After October 31, 2003, all Northern Border Pipeline's revenues from
interruptible and other new transportation service will no longer be subject to
sharing and thus, will be retained by Northern Border Pipeline. During 2001,
Northern Border Pipeline filed and received approval to implement several new
services. Northern Border Pipeline intends to continue to develop other new
services to meet customer needs and seek the FERC's authorization to implement
such services. Revenues from these sources are expected to be minimal for the
near term.
Northern Border Pipeline is subject to the requirements of FERC Order Nos. 497
and 566, which prohibit preferential treatment by interstate natural gas
pipelines of their marketing affiliates and govern how information may be
provided to those marketing affiliates. In September 2001, the FERC issued a
Notice of Proposed Regulation proposing new standards of conduct that would
apply uniformly to natural gas pipelines and transmitting
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public utilities. FERC is proposing one set of standards to govern
relationships between regulated transmission providers and all energy
affiliates. Should a final rule be issued in this proceeding, Northern Border
Pipeline may be subject to standards that could result in additional costs.
ENVIRONMENTAL AND SAFETY MATTERS
Northern Border Pipeline's operations are subject to federal, state and local
laws and regulations relating to safety and the protection of the
environment, which include the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, Clean Air Act, as amended, the Clean Water Act, as amended, the
Natural Gas Pipeline Safety Act of 1969, as amended, and the Pipeline Safety
Act of 1992.
Although TC PipeLines believes that Northern Border Pipeline's operations and
facilities are in general compliance in all material respects with applicable
environmental and safety regulations, risks of substantial costs and liabilities
are inherent in pipeline operations, and TC PipeLines cannot provide any
assurances that Northern Border Pipeline will not incur such costs and
liabilities. Moreover, it is possible that other developments, such as
increasingly strict environmental and safety laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from Northern Border Pipeline's operations, could result in substantial costs
and liabilities to Northern Border Pipeline. If Northern Border Pipeline is
unable to recover such resulting costs, earnings and cash distributions could be
adversely affected.
BUSINESS OF TUSCARORA GAS TRANSMISSION COMPANY
Tuscarora is a Nevada general partnership formed in 1993. Its general partners
are TC Tuscarora Intermediate Limited Partnership, a direct subsidiary of TC
PipeLines, which holds a 49% general partner interest, Tuscarora Gas Pipeline
Co., a wholly owned subsidiary of Sierra Pacific Resources Company, which holds
a 50% general partner interest and TCPL Tuscarora Ltd., an indirect wholly owned
subsidiary of TransCanada, which holds a 1% general partner interest.
The management of Tuscarora is overseen by a management committee that
determines the policies of, has authority over the affairs of, and approves the
actions of Tuscarora. The management committee participates in the management of
the construction, maintenance and operation of the Tuscarora pipeline system.
Under the Tuscarora partnership agreement, voting control is allocated among
Tuscarora's three general partners in proportion to their general partner
interests in Tuscarora. As a result, TC PipeLines has a 49% voting interest,
Sierra Pacific has a 50% voting interest, and TransCanada has a 1% voting
interest on the Tuscarora management committee. Tuscarora Gas Operating Company,
a subsidiary of Sierra Pacific, operates the Tuscarora pipeline system pursuant
to an operating agreement.
THE TUSCARORA PIPELINE SYSTEM
Tuscarora owns a 229-mile, 20-inch diameter, United States interstate pipeline
system that originates at an interconnection point with facilities of PG&E
National Energy Group, Gas Transmission Northwest near Malin, Oregon and runs
southeast through northeastern California and northwestern Nevada. The Tuscarora
pipeline system terminates near Reno, Nevada at the Tracy Power Plant.
Deliveries are also made directly to the local gas distribution system of Sierra
Pacific. Along its route, deliveries are made in Oregon, northern California and
northwestern Nevada.
The Tuscarora pipeline system was constructed in 1995 and was placed into
service in December 1995. The Tuscarora pipeline system has the capacity to
transport, on a firm basis, approximately 127 mmcfd of natural gas.
Tuscarora has firm transportation contracts for over 98% of its capacity,
including contracts held by Sierra Pacific Power Company, a subsidiary of Sierra
Pacific, for 94% of the total available capacity, the majority of which
expires on November 30, 2015. As of December 31, 2001, the weighted average
contract life on the Tuscarora pipeline system was approximately fourteen
years.
In January 2001, Tuscarora completed construction of the Hungry Valley lateral,
a 14-mile, 16-inch pipeline
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extension that serves as Tuscarora's second connection into Reno, Nevada. Sierra
Pacific Power holds firm capacity on the lateral for approximately 15 mmcfd
through firm transportation contracts that expire in January and October 2016.
The project was completed at a capital cost of approximately $8.0 million.
On January 30, 2002, the FERC issued a final certificate, approving the proposed
expansion of Tuscarora's pipeline system. The Tuscarora expansion consists of
three compressor stations and a 14-mile pipeline extension from the current
terminus of the Tuscarora pipeline system near Reno, Nevada to Wadsworth,
Nevada. The expansion is expected to cost $60 million and will increase
Tuscarora's capacity from 127 mmcfd to approximately 220 mmcfd. Approximately
two-thirds of the capital budget is expected to be spent in 2002. Commercial
operations are targeted to begin in November 2002 with approximately 40% of the
expansion volumes flowing. The full incremental 93 mmcfd of contracted volumes
are expected to be flowing by late 2003 when construction is expected to be
completed. The expansion is supported by long-term firm transportation contracts
ranging from ten to fifteen years. Sierra Pacific Power has contracted for
approximately 11 mmcfd of the increased capacity. At the request of the Public
Utilities Commission of Nevada, Tuscarora will submit to a cost and revenue
study to be conducted by the FERC within 3 years of the in service date of the
expansion.
On March 15, 2002, Tuscarora issued Series C Senior Secured Notes in the amount
of $10 million. These notes bear interest at 6.89% and are due in 2012. The
proceeds from these notes will be used to finance a portion of the construction
of Tuscarora's expansion project.
Tuscarora's competitive position is dependent on the continued availability of
commercially attractive western Canadian natural gas for import into the United
States and on the level of demand for western Canadian natural gas in the
markets the Tuscarora pipeline system serves. Shippers of natural gas from the
western Canadian sedimentary basin have other options for transporting Canadian
natural gas to the United States, including transportation on pipelines eastward
in Canada or to markets on the west coast of the United States and Canada.
Similarly, natural gas produced in the United States serves the same markets as
Tuscarora in northern Nevada. Tuscarora is able to transport both Canadian and
United States natural gas providing Tuscarora with a well-diversified supply of
natural gas to serve its markets.
FERC REGULATION
Tuscarora is subject to regulation by the FERC as a "natural gas company" under
the Natural Gas Act, and is subject to the FERC's rules, regulations and
accounting procedures.
Tuscarora generates revenues from individual transportation contracts with
shippers that provide for the receipt and delivery of natural gas at points
along the Tuscarora pipeline system. Tuscarora's transportation rates are based
on its cost of service as approved by the FERC. Tuscarora's cost of service
includes administrative and operating costs, depreciation and amortization,
taxes other than income taxes, an allowance for income taxes and a regulated
return on capital employed.
ENVIRONMENTAL AND SAFETY MATTERS
Tuscarora's operations are subject to federal, state and local laws and
regulations relating to safety and protection of the environment. TC PipeLines
believes that Tuscarora's operations and facilities comply in all material
respects with applicable United States environmental and safety regulations.
ITEM 2. PROPERTIES
TC PipeLines does not hold the right, title or interest in any properties.
PROPERTIES OF NORTHERN BORDER PIPELINE COMPANY
Northern Border Pipeline holds the right, title and interest in its pipeline
system. With respect to real property, the Northern Border pipeline system falls
into two basic categories: (a) parcels which are owned in fee, such as certain
of the compressor stations, meter stations, pipeline field office sites, and
microwave tower sites; and (b) parcels where Northern Border Pipeline's interest
derives from leases, easements, rights-of-way, permits or licenses from
landowners or governmental authorities permitting the use of such land for the
construction and operation of the Northern Border pipeline system. The right to
construct and operate the Northern Border pipeline system across certain
property was obtained by Northern Border Pipeline through exercise of the power
of eminent domain. Northern Border Pipeline continues to have the power of
eminent domain in each of the states in which Northern Border Pipeline operates,
although Northern Border Pipeline may not have the power of eminent domain with
respect to Native American tribal lands.
Approximately 90 miles of the Northern Border pipeline system are located on
fee, allotted and tribal lands within the exterior boundaries of the Fort
Peck Indian Reservation in Montana. Tribal lands are lands owned in trust by
the United States for the Fort Peck Tribes and allotted lands are lands owned
in trust by the United States for an individual Indian or Indians. Northern
Border Pipeline does have the right of eminent domain with respect to
allotted lands.
In 1980, Northern Border Pipeline entered into a pipeline right-of-way lease
with the Fort Peck Tribal Executive Board, for and on behalf of the
Assiniboine and Sioux Tribes of the Fort Peck Indian Reservation. This
pipeline right-of-way lease, which was approved by the Department of the
Interior in 1981, granted to Northern Border Pipeline the right and privilege
to construct and operate the Northern Border pipeline system on certain
tribal lands. This pipeline right-of-way lease expires in 2011.
In conjunction with obtaining a pipeline right-of-way lease across tribal lands
located within the exterior boundaries of the Fort Peck Indian Reservation,
Northern Border Pipeline also obtained a right-of-way across allotted lands
located within the reservation boundaries. Most of the allotted lands are
subject to a perpetual easement either granted, by the Bureau of Indian Affairs
for and on behalf of individual Indian owners or obtained through condemnation.
Several tracts are subject to a right-of-way grant that has a term of 15 years,
expiring in 2015.
PROPERTIES OF TUSCARORA GAS TRANSMISSION COMPANY
Tuscarora holds the right, title and interest in its pipeline system. Tuscarora
owns all of its material equipment and personal property and leases office space
in Reno, Nevada. With respect to real property, Tuscarora's ownership falls into
two basic categories (a) parcels which it owns in fee, including meter stations;
and (b) parcels where its interest derives from leases, easements, grants,
temporary use of permits or licenses from landowners or governmental authorities
permitting the use of the land for the construction and operation of its
pipeline system.
ITEM 3. LEGAL PROCEEDINGS
TC PipeLines is not currently a party to any material legal proceedings.
On July 31, 2001, the Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation filed a lawsuit in Tribal Court against Northern Border Pipeline to
collect more than $3 million in back taxes, together with interest and
penalties. The lawsuit relates to a utilities tax on certain of Northern Border
Pipeline's properties within the Fort Peck Reservation. Based on recent
decisions by the federal courts and other defenses, TC PipeLines believes that
the Tribes do not have authority to impose the tax and that the lawsuit will not
have a material adverse impact on TC PipeLines.
8
Neither Northern Border Pipeline nor Tuscarora are currently party to any
other legal proceedings that, individually or in the aggregate, would
reasonably be expected to have a material adverse impact on TC PipeLines'
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the year ended December 31, 2001.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED SECURITY
HOLDER MATTERS
The common units, representing limited partner interests in the Partnership,
were issued pursuant to an initial public offering on May 28, 1999 at a price of
$20.50 per common unit. The common units are quoted on the Nasdaq Stock Market
and trade under the symbol "TCLP" as of February 4, 2002. Prior to February 4,
2002, the common units traded under the symbol "TCLPZ."
The following table sets forth, for the periods indicated, the high and low sale
prices per common unit, as reported by the Nasdaq Stock Market, and the amount
of cash distributions per common unit paid with respect to the corresponding
periods. Cash distributions are paid within 45 days after the end of each
quarter.
Price Range Cash Distributions
High Low Paid per Unit
2001
FIRST QUARTER $24.500 $16.250 $0.475
SECOND QUARTER $24.240 $20.000 $0.500
THIRD QUARTER $27.000 $21.850 $0.500
FOURTH QUARTER $27.600 $23.000 $0.500
2000
First Quarter $18.375 $14.000 $0.450
Second Quarter $17.000 $14.500 $0.450
Third Quarter $20.375 $16.125 $0.475
Fourth Quarter $20.500 $17.875 $0.475
As of March 11, 2002, there were approximately 93 record holders of common units
and approximately 6,100 beneficial owners of the common units, including common
units held in street name.
The Partnership currently has 14,690,694 common units outstanding, of which
11,890,694 are held by the public and 2,800,000 are held by an affiliate of the
general partner. The Partnership also has 2,809,306 subordinated units
outstanding, all of which are held by the general partner, for which there is no
established public trading market. The common units and the subordinated units
represent an aggregate 98% limited partner interest and the general partner
interest represents an aggregate 2% general partner interest in the Partnership.
In general, the general partner is entitled to 2% of all cash distributions and
the holders of common units and subordinated units (collectively referred to as
unitholders) are entitled to the remaining 98% of all cash distributions. The
Partnership will make quarterly cash distributions to its partners (including
holders of subordinated units), comprising all of its Available Cash. Available
Cash is defined in the partnership agreement and generally means, with respect
to any quarter of the Partnership, all cash on hand at the end of such quarter
less the amount of cash reserves that are necessary or appropriate in the
reasonable discretion of the general partner to (i) provide for the proper
conduct of the business of the Partnership (including reserves for future
capital expenditures and for anticipated credit needs), (ii) comply with
applicable laws or any Partnership debt instrument or agreement, or (iii)
provide funds for cash distributions to unitholders and the general partner in
respect of any one or more of the next four quarters. Distributions of Available
Cash to the holder of subordinated units are subject to the prior rights of the
holders of common units to receive the minimum quarterly distribution for each
quarter while the subordinated units are outstanding (subordination period), and
to receive any arrearages in the cash distribution of minimum quarterly
distributions on the common units for prior quarters during the subordination
period. The partnership agreement defines the minimum quarterly distribution as
$0.45 for each full fiscal quarter.
The general partner is entitled to incentive distributions if the amount
distributed with respect to any quarter exceeds the minimum quarterly
distribution of $0.45 per common unit. Under the incentive distribution
provisions, the general partner is entitled to 15% of amounts distributed in
excess of $0.45 per common unit, 25% of amounts distributed in excess of $0.5275
per common unit, and 50% of amounts distributed in excess of $0.69 per common
unit provided the balance has been first distributed to unitholders on a pro
rata basis. The amounts that trigger
10
incentive distributions at various levels are subject to adjustment in certain
events, as described in the partnership agreement.
On September 5, 2000, the Partnership announced an increase in the quarterly
cash distribution from $0.45 per unit to $0.475 per unit for the 2000 third
quarter cash distribution, which was paid on November 14, 2000, resulting in the
first tier of incentive distributions being achieved. On July 19, 2001, the
Partnership announced another increase in the quarterly cash distribution from
$0.475 per unit to $0.50 per unit for the 2001 second quarter cash distribution,
which was paid on August 14, 2001.
In 2001, the Partnership made cash distributions to the limited partners and the
general partner that amounted to $35.2 million. These payments represented
$0.475 per unit for the quarters ended December 31, 2000 and March 31, 2001 and
$0.50 per unit for the quarters ended June 30, 2001 and September 30, 2001. On
February 14, 2002, the Partnership paid a cash distribution of $9.1 million to
the limited partners and the general partner, representing a cash distribution
of $0.50 per unit for the quarter ended December 31, 2001.
SUBORDINATION PERIOD
The subordination period extends until the first day of any quarter beginning
after June 30, 2004 in respect of which: (i) distributions of Available Cash
from operating surplus on the common units and the subordinated units for each
of the three non-overlapping four-quarter periods immediately preceding that
date equaled or exceeded the sum of the minimum quarterly distribution on all of
the outstanding common units and subordinated units during those periods, (ii)
the adjusted operating surplus generated during each of the three
non-overlapping four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distribution on all of the common
units and the subordinated units that were outstanding on a fully diluted basis
and the related distributions on the general partner interest during those
periods, and (iii) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
Before the end of the subordination period and to the extent the tests for
conversion described above are satisfied, a portion of the subordinated units
may convert into common units prior to June 30, 2004. Subordinated units will
convert into common units on a one-for-one basis on the first day after the
record date established for the distribution in respect of any quarter ending on
or after: (i) June 30, 2002 with respect to one-third of the subordinated units
(936,435 subordinated units), and (ii) June 30, 2003 with respect to one-third
of the subordinated units (936,435 subordinated units), in respect of which each
of the financial tests described above have been satisfied; provided, however,
that the early conversion of the second one-third of subordinated units may not
occur until at least one year following the early conversion of the first
one-third of subordinated units.
Upon expiration of the subordination period, all remaining subordinated units
will convert into common units on a one-for-one basis and will thereafter
participate, pro rata with the other common units in distributions of Available
Cash.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with the financial
statements, including the notes thereto, and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
11
TC PIPELINES, LP
(thousands of dollars, except per unit amounts)
Year ended December 31
---------------------------- May 28 (1) -
2001 2000 December 31, 1999
------------- -------------- ---------------------
INCOME DATA:
Equity income from investment in Northern Border Pipeline 42,138 38,119 20,923
Equity income from investment in Tuscarora (2) 3,608 943 -
General and administrative expenses (1,251) (1,337) (699)
Financial charges (973) (501) -
------------- -------------- ---------------------
Net income 43,522 37,224 20,224
------------- -------------- ---------------------
------------- -------------- ---------------------
Basic and diluted net income per unit $2.40 $2.08 $1.13
Units outstanding (thousands) 17,500 17,500 17,500
CASH FLOW DATA:
Net cash provided by operating activities 42,978 40,366 11,832
Distributions paid 35,231 32,657 11,037
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in Northern Border Pipeline 250,078 248,098 250,450
Investment in Tuscarora (2) 29,297 27,881 -
Total assets 288,688 277,545 251,245
Long-term debt 21,500 21,500 -
Partners' equity 266,704 255,405 250,838
(1) The Partnership commenced operations on May 28, 1999.
(2) The Partnership acquired a 49% interest in Tuscarora on September 1, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AS A RESULT OF THE PARTNERSHIP'S OWNERSHIP OF INVESTMENTS IN BOTH NORTHERN
BORDER PIPELINE AND TUSCARORA, THE FOLLOWING DISCUSSES FIRST THE RESULTS OF
OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES OF TC PIPELINES, THEN THOSE OF
EACH OF NORTHERN BORDER PIPELINE AND TUSCARORA IN THEIR ENTIRETY.
The following discussions of the financial condition and results of operations
for the Partnership, Northern Border Pipeline and Tuscarora should be read in
conjunction with the financial statements and notes thereto of the Partnership
and Northern Border Pipeline included elsewhere in this report (see Item 8. -
"Financial Statements and Supplementary Data"). For more detailed information
regarding the basis of presentation for the following financial information, see
the notes to the financial statements of the Partnership and Northern Border
Pipeline. As of December 31, 2001, TC PipeLines' interest in Northern Border
Pipeline represents approximately 87% of TC PipeLines' total assets and has
provided approximately 92% of TC PipeLines' equity income for the year ended
December 31, 2001. All amounts are stated in United States dollars.
RESULTS OF OPERATIONS OF TC PIPELINES, LP
CRITICAL ACCOUNTING POLICY
TC PipeLines accounts for its investments in both Northern Border Pipeline and
Tuscarora using the equity method of accounting as detailed in notes three and
four to the financial statements. The equity method of accounting is appropriate
where the investor is able to exercise significant influence over the operating
and financial policies of an investee. TC PipeLines is able to exercise
significant influence over its investments in Northern Border Pipeline and
Tuscarora as evidenced by its representation on their respective management
committees.
Since the 30% general partner interest in Northern Border Pipeline and the 49%
general partner interest in Tuscarora are currently the Partnership's only
material sources of income, the Partnership's results of operations are
influenced by and reflect the same factors that influence the financial results
of Northern Border Pipeline and Tuscarora.
12
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
For the year ended December 31, 2001, TC PipeLines recorded equity income of
$42.1 million from its investment in Northern Border Pipeline, compared to $38.1
million for 2000, an increase of $4.0 million. Approximately $1.0 million of
this increase is due to Project 2000, Northern Border Pipeline's 35-mile
extension and expansion into northern Indiana, which was completed in October
2001. An additional $1.9 million of the increase is due to lower operating and
maintenance costs as a result of Northern Border Pipeline's efforts to reduce
these costs, offset by the reserve to provide for November and December 2001
revenues due to Northern Border Pipeline under transportation agreements with
ENA, a subsidiary of Enron. ENA, which filed for Chapter 11 bankruptcy
protection on December 2, 2001, is in default of its payments to Northern
Border Pipeline, starting with payments due for November 2001 (see "Results
of Operations of Northern Border Pipeline - Impact of Enron's Chapter 11
Filing on Northern Border Pipeline's Business"). Favorable interest rates
decreased Northern Border Pipeline's interest expense in 2001, further
increasing 2001 equity income by $2.9 million. These increases to 2001 equity
income were partially offset by lower other income for Northern Border
Pipeline in 2001, resulting in a $2.5 million decrease in 2001 equity income
to TC PipeLines. In 2000, Northern Border Pipeline's other income was higher
due to non-recurring adjustments related to the approval of its rate
settlement agreement.
For the year ended December 31, 2001, TC PipeLines recorded equity income of
$3.6 million from its investment in Tuscarora, compared to $0.9 million for
2000, an increase of $2.7 million. This increase is attributed to the
Partnership acquiring its interest in Tuscarora in September 2000 and
incremental revenues from Tuscarora's 14-mile Hungry Valley lateral, which was
placed into service in January 2001.
General and administrative expenses were $1.3 million for each of the years
ended December 31, 2001 and 2000.
Financial charges were $1.0 million for the year ended December 31, 2001
compared to $0.5 million in 2000. This increase is attributed to the
Partnership having a balance of $21.5 million outstanding on its Revolving
Credit Facility for the full year in 2001 compared to 2000 when the Partnership
only had debt outstanding for four months of the year, partially offset by a
decrease in interest rates in 2001. The Partnership drew on the Revolving Credit
Facility in September 2000 in order to fund a portion of the purchase price of a
49% general partner interest in Tuscarora.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE PERIOD MAY 28 TO DECEMBER 31,
1999
For the year ended December 31, 2000, TC PipeLines recorded equity income of
$38.1 million from its investment in Northern Border Pipeline, compared to $20.9
million for the period from May 28 to December 31, 1999. The $17.2 million
increase reflects twelve months of activity in 2000 compared to approximately
seven months of activity in 1999 (TC PipeLines acquired its 30% general partner
interest in Northern Border Pipeline on May 28, 1999). In addition, Northern
Border Pipeline's 2000 net income reflects its rate case settlement, resulting
in incremental equity income to TC PipeLines. Northern Border Pipeline also
reduced reserves previously established for regulatory issues as the result of
the settlement of Northern Border Pipeline's rate case, resulting in increased
equity income to TC PipeLines.
For the year ended December 31, 2000, TC PipeLines recorded equity income of
$0.9 million from its investment in Tuscarora.
TC PipeLines incurred general and administrative expenses of $1.3 million for
the year ended December 31, 2000 compared to $0.7 million for the period from
May 28 to December 31, 1999. This increase reflects higher administrative costs
and a full year of operations in 2000.
The Partnership reported financial charges of $0.5 million for the year ended
December 31, 2000, which includes interest expense relating to the
Partnership's Revolving Credit Facility (see Item 7. - "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources of TC PipeLines, LP - General"). On September
1, 2000, the Partnership borrowed $24.5 million under the Revolving Credit
Facility to finance a portion of the acquisition of a 49% general partner
interest in Tuscarora. At December 31, 2000, the Partnership had $21.5
million outstanding under the Revolving Credit Facility.
13
LIQUIDITY AND CAPITAL RESOURCES OF TC PIPELINES, LP
CASH DISTRIBUTION POLICY OF TC PIPELINES, LP
During the subordination period, which generally cannot end before June 30,
2004, the Partnership makes distributions of Available Cash in the following
manner:
o First, 98% to the common units, pro rata, and 2% to the general
partner, until there is distributed for each outstanding common unit
an amount equal to the minimum quarterly distribution for that
quarter;
o Second, 98% to the common units, pro rata, and 2% to the general
partner, until there is distributed for each outstanding common unit
an amount equal to any arrearages in payment of the minimum quarterly
distribution on the common units for that quarter and for any prior
quarters during the subordination period;
o Third, 98% to the subordinated units, pro rata, and 2% to the general
partner, until there is distributed for each outstanding subordinated
unit an amount equal to the minimum quarterly distribution for that
quarter; and
o Thereafter, in a manner whereby the general partner has rights
(referred to as incentive distribution rights) to receive increasing
percentages of excess quarterly cash distributions over specified cash
distribution thresholds.
GENERAL
On January 18, 2002, the board of directors of the general partner declared the
Partnership's 2001 fourth quarter cash distribution. The fourth quarter cash
distribution, which was paid on February 14, 2002 to unitholders of record as of
January 31, 2002, totaled $9.1 million and was paid in the following manner:
$7.3 million to common unitholders, $1.4 million to the general partner as
holder of the subordinated units, and $0.3 million to the general partner, as
holder of incentive distribution rights and in respect of its 2% general partner
interest.
On August 22, 2000, the Partnership entered into an unsecured three-year credit
facility (Revolving Credit Facility) with a third party under which the
Partnership may borrow up to an aggregate principal amount of $30.0 million.
Loans under the Revolving Credit Facility may bear interest, at the option of
the Partnership, at a one-, two-, three-, or six-month London Interbank Offered
Rate (LIBOR) plus 0.875%, or at a floating rate based on the higher of the
federal funds effective rate plus 0.5% and the prime rate. The Revolving Credit
Facility matures on August 31, 2003. Amounts borrowed may be repaid in part or
in full prior to that time without penalty. The Revolving Credit Facility may be
used to finance capital expenditures and for other general purposes. On
September 1, 2000, the Partnership borrowed $24.5 million under the Revolving
Credit Facility to fund a portion of the purchase price of the 49% general
partner interest in Tuscarora. In November 2000, the Partnership made a $3.0
million principal payment on the Revolving Credit Facility. At December 31,
2001, the Partnership had $21.5 million outstanding under the Revolving Credit
Facility. The interest rate on the Revolving Credit Facility at December 31,
2001 and 2000 was 3.0% and 7.6%, respectively.
On May 28, 2001, the Partnership renewed its $40.0 million unsecured two-year
revolving credit facility (TransCanada Credit Facility) with TransCanada
PipeLine USA Ltd., an affiliate of the general partner. The TransCanada Credit
Facility bears interest at LIBOR plus 1.25%. The purpose of the TransCanada
Credit Facility is to provide borrowings to fund capital expenditures, to fund
capital contributions to Northern Border Pipeline, Tuscarora and any other
entity in which the Partnership directly or indirectly acquires an interest, to
fund working capital and for other general business purposes, including
temporary funding of cash distributions to partners, if necessary. At December
31, 2001, the Partnership had no amount outstanding under the TransCanada Credit
Facility.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased to $43.0 million for the
year ended December 31, 2001 from $40.4 million for 2000. In 2001, the
Partnership received cash distributions of $42.9 million and $2.4 million from
its investments in Northern Border Pipeline and Tuscarora, respectively,
compared to $40.5 million and $1.5 million in 2000.
Cash flows provided by operating activities increased to $40.4 million for the
year ended December 31, 2000 from $11.8 million for the period May 28 to
December 31, 1999. For the period May 28 to December 31, 1999, the Partnership
received cash distributions of $12.1 million from Northern Border Pipeline.
14
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities decreased by $28.3 million for the year
ended December 31, 2001 compared to 2000 due to the purchase of a 49% general
partner interest in Tuscarora in 2000.
CASH FLOWS FROM FINANCING ACTIVITIES
The Partnership paid cash distributions of $35.2 million in 2001 compared to
$32.7 million in 2000. The increase in cash distributions in 2001 is due to the
Partnership increasing its cash distribution from $0.475 per unit to $0.50 per
unit beginning with the second quarter cash distribution in 2001.
For the period May 28 to December 31, 1999, the Partnership paid cash
distributions of $11.0 million.
On September 1, 2000, the Partnership borrowed $24.5 million from the Revolving
Credit Facility to fund a portion of the purchase price of the 49% general
partner interest in Tuscarora. At December 31, 2001, the Partnership had $21.5
million outstanding under the Revolving Credit Facility.
CAPITAL REQUIREMENTS
To the extent TC PipeLines has any capital requirements with respect to its
investments in Northern Border Pipeline and Tuscarora or makes acquisitions in
2002, TC PipeLines expects to finance these requirements with debt and/or
equity.
RESULTS OF OPERATIONS OF NORTHERN BORDER PIPELINE COMPANY
IN THE FOLLOWING DISCUSSION OF THE RESULTS OF NORTHERN BORDER PIPELINE, ALL
AMOUNTS REPRESENT 100% OF THE OPERATIONS OF NORTHERN BORDER PIPELINE, IN WHICH
THE PARTNERSHIP HAS HELD A 30% INTEREST SINCE MAY 28, 1999.
The discussion and analysis of Northern Border Pipeline's financial condition
and operations are based on Northern Border Pipeline's financial statements,
which were prepared in accordance with accounting principles generally accepted
in the United States of America. The following discussion and analysis should be
read in conjunction with Northern Border Pipeline's financial statements
included elsewhere in this report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain amounts included in or affecting Northern Border Pipeline's financial
statements and related disclosures must be estimated, requiring Northern Border
Pipeline to make certain assumptions with respect to values or conditions that
cannot be known with certainty at the time the financial statements are
prepared. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Any effects on Northern Border Pipeline's business, financial
position or results of operations resulting from revisions to these estimates
are recorded in the period in which the facts that give rise to the revision
become known.
Northern Border Pipeline's significant accounting policies are summarized in
Note 2 - Notes to Northern Border Pipeline's Financial Statements included
elsewhere in this report. Certain of Northern Border Pipeline's accounting
policies are of more significance in their financial statement preparation
process than others. Northern Border Pipeline's accounting policies conform
to Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting
for the Effects of Certain Types of Regulation." Accordingly, certain assets
that result from the regulated ratemaking process are recorded that would not
be recorded under generally accepted accounting principles for nonregulated
entities. Northern Border Pipeline's long-lived assets are stated at original
cost. Northern Border Pipeline must use estimates in determining the economic
useful lives of those assets. For utility property, no retirement gain or
loss is included in income except in the case of extraordinary retirements or
sales. The original cost of utility property retired is charged to
accumulated depreciation and amortization, net of salvage and cost of
removal. Finally, Northern Border Pipeline's accounting for financial
instruments follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which Northern Border Pipeline adopted on January 1,
2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Northern Border Pipeline's net income to partners increased $13.4 million (11%)
for the year ended December 31, 2001, as compared to the same period in 2000.
Northern Border Pipeline benefited from reductions in interest rates,
15
which reduced Northern Border Pipeline's interest expense for 2001 as compared
to 2000. Northern Border Pipeline was also able to control its operating costs
resulting in reductions to operations and maintenance expenses.
Operating revenues, net increased $2.1 million for the year ended December 31,
2001, as compared to the same period in 2000 primarily due to additional
revenues associated with the completion of Project 2000 in October 2001. See
Item 1. "Business of Northern Border Pipeline Company - The Northern Border
Pipeline System."
Operations and maintenance expense decreased $7.9 million (19%) for the year
ended December 31, 2001, as compared to the same period in 2000, due primarily
to a decrease in Northern Border Pipeline's regulatory commission expense,
decreased costs to operate two of Northern Border Pipeline's electric-powered
compressor units and decreased employee payroll, benefit and administrative
expenses for the Northern Border pipeline system. Operations and maintenance
expense for 2001 includes approximately $1.3 million of bad debt expense related
to ENA (see "Impact of Enron's Chapter 11 Filing on Northern Border
Pipeline's Business").
Taxes other than income decreased $2.3 million (8%) for the year ended December
31, 2001, as compared to the same period in 2000, due primarily to a decrease in
use taxes paid to the state of Minnesota. Northern Border Pipeline had been
paying Minnesota a use tax based on the fuel used at Northern Border Pipeline's
compressor stations located in the state. A recent ruling by the Minnesota
Supreme Court directed that the compressor fuel used was exempt from this
particular tax. Northern Border Pipeline filed for a refund of amounts
previously paid, which was received by Northern Border Pipeline in March 2002.
Interest expense, net decreased $9.8 million (15%) for the year ended December
31, 2001, as compared to the same period in 2000, due primarily to a decrease in
Northern Border Pipeline's average interest rate between 2000 and 2001 as well
as a decrease in average debt outstanding.
Other income (expense) decreased $8.5 million for the year ended December 31,
2001, as compared to the same period in 2000. Other income (expense) for 2001
includes a net charge of approximately $1.5 million for an uncollectable
receivable from a telecommunications company that had purchased excess capacity
on Northern Border Pipeline's communication system. In 2000, Northern Border
Pipeline had recorded approximately $1.7 million of income from the sale of
excess capacity on Northern Border Pipeline's communication system. Other income
(expense) for 2000 also included $5.6 million of income due to a reduction in
reserves previously established for regulatory issues as the result of the
settlement of Northern Border Pipeline's rate case.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Operating revenues, net for the year ended December 31, 2000 were $311.0 million
as compared to $298.3 million for the same period in 1999, an increase of $12.7
million (4%). Northern Border Pipeline's net operating revenues for 2000 reflect
the significant terms of the rate case settlement discussed in Item 1. "Business
of Northern Border Pipeline Company - FERC Regulation." Operating revenues for
1999 were determined under Northern Border Pipeline's former cost of service
tariff.
Operations and maintenance expense increased $2.8 million (7%) for the year
ended December 31, 2000, from the same period in 1999, due primarily to
increased employee payroll and benefit expenses and costs to operate Northern
Border Pipeline's two electric-powered compressor units.
Depreciation and amortization expense increased $5.4 million (10%) for the year
ended December 31, 2000, as compared to the same period in 1999, due primarily
to an increase in the depreciation rate applied to transmission plant. As a
result of the rate case settlement, Northern Border Pipeline used a depreciation
rate for transmission plant of 2.25% for 2000. Northern Border Pipeline had used
a depreciation rate of 2.0% for 1999.
Taxes other than income decreased $2.3 million (8%) for the year ended December
31, 2000, as compared to the same period in 1999, due primarily to adjustments
to previous estimates of ad valorem taxes.
Interest expense, net increased $4.9 million (8%) for the year ended December
31, 2000, as compared to the same period in 1999, due primarily to an increase
in average interest rates between 1999 and 2000. The impact of the increase in
interest rates was partially offset by a decrease in average debt outstanding.
16
Other income increased $6.7 million (491%) for the year ended December 31, 2000,
as compared to the same period in 1999, due primarily to a reduction in reserves
previously established for regulatory issues as the result of the settlement of
Northern Border Pipeline's rate case.
17
LIQUIDITY AND CAPITAL RESOURCES OF NORTHERN BORDER PIPELINE COMPANY
SUMMARY OF CERTAIN CONTRACTUAL OBLIGATIONS
Payments Due by Period
---------------------------------------------------
Less Than After 5
Total 1 Year 1-3 Years 4-5 Years Years
------------- ------------ ------------- ------------ -----------
(In Thousands)
-----------------------------------------------------------------
1992 Series C and D Senior Notes $143,000 $78,000 $65,000 $- $ -
Senior Notes due 2009 200,000 - - - 200,000
Senior Notes due 2021 250,000 - - - 250,000
Credit Agreement 272,000 272,000 - - -
------------- ------------ ------------- ------------ -----------
Total $865,000 $350,000 $65,000 $- $450,000
------------- ------------ ------------- ------------ -----------
------------- ------------ ------------- ------------ -----------
DEBT AND CREDIT FACILITIES
In February 2002, Moodys' Investor Services, Inc. (Moodys) placed Northern
Border Pipeline on credit review for a possible downgrade in credit rating. At
this time, no action has been taken by Moodys. If Moodys was to issue the
downgrade, TC PipeLines expects Northern Border Pipeline's credit rating to
remain above investment grade.
Northern Border Pipeline had previously entered into a 1997 credit agreement
(Pipeline Credit Agreement) with certain financial institutions, which is
comprised of a $100 million five-year revolving credit facility and a $272
million term loan, both maturing in June 2002. At December 31, 2001, no amounts
were outstanding under the five-year revolving credit facility. Northern Border
Pipeline anticipates refinancing the Pipeline Credit Agreement in the second
quarter of 2002. Northern Border Pipeline's refinancing plans are to issue $225
million of senior notes and to enter into a $175 million revolving credit
facility.
At December 31, 2001, Northern Border Pipeline also had outstanding $143 million
of senior notes issued in a $250 million private placement under a July 1992
note purchase agreement. The note purchase agreement provides for four series of
notes, Series A through D, maturing between August 2000 and August 2003. The
Series A Notes with a principal amount of $66 million and Series B Notes with a
principal amount of $41 million were repaid in August 2000 and August 2001,
respectively. The Series C Notes with a principal amount of $78 million mature
in August 2002. Northern Border Pipeline anticipates borrowing on the refinanced
Pipeline Credit Agreement to repay the Series C Notes.
In September 2001, Northern Border Pipeline completed a private offering of $250
million of 7.50% Senior Notes due 2021 (2001 Pipeline Senior Notes) and in
August 1999, Northern Border Pipeline completed a private offering of $200
million of 7.75% Senior Notes due 2009 (1999 Pipeline Senior Notes). Both the
2001 Pipeline Senior Notes and the 1999 Pipeline Senior Notes were subsequently
exchanged in a registered offering for notes with substantially identical terms.
The indentures under which the 2001 Pipeline Senior Notes and 1999 Pipeline
Senior Notes were issued do not limit the amount of unsecured debt Northern
Border Pipeline may incur, but they do contain material financial covenants,
including restrictions on incurrence of secured indebtedness. The proceeds from
the 2001 Pipeline Senior Notes and 1999 Pipeline Senior Notes were used to
reduce indebtedness outstanding under the Pipeline Credit Agreement.
In November 2001, Northern Border Pipeline entered into forward starting
interest rate swaps with notional amounts totaling $150 million related to the
planned issuance of senior notes discussed previously. The swaps were entered
into to hedge the fluctuations in Treasury rates and spreads between the
execution date of the swaps and the issuance date of the senior notes.
Short-term liquidity needs will be met by operating cash flows and through the
Pipeline Credit Agreement, which is being refinanced in 2002. Long-term capital
needs may be met through Northern Border Pipeline's ability to issue long-term
indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased $21.4 million to $197.3
million for the year ended December 31, 2001, as compared to the same period in
2000, primarily due to increased earnings and positive changes in
18
working capital. During 2001, Northern Border Pipeline realized net cash
outflows of approximately $4.7 million related to Northern Border Pipeline's
rate case refunds.
Cash flows provided by operating activities increased $4.5 million to $176.0
million for the year ended December 31, 2000, as compared to the same period in
1999, primarily due to increased earnings. During 2000, Northern Border Pipeline
realized net cash inflows of approximately $2.4 million related to Northern
Border Pipeline's rate case, which included approximately $25.1 million of
amounts collected subject to refund less estimated refunds issued in late
December 2000 totaling approximately $22.7 million.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures of $54.7 million for the year ended December 31, 2001
included $49.0 million for Project 2000 (see Item 1. "Business of Northern
Border Pipeline Company - The Northern Border Pipeline System"). For the same
period in 2000, capital expenditures were $15.5 million, which included $7.4
million for Project 2000. The remaining capital expenditures for 2001 and 2000
are primarily related to renewals and replacements of existing facilities.
Total capital expenditures for 2002 are estimated to be $12 million, including
$2.5 million for Project 2000. Northern Border Pipeline currently anticipates
funding its 2002 capital expenditures primarily by borrowing on debt facilities
and using operating cash flows.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used in financing activities increased $12.0 million to $160.7
million for the year ended December 31, 2001, as compared to the same period in
2000. Distributions to partners increased $8.1 million to $143.0 million for the
year ended December 31, 2001, as compared to the same period in 2000, primarily
due to an increase in Northern Border Pipeline's net income. The net proceeds
from the issuance of the 2001 Pipeline Senior Notes totaled approximately $247.2
million and were used for repayment of amounts borrowed under the Pipeline
Credit Agreement. In August 2001 and August 2000, Northern Border Pipeline
repaid its Series B and A Notes of $41 million and $66 million, respectively,
primarily by borrowing under the Pipeline Credit Agreement. During the year
ended December 31, 2001, Northern Border Pipeline had net repayments under the
Pipeline Credit Agreement of $197.0 million, which consisted of borrowings of
$136.0 million and repayments of $333.0 million. For the comparable period in
2000, Northern Border Pipeline had net borrowings of $30.0 million, which
consisted of borrowings of $75.0 million and repayments of $45.0 million. For
the year ended December 31, 2001, Northern Border Pipeline recognized a decrease
in bank overdrafts of $22.4 million. At December 31, 2000, Northern Border
Pipeline reflected the bank overdraft primarily due to rate case refund checks
outstanding. In September 2001, Northern Border Pipeline paid approximately $4.1
million to terminate interest rate swap agreements upon issuance of the 2001
Pipeline Senior Notes. The swaps were entered into to hedge the fluctuations in
Treasury rates and spreads between the execution date of the swaps and the
issuance of the 2001 Pipeline Senior Notes.
Cash flows used in financing activities increased $58.8 million to $148.7
million for the year ended December 31, 2000, as compared to the same period in
1999. Distributions paid to the general partners increased $7.7 million to
$134.9 million for the year ended December 31, 2000 as compared to the same
period of 1999 primarily due to an increase in Northern Border Pipeline's net
income. For the year ended December 31, 2000, borrowings under the Pipeline
Credit Agreement, which were primarily used to repay $66 million of Series A
Notes, were $75 million as compared to borrowings of $90 million for the same
period in 1999, which were primarily used to finance a portion of the capital
expenditures for The Chicago Project, which was Northern Border Pipeline's
expansion and extension project completed in December 1998. Financing
activities for the year ended December 31, 1999 included $197.4 million from
the issuance of the 1999 Pipeline Senior Notes, net of associated debt
discounts and issuance costs, and $12.9 million from the termination of
interest rate forward agreements. Payments on the Pipeline Credit Agreement
were $45 million for the year ended December 31, 2000, as compared to $263
million for the same period in 1999. At December 31, 2000, Northern Border
Pipeline reflected bank overdrafts of approximately $22.4 million primarily
due to refund checks outstanding.
IMPACT OF ENRON'S CHAPTER 11 FILING ON NORTHERN BORDER PIPELINE'S BUSINESS
On December 2, 2001, Enron filed a voluntary petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. A number of
wholly owned Enron subsidiaries also filed for Chapter 11 bankruptcy
protection on or after December 2, 2001. Northern Border Pipeline has not
filed for bankruptcy protection. Northern Plains, Pan Border and Northwest
Border are the general partners of Northern Border Partners, which holds a
70% general partner interest in Northern Border Pipeline. Each of
19
Northern Plains and Pan Border are wholly owned subsidiaries of Enron, and
Northwest Border is a wholly owned subsidiary of Williams. Northern Plains and
Pan Border were not among the Enron companies filing for Chapter 11 protection.
The business of Enron and its subsidiaries that have filed for bankruptcy
protection are currently being administered under the direction and control
of the bankruptcy court. An unsecured creditors committee has been appointed
in the Chapter 11 cases. The creditors committee is responsible for general
oversight of the bankruptcy case, and has the power, among other things, to:
investigate the acts, conduct, assets, liabilities, and financial condition
of the debtor, the operation of the debtor's business and the desirability of
the continuance of such business; participate in the formulation of a plan of
reorganization; and file acceptances or rejections to such a plan. Factors
taken into account by Enron in making its business decisions while in Chapter
11 may include decisions with respect to its investment in Northern Plains,
Pan Border and Northern Border Partners, which decisions may affect Northern
Border Pipeline.
CURRENT EFFECTS Enron's bankruptcy filing has had an impact on Northern
Border Pipeline. At the time of the filing of the bankruptcy petition,
Northern Border Pipeline had a number of contractual relationships with Enron
and its subsidiaries. Northern Plains provided and continues to provide
operating and administrative services for Northern Border Pipeline. Northern
Plains has continued to meet its operational and administrative service
obligations under the existing agreements, and Northern Border Pipeline
believes Northern Plains will continue to do so.
ENA, a wholly owned subsidiary of Enron that is in bankruptcy, is a party to
shipper contracts obligating ENA to pay for 3.5% of Northern Border
Pipeline's capacity. Through October 31, 2002, ENA has temporarily released
1.1% of this capacity to a third party. Although this third party has filed a
complaint with the FERC requesting, in effect, that its contracts be deemed
terminated as a consequence of ENA's filing for bankruptcy protection,
Northern Border Pipeline believes this shipper's contract will remain in
effect until October 31, 2002. ENA has not assumed or rejected these
contracts, but its ability to use the capacity has been suspended until it
provides adequate assurance of credit support. Northern Border Pipeline
estimates that it has aggregate financial exposure over the next 12 months of
approximately $9 million of revenues under its firm transportation contracts
with ENA (TC PipeLines' share equates to approximately $2.7 million).
Northern Border Pipeline believes that failure by ENA to perform its
obligations under the firm transportation contracts will not have a material
adverse impact on its financial condition (see "Impact of Enron's Chapter 11
Filing on TC PipeLines' Business").
Northern Border Pipeline has retained outside counsel and TC PipeLines has
been advised that Northern Border Pipeline intends to assert and file claims
against ENA's bankruptcy estate related to these agreements. These claims
will likely be deemed to be unsecured claims against the Enron related
Chapter 11 companies. Northern Border Pipeline is uncertain regarding the
ultimate amount of damages for breach of contract or other claims that it
will be able to establish in the bankruptcy proceeding, and Northern Border
Pipeline cannot predict the amounts that it will collect or the timing of
collection. Northern Border Pipeline believes, however, that any such delay
in collecting or failure to collect will not have a material adverse effect
on its financial condition, and any amounts collected will not be material to
Northern Border Pipeline.
Enron's filing for bankruptcy protection and the related developments have
had other impacts on Northern Border Pipeline's business and management. On
February 5, 2002, Arthur Andersen LLP resigned as Northern Border Pipeline's
independent auditor, and Northern Border Pipeline subsequently retained KPMG
LLP as its new independent auditor for the fiscal year 2001 effective as of
February 11, 2002. Enron has received several requests for information from
different agencies and committees of the United States House of
Representatives and Senate. Some of the information requested from Enron may
include information about Northern Border Pipeline. In addition, TC PipeLines
is aware that the Senate Committee on Governmental Affairs has issued a
subpoena to Enron requesting documents disclosing Enron's communications with
the Securities and Exchange Commission (SEC) and the FERC, as well as
information on compensation matters. As a result of Enron's indirect
ownership interest in Northern Border Pipeline, Northern Border Pipeline has
advised that it is willing to comply with the mandate of the subpoena in such
a manner that may be determined by the Committee on Governmental Affairs of
the Senate of the United States.
POSSIBLE EFFECTS While Northern Plains and Pan Border have not filed for
Chapter 11 bankruptcy protection, they are wholly owned subsidiaries of
Enron, which is in bankruptcy. It is possible that in the course of Enron's
bankruptcy proceedings Enron could attempt to sell its interest in Northern
Plains and/or Pan Border, or take other action with respect to its investment
in Northern Border Partners. Enron could also cause Northern Plains and Pan
Border to file for bankruptcy protection. Northern Border Pipeline has
advised that it has had no current indication from Enron that it intends to
sell all or a part of its ownership interest in Northern Plains or Pan Border
or cause either of these companies to file for bankruptcy protection.
Northern Border Pipeline is managed by a four-member management committee.
One representative is designated by TC PipeLines and three representatives
are designated by Northern Border Partners, with each of its general partners
selecting one representative. The vote among Northern Border Partners'
representatives on the Northern Border Pipeline management committee is in
proportion to their general partner interests in Northern Border Partners. As
a result, the 70% voting interest of Northern Border Partners' three
representatives is allocated 35%, 22.75% and 12.25% among Northern Plains,
Pan Border and Northwest Border,
20
respectively. If Enron were to sell all of its ownership interest in each of
Northern Plains and Pan Border, the purchaser would have the right to appoint
a majority of the Northern Border Pipeline management committee and control
the activities of Northern Border Pipeline, except for those activities
requiring a unanimous vote, which include changes to Northern Border
Pipeline's cash distribution policy, certain expansions and extensions of the
Northern Border pipeline system, some transfers of general partner interests
and settlement of rate cases.
If Northern Plains and Pan Border were to file for bankruptcy protection,
Northern Border Partners' Partnership Agreement provides that they would
automatically be deemed to have withdrawn as general partners of Northern
Border Partners. It is possible that the enforceability of the automatic
withdrawal provisions in this partnership agreement may be challenged. The
success and impact of a challenge are unknown. Upon the occurrence of such an
event of withdrawal, the remaining general partner of Northern Border
Partners, would have the right to purchase the withdrawing partners' general
partnership interests. Should the remaining general partner elect not to
purchase these general partnership interests, the limited partners of
Northern Border Partners would have the right to elect new general partners.
In either event, the party acquiring the general partner interests currently
held by Northern Plains and Pan Border would have the right to appoint a
majority of the Northern Border Pipeline management committee and control the
activities of Northern Border Pipeline, except for those activities requiring
a unanimous vote.
Northern Plains also serves as operator of the Northern Border pipeline
system. If Northern Plains were to file for bankruptcy protection, it could
potentially be removed as operator. Northern Border Pipeline's 1997 credit
agreements provide that an event of default would occur if Northern Plains
was replaced as operator without the consent of the lenders.
Other than the complaint against Northern Border Pipeline filed with the FERC
by the shipper with temporarily released capacity, Northern Border Pipeline
has advised that it is currently not aware of any claims made against
Northern Border Pipeline that arise out of the Enron bankruptcy cases.
IMPACT OF ENRON'S CHAPTER 11 FILING ON TC PIPELINES'S BUSINESS
Based on currently available information, TC PipeLines does not expect the
impact of Enron's bankruptcy protection filing on Northern Border Pipeline to
have a material impact on the business or financial condition of TC
PipeLines. TC PipeLines' 30% share of Northern Border Pipeline's aggregate
financial exposure over the next 12 months under Northern Border Pipeline's
firm transportation contracts with ENA equates to $2.7 million (see "Impact
of Enron's Chapter 11 Filing on Northern Border Pipeline's Business").
TC PipeLines plans to continue to monitor developments at Enron and to
continue to assess any impact of Enron's Chapter 11 proceedings on Northern
Border Pipeline in light of Northern Border Pipeline's existing agreements
and relationships with Enron and its subsidiaries, and to take all
appropriate action to protect the interests of TC PipeLines and its
unitholders.
OUTLOOK
Northern Border Pipeline will continue to focus on the safe, efficient, and
reliable operations and the further development of the Northern Border
pipeline system. Northern Border Pipeline intends to maintain its position as
a low cost transporter of Canadian natural gas to the midwestern, U.S. and
provide highly valued services to Northern Border Pipeline's customers.
Growth is expected to occur primarily in market areas Northern Border
Pipeline serves through incremental projects supported by long-term
contracts. Project 2000, Northern Border Pipeline's recently completed
extension into Indiana, is a good example of the kinds of growth projects
Northern Border Pipeline expects to pursue. This project, completed on time
and well under budget, connects Northern Border Pipeline directly to a large
Chicago-area gas distribution company, (Northern Indiana Public Service
Company) and to industrial gas consumers in northern Indiana. Northern Border
Pipeline also intends to continue to expand the marketing of new services to
meet its customers' needs. Depending on natural gas prices and natural gas
development activities, selected opportunities to connect new sources of
supply to the Northern Border pipeline system may arise. Northern Border
Pipeline is currently working with producers and marketers to develop the
contractual support for a new pipeline project, the Bison Pipeline, to
connect the coal bed methane reserves in the Powder River Basin to markets
served by Northern Border Pipeline.
In 2002, Northern Border Pipeline will begin contract extension discussions
with its customers for contracts that will expire prior to November 1, 2003,
which represents approximately 42% of the Northern Border pipeline system
capacity. Similar to other industries, the value of capacity on interstate
pipelines is driven by supply and demand conditions. In particular, the
relationship between natural gas prices in Canada and prices in the
midwestern U.S. markets will determine the underlying value of
transportation. This relationship, and natural gas markets overall, has been
volatile of late, which is also an important factor in contracting for firm
transportation capacity. Under Northern Border Pipeline's FERC tariff,
Northern Border Pipeline may concurrently solicit bids for available capacity
from other parties subject to the existing customer's rights to match the
best offer. Northern Border Pipeline can begin this process during a period
that extends from 6 to 18 months before the termination date of the contract.
The commencement of any bidding process will be dependent upon the progress
of negotiations and the market conditions affecting the value of
transportation on the pipeline. Based on current conditions, contracts for
service on the Northern Border pipeline system may require discounts from
maximum transportation rates established in Northern Border Pipeline's tariff
and/or shorter duration than its existing contract portfolio. Additionally,
Northern Border Pipeline may enter into negotiated rate contracts involving
charges established on the basis of Canadian-midwestern U.S. natural gas
price differentials or other factors.
RESULTS OF OPERATIONS OF TUSCARORA GAS TRANSMISSION COMPANY
IN THE FOLLOWING DISCUSSION OF THE RESULTS OF TUSCARORA, ALL AMOUNTS REPRESENT
100% OF THE OPERATIONS OF TUSCARORA, IN WHICH THE PARTNERSHIP HAS HELD A 49%
INTEREST SINCE SEPTEMBER 1, 2000.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
21
Revenues generated by Tuscarora increased to $21.3 million for the year ended
December 31, 2001 compared to $19.4 million in 2000 due to the Hungry Valley
lateral which was placed into service in January 2001.
Tuscarora incurred costs and expenses of $2.6 million for the year ended
December 31, 2001 compared to $2.4 million for the year ended December 31, 2000.
Tuscarora recorded depreciation of $4.6 million and $4.4 million for the years
ended December 31, 2001 and 2000, respectively.
Tuscarora reported financial charges of $6.1 million and $6.0 million for the
years ended December 31, 2001 and 2000, respectively.
Tuscarora reported other income of $0.3 million and $0.2 million for the years
ended December 31, 2001 and 2000, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Revenue generated by Tuscarora was $19.4 million and $19.3 million for the years
ended December 31, 2000 and 1999, respectively.
For the year ended December 31, 2000, Tuscarora incurred costs and expenses of
$2.4 million compared to $2.9 million in 1999. The decrease in costs and
expenses is primarily due to the capitalization of labor costs relating to the
construction of the Hungry Valley lateral and lower property taxes.
Tuscarora recorded depreciation of $4.4 million for each of the years ended
December 31, 2000 and 1999.
Tuscarora recorded financial charges of $6.0 million and $6.2 million for the
years ended December 31, 2000 and 1999, respectively.
Tuscarora recorded other income of $0.2 million for each of the years ended
December 31, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES OF TUSCARORA GAS TRANSMISSION COMPANY
GENERAL
In September 2000, Tuscarora adopted a cash distribution policy that became
effective January 1, 2001. Under the terms of the cash distribution policy,
Tuscarora will make quarterly cash distributions to its general partners in
accordance with their respective general partner interests. Cash distributions
will generally be computed as the sum of Tuscarora's net income before taxes and
depreciation and amortization, less amounts required for debt repayments, net of
refinancings, maintenance capital expenditures, certain non-cash items, and any
cash reserves deemed necessary by the management committee. Cash distributions
will be computed at the end of each calendar quarter and the distribution will
be made on or before the last day of the month following the quarter end.
In November 2001 and January 2002, Tuscarora entered into forward starting
interest rate swaps with notional amounts of $10 million and $8 million,
respectively, related to the planned issuance of Series C Senior Secured Notes.
The swaps were settled on February 15, 2002 for net proceeds of
approximately $0.2 million. The swaps were entered into to hedge the
fluctuations in treasury rates and spreads between the execution date of the
swaps and the issuance date of the Series C Senior Secured Notes.
On January 4, 2002, Tuscarora entered into a credit agreement with a third party
for a $5 million, 364-day revolving credit facility which bears interest at
either the LIBOR rate plus 1% or the prime rate.
On March 15, 2002, Tuscarora issued Series C Senior Secured Notes in the amount
of $10 million. These notes bear interest at 6.89% and are due in 2012. The
proceeds from these notes will be used to finance the construction of
Tuscarora's expansion project.
22
Short-term liquidity needs will be met by operating cash flows and through the
credit agreement discussed above. Long-term capital needs may be met through the
ability to issue long-term indebtedness.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased to $13.4 million for the
year ended December 31, 2001 compared to $10.7 million in 2000. This increase is
due to increased earnings and a decrease in working capital.
Cash flows provided by operating activities for the year ended December 31, 1999
were $10.7 million.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities increased to $10.2 million for the year
ended December 31, 2001 compared to $3.7 million for the same period in 2000.
This increase is due to capital expenditures incurred in 2001 relating to the
construction of the Hungry Valley lateral and Tuscarora's expansion project.
Net cash used in investing activities increased to $3.7 million for the year
ended December 31, 2000 compared to $0.7 million in 1999 due to capital
expenditures incurred in 2000 relating to construction of the Hungry Valley
lateral.
CASH FLOWS FROM FINANCING ACTIVITIES
For the years ended December 31, 2001, 2000 and 1999 Tuscarora made debt
repayments of $4.2 million, $3.6 million and $2.8 million, respectively.
On December 19, 2000, Tuscarora issued Series B Senior Secured Notes in the
amount of $8.0 million. These notes bear interest at 7.99% and are due in 2010.
The proceeds from these notes were used to finance the construction of the
Hungry Valley lateral.
Tuscarora paid cash distributions of $5.0 million, $5.3 million and $8.5 million
to its general partners for the years ended December 31, 2001, 2000 and 1999,
respectively. The decrease in cash distributions in 2001 compared to 2000 is
due to the timing of implementation of the cash distribution policy. The
decrease in cash distributions in 2000 compared to 1999 is due to an increase
in the amount of cash used to fund capital expenditures relating to the
Hungry Valley lateral.
NEW ACCOUNTING PRONOUNCEMENTS
In the third quarter of 2001, the Financial Accounting Standards Board issued
SFAS No. 141, "Business Combinations," SFAS No. 142, "Goodwill and Other
Intangible Assets," SFAS No. 143, "Accounting for Asset Retirement
Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
SFAS No. 141 requires all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. The Partnership did not enter into
any business combinations subsequent to June 30, 2001.
SFAS No. 142 modifies the accounting and reporting of goodwill and intangible
assets. It requires entities to discontinue the amortization of goodwill,
reallocate goodwill among its reporting segments and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Subsequent to the initial adoption, goodwill must be tested for
impairment annually or more frequently if circumstances indicate a possible
impairment. For goodwill and intangible assets on the balance sheet at June 30,
2001, the provisions of SFAS No. 142 must be applied to fiscal years beginning
after December 15, 2001. At December 31, 2001, the Partnership's balance sheet
does not include any goodwill.
SFAS No. 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for fiscal years
23
beginning after June 15, 2002 with earlier application encouraged. The
Partnership is in the process of evaluating the application of this
pronouncement on its investments in Northern Border Pipeline and Tuscarora.
SFAS No. 144 establishes one accounting model to be used for long-lived assets
to be disposed of by sale, and broadens the presentation of discontinued
operations to include more disposal transactions. SFAS No. 144 supercedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB Opinion No. 30. This standard is effective for fiscal years
beginning after December 15, 2001. The Partnership is in the process of
evaluating the application of this pronouncement on its investments in Northern
Border Pipeline and Tuscarora.
RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
A number of statements made or incorporated by reference by TC PipeLines, in
this Form 10-K filing made with the SEC, are forward-looking and relate to,
among other things, anticipated financial performance, business prospects,
strategies, market forces and commitments. Much of this information appears
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" found herein. Forward-looking information typically contains
statements with words such as "anticipate," "believe," "estimate," "expect,"
"plan," "target" or similar words suggesting future outcomes. By its nature,
such forward-looking information is subject to various risks and
uncertainties, which could cause TC PipeLines' actual results and experience
to differ materially from the anticipated results or other expectations
expressed in this Form 10-K. Readers are cautioned not to place undue
reliance on this forward-looking information, which is as of the date of this
Form 10-K, and TC PipeLines undertakes no obligation to update publicly or
revise any forward-looking information, whether as a result of new
information, future events or otherwise.
RISK FACTORS
TC PIPELINES MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO PAY
THE MINIMUM QUARTERLY DISTRIBUTION ON THE COMMON UNITS EVERY QUARTER
The actual amount of cash TC PipeLines has available to pay the minimum
quarterly distribution will depend upon numerous factors relating to each of TC
PipeLines', Northern Border Pipeline's and Tuscarora's business, some of which
are beyond the control of TC PipeLines or the general partner, including:
o the tariff and transportation charges collected by Northern Border
Pipeline and Tuscarora for transportation services on their pipeline
systems;
o the amount of cash distributed to TC PipeLines by Northern Border
Pipeline and Tuscarora;
24
o the amount of cash set aside and the adjustment in reserves made by
the general partner at its discretion;
o the amount of cash required to be contributed by TC PipeLines to
either Northern Border Pipeline or Tuscarora in the future;
o required principal and interest payments on TC PipeLines debt;
o the cost of acquisitions, including related debt service payments;
o TC PipeLines' issuance of debt and equity securities;
o pipelines competing with Northern Border Pipeline and Tuscarora;
o increases in Northern Border Pipeline's and Tuscarora's maintenance
and operating costs;
o payment defaults of shippers, including affiliates of Enron, on
Northern Border's pipeline system and payment defaults of shippers on
Tuscarora's pipeline system; and
o expansion costs related to these systems.
CASH DISTRIBUTIONS ARE DEPENDENT PRIMARILY ON TC PIPELINES' CASH FLOW, FINANCIAL
RESERVES AND WORKING CAPITAL BORROWINGS
Cash distributions are not dependent solely on TC PipeLines' profitability,
which is affected by non-cash items. Therefore, TC PipeLines may make cash
distributions during periods when losses are recorded and may not make cash
distributions during periods when profits are recorded.
TC PIPELINES DOES NOT PRESENTLY HAVE SUFFICIENT STAND-ALONE MANAGEMENT RESOURCES
TO OPERATE WITHOUT SERVICES PROVIDED BY TRANSCANADA
TransCanada provides all of TC PipeLines' management resources. Further, TC
PipeLines would not be able to evaluate potential acquisitions and successfully
complete acquisitions without TransCanada's resources.
NORTHERN BORDER PIPELINE'S AND TUSCARORA'S INDEBTEDNESS MAY LIMIT THEIR ABILITY
TO BORROW ADDITIONAL FUNDS, MAKE DISTRIBUTIONS TO TC PIPELINES OR CAPITALIZE ON
BUSINESS OPPORTUNITIES
Northern Border Pipeline is prohibited from making cash distributions during an
event of default under its indebtedness. Provisions in Northern Border
Pipeline's indebtedness limit its ability to incur indebtedness and engage in
specific transactions which could reduce its ability to capitalize on business
opportunities that arise in the course of its business. Tuscarora is prohibited
from making cash distributions during an event of default under its
indebtedness. Under Tuscarora's indebtedness, Tuscarora has granted a security
interest in certain of its transportation contracts, which are available to
noteholders during an event of default. Any future refinancing of their existing
indebtedness or any new indebtedness could have similar or greater restrictions.
IF TC PIPELINES IS UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY
ACCEPTABLE TERMS, EITHER FROM THIRD PARTIES OR TRANSCANADA, TC PIPELINES' FUTURE
FINANCIAL PERFORMANCE WILL BE LIMITED TO PARTICIPATION IN NORTHERN BORDER
PIPELINE AND TUSCARORA
Future acquisitions may involve the expenditure of significant funds. Depending
upon the nature, size and timing of future acquisitions, TC PipeLines may be
required to secure additional financing. Additional financing may not be
available to TC PipeLines on acceptable terms.
MAJORITY CONTROL OF THE NORTHERN BORDER PIPELINE MANAGEMENT COMMITTEE BY
AFFILIATES OF ENRON MAY LIMIT TC PIPELINES' ABILITY TO INFLUENCE NORTHERN BORDER
PIPELINE
TC PipeLines owns a 30% general partner interest in Northern Border Pipeline.
The remaining 70% general partner interest in Northern Border Pipeline is owned
by Northern Border Partners, a publicly traded limited partnership, which
is not affiliated with TC PipeLines. The general partners of Northern Border
Partners are Northern Plains and Pan Border, both subsidiaries of Enron, and
Northwest Border, a subsidiary of The Williams Companies. Except as to any
matters requiring unanimity, such as significant expansions or extensions to the
pipeline system, the acceptance of rate cases and changes to, or suspensions of,
the cash distribution policy, management committee members designated by
subsidiaries of Enron have the power to approve a particular matter requiring a
majority vote despite the fact that TC PipeLines' representative may vote
against the project or other matter. Conversely, with
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respect to any matter requiring a majority vote, management committee members
designated by subsidiaries of Enron may disapprove a particular matter despite
the fact that TC PipeLines' representative may vote in favor of that matter.
NORTHERN PLAINS NATURAL GAS COMPANY MAY NOT BE ABLE TO CONTINUE TO EFFICIENTLY
OPERATE OR MAY BE FORCED TO CEASE TO OPERATE NORTHERN BORDER PIPELINE
Since Northern Plains is a wholly owned subsidiary of Enron it depends on
Enron and some of its affiliates for some of the administrative services
Northern Plains provides to Northern Border Pipeline. Potential further
developments in the Enron situation may cause Northern Plains to be unable to
provide a sufficient level of services or any services as operator. Any
interruption of services may have a significant impact on the operations of
Northern Border Pipeline and Northern Border Pipeline may not be able to
transition to a new operator in a timely and efficient manner.
THE IRS COULD TREAT TC PIPELINES AS A CORPORATION, WHICH WOULD SUBSTANTIALLY
REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS
Current law may change so as to cause TC PipeLines to be taxable as a
corporation for federal income tax purposes or otherwise to be subject to
entity-level taxation. The partnership agreement provides that, if a law is
enacted or existing law is modified or interpreted in a manner that subjects TC
PipeLines to taxation as a corporation or otherwise subjects TC PipeLines to
entity-level taxation for federal, state or local income tax purposes, then
specified provisions of the partnership agreement relating to distributions will
be subject to change, including a decrease in distributions to reflect the
impact of that law on TC PipeLines.
NORTHERN BORDER PIPELINE AND TUSCARORA ARE EXTENSIVELY REGULATED BY THE FERC
If the FERC requires that Northern Border Pipeline's or Tuscarora's tariff be
changed, Northern Border Pipeline's or Tuscarora's cash flow may be adversely
affected.
IF NORTHERN BORDER PIPELINE OR TUSCARORA DO NOT MAINTAIN OR INCREASE THEIR
RESPECTIVE RATE BASES BY SUCCESSFULLY COMPLETING FERC-APPROVED PROJECTS, THE
AMOUNT OF REVENUE ATTRIBUTABLE TO THE RETURN ON THE RATE BASE THEY COLLECT FROM
THEIR SHIPPERS WILL DECREASE OVER TIME
The Northern Border and Tuscarora pipeline systems are generally allowed to
collect from their customers a return on their assets or "rate base" as
reflected in their financial records as well as recover that rate base through
depreciation. The amount they may collect from customers decreases as the rate
base declines as a result of, among other things, depreciation and amortization.
In order to avoid a reduction in the level of cash available for distributions
to its partners based on its current FERC-approved tariff, each of these
pipelines must maintain or increase its rate base through projects that maintain
or add to existing pipeline facilities. These projects will depend upon many
factors including:
o sufficient demand for natural gas;
o an adequate supply of proved natural gas reserves;
o available capacity on pipelines that connect with these pipelines;
o the execution of natural gas transportation contracts;
o the approval of any expansion or extension of the pipeline systems by
their respective management committees, or in some cases, a ruling
from an arbitrator;
o obtaining financing for these projects; and
o receipt and acceptance of necessary regulatory approvals.
Northern Border Pipeline's and Tuscarora's ability to complete these projects is
also dependent on numerous business, economic, regulatory, competitive and
political uncertainties beyond its control, and neither Northern Border Pipeline
nor Tuscarora may be able to complete these projects.
IF ANY SHIPPER FAILS TO PERFORM ITS CONTRACTUAL OBLIGATIONS, NORTHERN BORDER
PIPELINE'S OR TUSCARORA'S RESPECTIVE CASH FLOWS AND FINANCIAL CONDITION COULD BE
ADVERSELY IMPACTED
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If any shipper fails to perform its contractual obligations, Northern Border
Pipeline's or Tuscarora's cash flows and financial condition could be adversely
impacted. As a result, the cash available for distribution by TC PipeLines to
unitholders could be reduced.