UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-26091
TC PIPELINES, LP
(Exact name of registrant as specified in its charter)
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DELAWARE |
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52-2135448 |
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(State or other
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(I.R.S. Employer |
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110 TURNPIKE ROAD, SUITE 203 |
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WESTBOROUGH, MASSACHUSETTS 01581 |
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(Address of principal executive offices) (zip code) |
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Registrant’s telephone number, including area code: 508-871-7046 |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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NONE |
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Securities registered pursuant to Section 12(g) of the Act:
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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 ý No o
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. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes ý No o
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as at June 28, 2002, was approximately $303.8 million.
As of March 11, 2003, there were 15,627,129 of the registrant’s common units outstanding.
TC PIPELINES, LP
TABLE OF CONTENTS
All amounts are stated in United States dollars unless otherwise indicated.
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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’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Partnership’s website at www.tcpipelineslp.com/investor/reports.htm as soon as reasonably practicable after the Partnership electronically files these materials with, or furnishes them to, the Securities and Exchange Commission.
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 that is controlled by affiliates of Enron Corp. TransCanada holds a minority general partner interest in Northern Border Partners.
TC PipeLines also owns a 49% general partner interest in Tuscarora Gas Transmission Company. The Partnership acquired this interest from TCPL Tuscarora Ltd., an indirect subsidiary of TransCanada, in September 2000.
At December 31, 2002, the Partnership had 15,627,129 common units outstanding, of which 11,890,694 were held by the public, 2,800,000 were held by an affiliate of the general partner and 936,435 were held by the general partner.
TransCanada, by virtue of its ownership of the Partnership’s general partner, holds an aggregate 2% general partner interest in the Partnership. The general partner also owns 936,435 common units and 1,872,871 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”).
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 voting power, respectively, through a subsidiary limited partnership. 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 TransCanada.
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. TC PipeLines estimates that in the year ended December 31, 2002, 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 89% 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
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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 natural gas commodity price 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 with their proportionate general partner interests. As a result, TC PipeLines holds 30% of the voting power. 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. On March 19, 2003, Enron announced its intention to create a new pipeline operating entity which will include Enron’s interests in Northern Plains and Pan Border. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations of Northern Border Pipeline Company - Update on the Impact of Enron’s Chapter 11 Filing on Northern Border Pipeline’s Business.”
The Northern Border pipeline system is operated by Northern Plains pursuant to an operating agreement. As of December 31, 2002, Northern Plains employed approximately 203 individuals located at Northern Plains’ headquarters in Omaha, Nebraska, and at various locations along the pipeline route. Northern Plains also used employees and information technology systems of its affiliates to provide its services. 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 to various natural gas markets in the United States.
The Northern Border pipeline system consists of 822 miles of 42-inch diameter pipe from the Canadian border to Ventura, Iowa capable of transporting a total of 2,374 million cubic feet per day (mmcfd); 30-inch diameter pipe and 36-inch diameter pipe, each approximately 147 miles in length, capable of transporting 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 capable of transporting 844 mmcfd from Harper, Iowa to Manhattan, Illinois (Chicago area); and 35 miles of 30-inch diameter pipe capable of transporting 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.
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, domestic natural gas produced within the Williston Basin and synthetic gas produced at the Dakota Gasification plant in North Dakota. In addition, the Northern Border pipeline system is capable of physically receiving natural gas at two locations near Chicago. 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. Also, at the north end, the Northern Border pipeline system connects to a domestic natural gas gathering system owned by EnCana Corporation. In North Dakota, the Northern Border pipeline system connects with facilities of Northern Natural Gas Company at Buford, which facilities in turn are connected to Williston Basin Interstate Pipeline and the gathering system owned by Bear Paw Energy, LLC, a wholly owned subsidiary of Northern Border Partners. Other locations in North Dakota where the Northern Border pipeline system can receive gas are interconnections
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with Williston Basin Interstate Pipeline at Glen Ullin, and Amerada Hess Corporation at Watford City and facilities of Dakota Gasification Company at Hebron. Near its terminus, the Northern Border pipeline system is capable of physically receiving natural gas from Northern Illinois Gas Company at Troy Grove, Illinois and from Midwestern Gas Transmission Company, a wholly owned subsidiary of Northern Border Partners at Channahon, Illinois. For the year ended December 31, 2002, of the natural gas transported on the Northern Border pipeline system, approximately 89% was produced in Canada, approximately 5% was produced by the Dakota Gasification plant and approximately 6% was produced in the Williston Basin.
Interconnects
The Northern Border pipeline system connects with multiple pipelines of various interstate, intrastate and local distribution companies 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:
• Northern Natural Gas Company at Ventura, Iowa, as well as multiple smaller interconnections in South Dakota, Minnesota and Iowa;
• Natural Gas Pipeline Company of America at Harper, Iowa;
• MidAmerican Energy Company at Iowa City and Davenport, Iowa and Cordova, Illinois;
• Alliant Power Company at Prophetstown, Illinois;
• Northern Illinois Gas Company at Troy Grove and Minooka, Illinois;
• Midwestern Gas Transmission Company near Channahon, Illinois;
• ANR Pipeline Company near Manhattan, Illinois;
• Vector Pipeline L.P. in Will County, Illinois;
• Guardian Pipeline, L.L.C., an affiliate of Northern Border Partners, in Will County, Illinois;
• The Peoples Gas Light and Coke Company near Manhattan, Illinois; and
• Northern Indiana Public Service Company near North Hayden, Indiana at the terminus of the Northern Border pipeline system.
Several market centers 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, have developed on the Northern Border pipeline system. The largest of these market centers is at Northern Border Pipeline’s Ventura, Iowa connection with Northern Natural Gas Company. Two other market center locations are the Harper, Iowa connection with Natural Gas Pipeline Company of America and Northern Border pipeline system’s multiple interconnects in the Chicago area that include connections with Northern Illinois Gas Company, The Peoples Gas Light and Coke Company and Northern Indiana Public Service Company, as well as four interstate pipelines.
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, 2002, 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, 2002, the termination dates of these contracts ranged from March 31, 2003 to December 21, 2013, and the weighted average contract life, based upon annual contractual obligations, was approximately four and one-half years. Contracts for approximately 42% of the capacity will expire during 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.”
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. Shippers on the Northern Border pipeline system temporarily released capacity during 2002 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, 2002, the largest shipper, Pan-Alberta Gas (U.S.) (Pan-Alberta) is obligated for approximately 20% of the contracted firm capacity, of which approximately 3% of the total contracted capacity has been
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temporarily released by Pan-Alberta to other shippers through October 31, 2003. Pan-Alberta’s firm contracts expire October 31, 2003. Mirant Americas Energy Marketing, LP, who manages the assets of Pan-Alberta Gas, Ltd., including Pan-Alberta’s contracts with Northern Border Pipeline, is also obligated for approximately 10% of the contracted firm capacity. Mirant’s firm contracts expire in October 2006 and December 2008. Mirant and Pan-Alberta have agreed to maintain credit support in accordance with Northern Border Pipeline's tariff, including letters of credit, that mitigate a portion of Northern Border Pipeline's credit exposure. The only other shipper that held over 10% of the contracted firm capacity at December 31, 2002 is BP Canada Energy Marketing Corp, with approximately 12% of the contracted firm capacity, of which approximately 8% of the total contracted capacity expires on October 31, 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.”
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 transportation capacity 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 it serves.
A variety of factors could affect the demand for natural gas in the markets that the Northern Border pipeline system serves. These factors include:
• economic conditions;
• fuel conservation measures;
• alternative energy requirements and prices;
• gas storage inventory levels;
• climatic conditions;
• government regulation; and
• technological advances in fuel economy and energy generation devices.
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 a 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 transportation rate customers are willing to pay 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 such 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
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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 the Alliance Pipeline, on TransCanada's pipeline system, through various interconnects with U.S. interstate pipelines or to markets on the West Coast.
The Alliance Pipeline competes directly with Northern Border Pipeline in the transportation of natural gas from the western Canadian sedimentary basin to the Chicago area. 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 in the Chicago area 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. interconnects with the Alliance Pipeline and transports gas eastward to a terminus in eastern Canada. Guardian Pipeline was placed into service in December 2002 and interconnects with Northern Border Pipeline. Guardian Pipeline delivers into markets in Wisconsin and could provide access to additional markets for Northern Border Pipeline’s shippers.
Natural gas is also produced in the United States and 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:
• transportation of natural gas;
• rates and charges;
• construction of new facilities;
• extension or abandonment of service and facilities;
• accounts and records;
• depreciation and amortization policies;
• the acquisition and disposition of facilities; and
• the initiation and discontinuation of services.
Where required, Northern Border Pipeline holds certificates of public convenience and necessity issued by the FERC covering its facilities, activities and services. Under Section 8 of the Natural Gas Act, the FERC has the power to prescribe the accounting treatment for items for regulatory purposes. Northern Border Pipeline’s books and records may be periodically audited under Section 8. Northern Border Pipeline was notified in November that it is one of the companies selected by the FERC to undergo an industry-wide audit of FERC-assessed annual charges. The overall audit objective is to determine compliance with FERC accounting requirements and regulations as they relate to the calculation and assessment of annual charges by validating the accuracy of the data filed annually with the FERC. The audit covers the period of January 1, 2001 to December 31, 2001. Based on Northern Border Pipeline's discussion with the FERC, the FERC is intending to issue its final report by the end of the second quarter of 2003. Northern Border Pipeline advises that it does not believe the results of the audit will have a material adverse impact on its results of operations or financial position.
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 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.
Transportation rates are established periodically in FERC proceedings known as rate cases. Under Northern Border Pipeline’s tariff, Northern Border Pipeline is allowed to charge for its services on the basis of stated transportation
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rates established in Northern Border Pipeline’s 1999 rate case. Northern Border Pipeline may also 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. As a result, 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 transportation 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 previous 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 was implemented, which effectively reduced 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. However, Northern Border Pipeline is permitted to retain revenue from interruptible transportation service to offset any decontracted firm capacity.
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 Rulemaking proposing new standards of conduct that would apply uniformly to natural gas pipelines and transmitting 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.
On August 1, 2002, FERC issued a Notice of Proposed Rulemaking regarding the Regulation of Cash Management and is proposing to establish limits on the amount of funds that can be transferred from the regulated subsidiary to its non-regulated parent. It is not expected that FERC proposed policy will have an impact on the cash management practices of Northern Border Pipeline.
On July 17, 2002, FERC issued a Notice of Inquiry Concerning Natural Gas Pipeline Negotiated Rate Policies and Practices. In this proceeding the FERC is evaluating its negotiated rate program and has invited all segments of the industry to provide comments. The outcome of this inquiry may change the existing FERC policy concerning the types of negotiated rates that it allows and may have an undetermined impact on the pricing practices for a pipeline’s transportation services.
Recent FERC orders in proceedings involving other natural gas pipelines have addressed certain aspects of the pipelines' creditworthiness provisions set forth in their tariffs. In addition, industry groups such as the North American Energy Standards Board are studying creditworthiness standards and may recommend that the FERC promulgate changes in such standards on an industry-wide basis. The enactment of some of these recommendations may have the effect of easing certain creditworthiness standards and parameters currently reflected in Northern Border Pipeline's tariff. At this stage of the proceedings, however, Northern Border Pipeline advises that it cannot predict the ultimate impact, if any, such changes would have on Northern Border Pipeline.
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From time to time, Northern Border Pipeline files to make changes to its tariff to clarify provisions, to reflect current industry practices and to reflect recent FERC rulings. In February 2003, Northern Border Pipeline filed to amend the definition of company use gas, which is gas supplied by its shippers for its operations, to clarify the language by adding detail to the broad categories that comprise company use gas. Relying upon the currently effective version of the tariff, Northern Border Pipeline included in its collection of company use gas, quantities that were equivalent to the cost of electric power at its electric-driven compressor stations during the period of June 2001 through January 2003. Several parties have filed protests of this change and have requested that the FERC order refunds. At its meeting on March 26, 2003, the FERC voted to reject Northern Border Pipeline's filing and require refunds. In its draft order, the FERC directed Northern Border Pipeline to cease collecting electric costs through its company use gas provisions and to refund with interest, within 90 days, all electric costs that had been collected through Northern Border Pipeline's company use gas provisions. Other parties and Northern Border Pipeline will have thirty days from the date of order to request rehearing. A reserve in the amount of $10.0 million was established (TC PipeLines' share equates to $3.0 million). Northern Border Pipeline advises that it believes this reserve is sufficient to cover the potential refunds.
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.
The Pipeline Safety Improvement Act (Act) was signed into law in December 2002. The Act contains numerous provisions that increase federal inspection and safety requirements for the pipelines. As a result, the Secretary of Transportation and various government agencies are required to develop and implement regulations under the Act in order for the pipelines to carry out the prescribed evaluations and implementation of programs to ensure the safety of its facilities. The Act and subsequent regulations have prescribed timelines and the implementation may have an impact on the costs that Northern Border Pipeline incurs.
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, 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.
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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 Resources 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 Resources, operates the Tuscarora pipeline system pursuant to an operating agreement. Effective December 1, 2002, TransCanada is under contract to provide gas control services for the Tuscarora pipeline system, including monitoring and control of the compressor units, as well as emergency call out functions and other operational co-ordination between the companies.
The Tuscarora Pipeline System
Tuscarora owns a 240-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 Wadsworth, Nevada. Deliveries are also made directly to the local gas distribution system of Sierra Pacific Resources. 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 firm capacity contracts to transport approximately 182 mmcfd of natural gas.
On December 1, 2002, Tuscarora completed and placed into service an expansion of its pipeline system. The Tuscarora expansion consists of two compressor stations and an 11-mile pipeline extension from the previous terminus of the Tuscarora pipeline system near Reno, Nevada to Wadsworth, Nevada. The expansion increased Tuscarora’s capacity from 127 mmcfd to approximately 182 mmcfd. The new capacity is contracted under long-term firm transportation contracts ranging from ten to fifteen years. Sierra Pacific Power Company, a subsidiary of Sierra Pacific Resources, has contracted for approximately 11 mmcfd of the expansion capacity. The project had a capital budget of approximately $43.0 million and was completed at a capital cost of approximately $39.0 million. At the request of the Public Utilities Commission of Nevada, Tuscarora will submit a cost and revenue study to the FERC within 3 years of the in service date of the expansion.
In January 2001, Tuscarora completed construction of the Hungry Valley lateral, a 14-mile, 16-inch pipeline 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.
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,
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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 sites for compressor stations, meter stations, pipeline field offices, and microwave towers; 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 it 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. See Item 3. “Legal Proceedings.”
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; and (b) parcels where its interest derives from leases, easements, grants, 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 Indian Reservation. Northern Border Pipeline and the Tribes, through a mediation process, have held
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settlement discussions and have reached a settlement in principle on pipeline right-of-way lease and taxation issues, subject to final documentation and necessary governmental approvals. Northern Border Pipeline advises that it believes that it will obtain regulatory recovery of the costs resulting from the settlement, which will result in no material adverse impact to its results of operations or financial position. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors and Information Regarding Forward-Looking Statements."
See Item 1. “Business – Business of Northern Border Pipeline Company - FERC Regulation” for a discussion on the proceeding relating to company use gas before the FERC.
Northern Border Pipeline is not currently party to any other legal proceedings that, individually or in aggregate, would reasonably be expected to have a material adverse impact on TC PipeLines’ results of operations or financial position.
Tuscarora is not currently a party to any material legal proceedings.
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, 2002.
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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 $20.50 per common unit. The common units are quoted on the Nasdaq Stock Market and trade under the symbol “TCLP.”
The following table sets forth, for the periods indicated, the high and low sale prices per common unit, as reported by the Nasdaq Stock Market, and the amount of cash distributions per common unit declared with respect to the corresponding periods. Cash distributions are paid within 45 days after the end of each quarter to unitholders of record as of the record date.
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Price Range |
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Cash
Distributions |
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High |
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Low |
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2002 |
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First Quarter |
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$ |
27.38 |
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$ |
23.90 |
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$ |
0.500 |
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Second Quarter |
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$ |
26.00 |
|
$ |
23.31 |
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$ |
0.525 |
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|
Third Quarter |
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$ |
26.99 |
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$ |
21.30 |
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$ |
0.525 |
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Fourth Quarter |
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$ |
27.88 |
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$ |
24.02 |
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$ |
0.525 |
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