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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition period
from to
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Commission File Number: 000-26091
TC PipeLines, LP
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction
of incorporation or organization
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52-2135448
(I.R.S. Employer
Identification No.)
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717 Texas Street, Suite 2400
Houston, Texas
(Address of principal executive offices)
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77002-2761
(Zip code)
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877-290-2772
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Common units representing limited partner interests
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NASDAQ Stock Market
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Title of each class
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Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
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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
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No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes
o
No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of
this chapter) 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "small reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a small reporting company)
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Smaller Reporting Company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as at
June 30, 2009 was approximately $839.8 million.
As
of February 26, 2010, there were 46,227,766 common units of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TC PIPELINES, LP
TABLE OF CONTENTS
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Page No.
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PART I
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Item 1.
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Business
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9
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Item 1A.
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Risk Factors
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32
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Item 1B.
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Unresolved Staff Comments
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46
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Item 2.
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Properties
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46
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Item 3.
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Legal Proceedings
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46
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Item 4.
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Submission of Matters to a Vote of Security Holders
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47
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PART II
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Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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48
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Item 6.
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Selected Financial Data
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49
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Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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49
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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73
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Item 8.
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Financial Statements and Supplementary Data
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75
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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75
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Item 9A.
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Controls and Procedures
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75
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Item 9B.
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Other Information
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76
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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77
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Item 11.
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Executive Compensation
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80
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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83
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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84
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Item 14.
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Principal Accounting Fees and Services
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89
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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91
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All amounts are stated in United States dollars unless otherwise indicated.
2009 ANNUAL REPORT
5
Glossary
The abbreviations, acronyms, and industry terminology used in this annual report are defined as follows:
2007 Credit Agreement
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Northern Border's $250.0 million amended and restated revolving credit agreement
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Acquisition Agreement
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Agreement for Purchase and Sale of Membership Interest
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Alberta Hub
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The grouping of gas gathering lines, processing, storage facilities in large scale and also a "liquid" pricing point recognized for trading in Alberta, Canada
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ASC
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Accounting Standards Codification
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ANR
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ANR Pipeline Company
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Bcf
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Billion cubic feet
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Bcf/d
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Billion cubic feet per day
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BIA
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Bureau of Indian Affairs
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Bison
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Bison Pipeline LLC
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CERCLA
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Comprehensive Environmental Response, Compensation and Liability Act
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CWA
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Clean Water Act
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Collar Agreement
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Northern Border's interest rate collar agreement
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DCF
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Discounted cash flow
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Delaware Act
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Delaware Revised Uniform Limited Partnership Act
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Design capacity
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Pipeline capacity available to transport natural gas based on system facilities and design conditions
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Dth
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Dekatherms
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Dth/d
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Dekatherms per day
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EBITDA
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Net income plus interest expense, income taxes, depreciation and amortization and all other non-cash charges
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El Paso
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El Paso Natural Gas Company
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EPA
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U.S. Environmental Protection Agency
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Essar
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Essar Steel Minnesota LLC
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Exchange Agreement
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Agreement with the general partner pursuant to which the Partnership issued new common units to the general partner and provided for Revised IDRs in exchange for the cancellation of the Old
IDRs
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FERC
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Federal Energy Regulatory Commission
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GAAP
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U.S. generally accepted accounting principles
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Gas exiting the WCSB
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Net of the supply of and demand for natural gas in the WCSB region that is available for transportation to downstream markets; where supply represents WCSB production adjusted for injections into and
withdrawals from WCSB storage
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General Partner
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TC PipeLines GP, Inc.
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GL Cost and Revenue Study
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Cost and Revenue study filed by Great Lakes with the FERC in response to the FERC's November 19, 2009 Order
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GL Executive Committee
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Executive Committee of the Great Lakes Management Committee
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6
TC PIPELINES,
LP
GL Management Committee
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Great Lakes Management Committee
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GL Rate Proceeding
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FERC investigation into Great Lakes' rates pursuant to Section 5 of the NGA
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Great Lakes
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Great Lakes Gas Transmission Limited Partnership
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GTN
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Gas Transmission Northwest Corporation
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IDRs
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Incentive Distribution Rights
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INGAA
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Interstate Natural Gas Association of America
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IRS
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Internal Revenue Service
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LDCs
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Local Distribution Companies
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LIBOR
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London Interbank Offered Rate
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LNG
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Liquefied Natural Gas
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MBT
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Michigan Business Tax
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MDth/d
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Thousand dekatherms per day
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MLP
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Master Limited Partnership
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MMcf/d
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Million cubic feet per day
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NEPA
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National Environmental Policy Act
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NGA
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Natural Gas Act
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North Baja
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North Baja Pipeline, LLC
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Northern Border
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Northern Border Pipeline Company
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NOV
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Notice of Violation
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November 2009 Order
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FERC order issued in FERC Docket No. RP10-149 on November 19, 2009 instituting GL Rate Proceeding
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Offering
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The sale of 2,609,680 newly issued, unregistered common units representing limited partner interests in the Partnership to TransCan Northern at a price per common unit of $30.042 for an aggregate
amount of approximately $78.4 million
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Old IDRs
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IDRs available to the general partner under the Amended and Restated Agreement of Limited Partnership
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ONEOK Partners
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ONEOK Partners, L.P.
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ONEOK Partners GP
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ONEOK Partners GP, LLC
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Other Pipes
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North Baja and Tuscarora
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Our pipeline systems
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Great Lakes, Northern Border, North Baja and Tuscarora
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Paiute
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Paiute Pipeline Company
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Partnership
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TC PipeLines, LP and its subsidiaries
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Partnership Agreement
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Second Amended and Restated Agreement of Limited Partnership
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RCRA
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Resource Conservation and Recovery Act
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Revised IDRs
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IDRs available to the general partner under the Second Amended and Restated Agreement of Limited Partnership
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REX
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Rockies Express Pipeline
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ROE
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Return on equity
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Ruby
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Ruby Pipeline LLC
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2009 ANNUAL REPORT
7
SEC
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Securities and Exchange Commission
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Senior Credit Facility
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TC PipeLines' revolving credit and term loan agreement
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SFAS
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Statement of Financial Accounting Standards
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Sierra Pacific Power
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Sierra Pacific Power Company, a subsidiary of NV Energy Inc. (formerly known as Sierra Pacific Resources)
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TCILP
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TC PipeLines Intermediate Limited Partnership, a subsidiary of the Partnership
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TransCan Northern
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TransCan Northern Ltd.
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TransCanada
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TransCanada Corporation and its subsidiaries
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Tuscarora
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Tuscarora Gas Transmission Company
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U.S.
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United States of America
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WCSB
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Western Canada Sedimentary Basin
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Yuma Lateral
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An expansion of the North Baja pipeline from the Mexico/Arizona border to Yuma City, Arizona
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8
TC PIPELINES,
LP
PART I
FORWARD-LOOKING STATEMENTS
The statements in this report that are not historical information, including statements concerning plans and objectives of management for future operations, economic
performance or related assumptions, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking
statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "forecast" and other words and terms of similar meaning. The absence of these words,
however, does not mean that the statements are not forward-looking.
These
statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions. Certain factors that could cause actual
results to differ materially from those contemplated in the forward-looking statements include:
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the
ability of Great Lakes Gas Transmission Limited Partnership (Great Lakes) and Northern Border Pipeline Company (Northern Border) to continue to make distributions at
their current levels;
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the
impact of unsold capacity on Great Lakes and Northern Border being greater or less than expected;
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competitive
conditions in our industry and the ability of Great Lakes, Northern Border, North Baja Pipeline, LLC and Tuscarora Gas Transmission Company (together "our
pipeline systems") to market pipeline capacity on favorable terms, which is affected by:
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future
demand for and prices of natural gas;
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level
of natural gas basis differentials;
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competitive
conditions in the overall natural gas and electricity markets;
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availability
and relative cost of supplies of Canadian and United States (U.S.) natural gas, including the recently discovered shale gas resources such as the Horn
River and Montney deposits in Western Canada, along with U.S. Rockies, Mid-Continent, and Marcellus gas developments;
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competitive
developments by U.S. and Canadian natural gas transmission companies;
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the
availability of additional storage capacity and current storage levels;
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the
level of liquefied natural gas imports;
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weather
conditions that impact supply and demand; and
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the
ability of shippers to meet credit worthiness requirements;
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the
impact of current and future laws, rulings and governmental regulations, particularly Federal Energy Regulatory Commission regulations and rate proceedings, and proposed
and pending legislation by Congress and proposed and pending regulations by the U.S. Environmental Protection Agency on us and our pipeline systems;
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changes
in relative cost structures of natural gas producing basins, such as changes in royalty programs, that may prejudice the development of the Western Canada
Sedimentary Basin;
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decisions
by other pipeline companies to advance projects which will affect our pipeline systems and the regulatory, financing and construction risks related to construction
of interstate natural gas pipelines and additional facilities;
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the
ability of our pipeline systems to identify and/or consummate expansion projects which are accretive growth opportunities for the Partnership;
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performance
of contractual obligations by customers of our pipeline systems;
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the
imposition of entity level taxation by states on partnerships;
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operating
hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
2009 ANNUAL REPORT
9
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the
Partnership's ability to identify and/or consummate accretive growth opportunities from TransCanada Corporation or others;
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our
ability to control operating costs and the ability of TransCanada to implement its reorganization of U.S. pipeline operations, including the operations of our
pipeline systems, and realize cost savings; and
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general
economic conditions in North America, which impact:
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the
debt and equity capital markets and our ability to access these markets at reasonable costs;
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the
overall demand for natural gas by end users; and
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natural
gas prices.
Other
factors described elsewhere in this document, or factors that are unknown or unpredictable, could also have material adverse effects on future results. Please also
read Item 1A. "Risk Factors". All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. These forward-looking
statements and information are made only as of the date of the filing of this report, and except as required by applicable law, we undertake no obligation to update these forward-looking statements
and information to reflect new information, subsequent events or otherwise.
Item 1. Business
OVERVIEW
We are a publicly traded Delaware limited partnership formed in 1998 by TransCanada PipeLines Limited to acquire, own and participate in the management of energy infrastructure
businesses in North America. Our strategic focus is on delivering stable, sustainable cash distributions to our unitholders and finding opportunities to increase cash distributions while maintaining a
low risk profile.
TC PipeLines, LP
and its subsidiaries are collectively referred to herein as "the Partnership". In this report, references to "we", "us" or "our" refer to the
Partnership. TransCanada PipeLines Limited is a wholly-owned subsidiary of TransCanada Corporation (which, together with its subsidiaries, is referred to as TransCanada).
The
general partner of the Partnership is TC PipeLines GP, Inc., a wholly-owned subsidiary of TransCanada.
To
date, our investments have been in interstate natural gas pipeline systems that transport natural gas to a variety of markets in the United States, Eastern Canada
and Mexico.
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We
own a 46.45 per cent general partner interest in Great Lakes Gas Transmission Limited Partnership (Great Lakes). The remaining 53.55 per cent
interest in Great Lakes is held by TransCanada.
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We
own a 50 per cent general partner interest in Northern Border Pipeline Company (Northern Border). The other 50 per cent interest is held by
ONEOK Partners, L.P. (ONEOK Partners), a publicly traded limited partnership that is controlled by ONEOK, Inc.
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We
own 100 per cent of North Baja Pipeline, LLC (North Baja), which we acquired on July 1, 2009 from TransCanada. Please read "Year in
Review 2009" within this section for additional information regarding the North Baja acquisition.
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We
own 100 per cent of Tuscarora Gas Transmission Company (Tuscarora).
We
believe our strong financial position, including available unused capacity on our credit facility, gives us the capacity to pursue opportunities to grow in a sustained
and disciplined manner for the long-term benefit of our unitholders.
TransCanada
operates Great Lakes, Northern Border, North Baja and Tuscarora (collectively, "our pipeline systems"). See Item 13. "Certain Relationships and Related
Transactions, and Director Independence".
10
TC PIPELINES,
LP
Year in Review 2009
Partnership
Public Equity Issuance
On November 18, 2009, the Partnership completed a public offering of 5,000,000 common units at a price of $38.00 per unit for net proceeds of approximately
$185 million, including the capital contribution of approximately $4 million from our general partner to maintain its two per cent general partner interest. The proceeds were used
to repay debt outstanding under our revolving credit facility.
North Baja Acquisition
On July 1, 2009, the Partnership acquired 100 per cent of North Baja from TransCanada for a purchase price of approximately $271 million. The
acquisition was financed through a combination of a private equity issuance, a draw on the Partnership's credit facility and cash on hand. The private equity issuance resulted in
2,609,680 common units issued to a wholly-owned subsidiary of TransCanada at $30.042 per common unit.
The
Partnership agreed to acquire an expansion of the North Baja pipeline from the Mexico/Arizona border to Yuma City, Arizona (Yuma Lateral) if TransCanada completed the
expansion by June 30, 2010. See "Business of North Baja" within this section for an update with respect to the Yuma Lateral.
Incentive Distribution Right (IDR) Restructuring
Concurrent with the acquisition of North Baja, the Partnership entered into an exchange agreement (Exchange Agreement) with its general partner whereby the Partnership issued
3,762,000 new common units to the general partner and provided revised incentive distribution rights (Revised IDRs) in exchange for the cancellation of the incentive distribution rights
available to the general partner (Old IDRs) under the Partnership's Amended and Restated Agreement of Limited Partnership.
Under
the terms of the Revised IDRs, the distributions to the general partner were reset to two per cent, down from the general partner distribution levels of the Old
IDRs at 50 per cent (for combined general partner interest and incentive distribution interest). The incentive distribution levels of the Revised IDRs will result in increased
combined distributions to the general partner (for general partner interest and incentive distribution interest) of 15 per cent and a maximum of 25 per cent when
quarterly distributions increase to $0.81 and $0.88 per common unit, or $3.24 and $3.52 per common unit on an annualized basis, respectively.
Partnership Agreement Amended and Restated
As part of the Exchange Agreement, the Partnership's Amended and Restated Agreement of Limited Partnership was amended and restated effective July 1, 2009 to reflect the
Revised IDRs as described above.
Our Pipeline Systems
Great Lakes Rate Proceeding
On November 19, 2009, the Federal Energy Regulatory Commission (FERC) instituted proceedings under Section 5 of the Natural Gas Act to review the tariff rates of
Great Lakes. As directed under the November 2009 FERC Order, Great Lakes filed a cost and revenue study on February 4, 2010. See "Regulatory Environment, Government Regulation" within
this section and also Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information with respect to this proceeding.
Great Lakes Contract Renewal
On November 3, 2009, Great Lakes and TransCanada extended contracts until October 31, 2011 for 470 thousand dekatherms per day (MDth/d) of long haul
capacity, which would have expired on October 31, 2010. Great Lakes has 486 MDth/d of long haul capacity and an additional 110 MDth/d of short haul capacity under contracts
expiring on October 31, 2010. See "Contracting" within this section for more information with respect to Great Lakes' contracting position.
2009 ANNUAL REPORT
11
Northern Border Des Plaines Project
Northern Border's Des Plaines compressor station and interconnect facilities project went into service in March 2009, with a final cost to Northern Border of
approximately $17 million.
Business Strategies
Our strategic focus is on delivering stable, sustainable cash distributions to our unitholders and finding opportunities to increase cash distributions while maintaining a low
risk profile.
We
seek opportunities to undertake accretive acquisitions and pursue organic growth projects through our pipeline systems to maximize the value of our existing portfolio of
investments. Working with our partners in our pipeline systems, we seek to pursue policies that:
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maximize
the utilization of our pipeline systems;
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expand
our pipeline systems to meet market demand and increase supply diversity; and
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promote
safe and efficient operations.
We
intend to support the execution of our business strategies by:
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maintaining
a strong and balanced financial position to:
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maintain
a prudent level of available cash for distribution to unitholders;
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fund
future growth; and
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broaden
our asset base in a disciplined and focused manner;
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investing
in energy infrastructure businesses in North America that are underpinned by strong business fundamentals and provide stable cash flows; and
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maximizing
the benefits of our relationship with TransCanada.
Competitive Strengths
We believe that we are well positioned to execute our business strategies successfully because of the following competitive strengths:
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Our
pipeline systems hold strategic market positions and, except for North Baja, comprise critical links for the transportation of natural gas from the Alberta Hub in Canada
to U.S. markets. The Alberta Hub is one of the largest natural gas hubs in North America. Additional natural gas supply from the Alberta Hub is expected to be available in the future when new
pipeline projects associated with the Montney and Horn River shale deposits in Western Canada are constructed, or if the longer-term potential associated with the proposed development of
the Mackenzie Delta in Northern Canada and the North Slope in Alaska is realized;
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With
TransCanada as operator of our pipeline systems, we believe our pipeline systems are well positioned to continue to operate as trusted and experienced transportation
service providers; and
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-
The
senior management team and the board of directors of our general partner have extensive industry experience and include some of the most senior officers of TransCanada.
The management team plays a significant role in developing the strategic direction of our pipeline systems and their associated operations, and we believe our ability to execute our business
strategies is enhanced by our affiliation with TransCanada.
12
TC PIPELINES,
LP
Our Relationship with TransCanada
One of our principal strengths is our relationship with TransCanada. TransCanada, a Canadian corporation, was founded in 1951 with the objective of transporting natural gas
from Alberta, Canada to distant markets. Today, TransCanada is a major North American energy infrastructure company engaged in numerous aspects of the energy industry but is primarily focused on
natural gas and oil transmission and power generation services. TransCanada owns, including assets that are under construction or in development, approximately 37,300 miles of wholly-owned
natural gas pipelines and interests in an additional 5,500 miles of natural gas pipelines, along with approximately 380 billion cubic feet (Bcf) of storage capacity and, including
facilities that are under construction or in development, also owns, operates, and/or controls over 11,700 megawatts of power generation. TransCanada is also constructing the Keystone oil
pipeline which will be approximately 3,800 miles in length.
TransCanada
provides access to a significant pool of management talent and strong relationships throughout the energy industry. We expect to pursue strategic acquisitions in
a disciplined manner and to have the opportunity to participate jointly with TransCanada in reviewing potential acquisitions, including transactions that we would be unable to pursue on our own.
Additionally, we may have the opportunity to make acquisitions directly from TransCanada. TransCanada, however, is under no obligation to allow us to participate in any of its pipeline or energy
infrastructure acquisitions, nor is TransCanada required to offer any of its assets to us.
See
Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for more information regarding
TransCanada's ownership in us.
Our Partnership Structure
The following chart depicts our organizational and ownership structure.
-
(1)
-
Through
subsidiary companies.
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(2)
-
Effective
aggregate economic interest.
2009 ANNUAL REPORT
13
Our Pipeline Systems
All
of our pipeline systems are regulated by the FERC. Operating revenue is derived from the transportation of natural gas. The maximum transportation rates that our
pipeline systems may charge are approved by the FERC, and in most cases, established in a FERC proceeding known as a rate case. During a rate case, a determination is reached by the FERC, either
through a hearing or a settlement, on the maximum rates permissible for transportation service on a pipeline system that include the recovery of cost-based investment, operating expenses
and a reasonable return for its investors. Once maximum rates are set, the pipeline system is not permitted to adjust the maximum rates to reflect changes in costs or contract demand until new rates
are approved by the FERC, usually after a rate case has been filed. The FERC also governs the general terms and conditions for natural gas transportation service on interstate natural gas pipelines.
The tariff also allows for services to be provided under negotiated and discounted rates. As a result, earnings and cash flow of each pipeline system depend on costs incurred; contracted capacity and
transportation path; the volume of gas transported; and the ability of each system to sell capacity at acceptable rates.
Transportation Services
Our pipeline systems' transportation contracts include specifications regarding the receipt and delivery of natural gas at points along the pipeline system. The transportation
services provided by our pipeline systems are generally categorized as firm or interruptible. The type of transportation contract, either for firm or interruptible service, determines the basis upon
which each customer is charged.
14
TC PIPELINES,
LP
Customers
with firm service transportation agreements pay a fee known as a reservation charge to reserve pipeline capacity, regardless of use, for the term of their
contracts. On the Great Lakes, Northern Border and North Baja systems, firm service transportation customers also pay a variable usage fee known as a commodity charge (or utilization fee) that
is generally based on distance and the volume of natural gas they transport.
Customers
with interruptible service transportation agreements may utilize available capacity on a pipeline system after firm service transportation requests are satisfied.
Interruptible service customers are assessed commodity charges (or utilization fees) based on distance and the volume of natural gas they transport. On the Great Lakes and Tuscarora systems,
interruptible revenues are generally subject to a sharing mechanism whereby
90 per cent of the revenue is refunded to firm shippers paying maximum tariff rates. Our Northern Border and North Baja pipeline systems are not subject to sharing mechanisms with their
shippers on their interruptible revenues.
Variable
usage fees for Northern Border include a compressor usage surcharge to recover the cost of the electric compression and fuel use tax which relates to both firm and
interruptible transportation services.
The
table below provides information with respect to tariff revenue composition for each of our investments for the year ended December 31, 2009. It is provided to
indicate the extent to which the revenue for our pipeline systems is dependent upon fixed versus variable fees.
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2009 Tariff Revenue Composition
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Firm Contracts
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Our
Ownership
Interest
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Capacity
Reservation
Charges
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Variable
Usage Fees
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Interruptible
Contracts &
Other Services
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Great Lakes
|
|
46.45%
|
|
97%
|
|
2%
|
|
1%
|
|
Northern Border
|
|
50%
|
|
85%
|
|
10%
|
|
5%
|
|
North Baja
|
|
100%
|
|
97%
|
|
2%
|
|
1%
|
|
Tuscarora
|
|
100%
|
|
100%
|
|
0%
|
|
0%
|
|
Business of Great Lakes
Great Lakes is a Delaware limited partnership formed in 1990. The Partnership acquired its 46.45 per cent general partner interest in Great Lakes in
February 2007.
Great
Lakes receives natural gas from an interconnection with the TransCanada Mainline system at the Canadian border near Emerson, Manitoba, Canada and extends across
Minnesota, Northern Wisconsin and Michigan, and redelivers gas to TransCanada at the Canadian border near Sault Ste. Marie, Ontario, Canada and St. Clair, Ontario, Canada. Great Lakes also
connects to storage centers in Michigan and interconnects with other interstate natural gas pipelines.
The
pipeline system consists of approximately 2,115 miles of pipeline with diameters ranging from 10 inches to 36 inches and a design capacity of
2,500 million cubic feet per day (MMcf/d) during the winter and 2,300 MMcf/d during the summer. Annual capacity is determined by the summer design capacity. Great Lakes has
14 compressor stations with a total of 438,000 horsepower and measurement facilities to support the 58 receipt and delivery points on the system.
The
original construction of the Great Lakes system occurred in 1967 and 1968. Numerous capacity system expansions have occurred since its original construction, the last
one completed in 1998.
The
major policies of Great Lakes are established by the management committee of Great Lakes (GL Management Committee). The current GL Management Committee consists
of four appointed members, two of whom are designated by us and two of whom are designated by TransCanada. All decisions by the GL Management Committee
2009 ANNUAL REPORT
15
require
unanimous consent. For the day to day management of Great Lakes' business, the GL Management Committee established an executive committee (GL Executive Committee). The GL Executive
Committee currently consists of two appointed members: one Partnership GL Management Committee member, and one TransCanada GL Management Committee member, who also serves as the president of Great
Lakes. The GL Executive Committee has all of the powers of the GL Management Committee in the management of Great Lakes' business.
Business of Northern Border
Northern Border is a Texas general partnership formed in 1978. The Partnership had a 30 per cent general partner interest in Northern Border at its initial public
offering and acquired an additional 20 per cent general partner interest in April 2006.
Northern
Border transports natural gas from the Canadian border near Port of Morgan, Montana to a terminus near North Hayden, Indiana. Additionally, Northern Border
transports natural gas produced in the Williston Basin of Montana and North Dakota, and the Powder River Basin of Wyoming and Montana, as well as synthetic gas produced at the Dakota Gasification
plant in North Dakota.
The
pipeline system consists of 1,249 miles of pipeline with diameters ranging from 30 to 42 inches and a design capacity on the largest segment of the
pipeline of 2,374 MMcf/d. Northern Border has 18 compressor stations with a total of approximately 517,000 horsepower, measurement facilities to support the 65 receipt and
delivery points on the system.
Construction
of Northern Border's system was initially completed in 1982, followed by expansions or extensions in 1991, 1992, 1998, 2001 and 2006.
Northern
Border is managed by a management committee that consists of four members. Each partner designates two members, and the Partnership designates one of our members as
Chairman. Each partner holds a 50 per cent voting interest on the management committee.
Des Plaines Project
The compressor station and interconnect facilities project went
into service in March 2009, with a final cost to Northern Border of approximately $17 million. The project is fully subscribed under a 10 year compression and transportation
contract. The new contract generates approximately $3 million in annual revenue for Northern Border.
Business of North Baja
North Baja is a Delaware limited liability company formed in 2000. The Partnership acquired 100 per cent of North Baja on July 1, 2009 from
TransCanada.
North
Baja transports natural gas between an interconnection with El Paso Natural Gas Company (El Paso) near Ehrenberg, Arizona and an interconnection near Ogilby,
California on the California/Mexico border with the Gasoducto Bajanorte natural gas pipeline system which is owned by Sempra Energy International. North Baja is a bi-directional system
which allows it to accept receipts and make deliveries of natural gas at both interconnection points with connecting pipelines.
The
pipeline system consists of 80 miles of pipeline with diameters of 30 and 36 inches and a FERC licensed capacity of 500 MMcf/d for southbound
transportation and a design capacity of 600 MMcf/d for northbound transportation. There is one compressor station at the north end of the pipeline with a limit of 21,600 horsepower. The
metering points at both ends of the pipeline act as either receipt or delivery points depending on the direction of flow.
The
North Baja pipeline system was initially placed into service in 2002. An expansion was completed in April 2008 to allow for bi-directional gas flow.
To date, all gas flows have been southbound.
16
TC PIPELINES,
LP
Yuma Lateral Project
At the time of our acquisition of North Baja, TransCanada had
begun an expansion project of the North Baja pipeline from the Mexico/Arizona border to Yuma City, Arizona. We agreed to acquire the expansion facilities and contracts for an additional sum up to
$10 million, if TransCanada completed the project by June 30, 2010. The Yuma Lateral project is currently under construction and is expected to be completed in March 2010. The
purchase price has yet to be determined.
Business of Tuscarora
Tuscarora is a Nevada general partnership formed in 1993. The Partnership acquired 49 per cent of Tuscarora in September 2000, followed by an additional
49 per cent in December 2006, and the final two per cent in December 2007.
Tuscarora
originates at an interconnection point with existing facilities of Gas Transmission Northwest Corporation (GTN), a wholly-owned subsidiary of TransCanada, near
Malin, Oregon and runs southeast through Northeastern California and Northwestern Nevada. Tuscarora's pipeline system terminates near Wadsworth, Nevada. Along its route, deliveries are made in Oregon,
Northern California and Northwestern Nevada.
The
pipeline system consists of 240 miles of pipeline with a diameter of 20 inches and a design capacity of approximately 230 MMcf/d. Tuscarora has
three compressor stations with a total of over 17,100 horsepower, and measurement facilities at one receipt point and 16 delivery points.
The
Tuscarora pipeline system was initially placed into service in 1995, followed by expansions or extensions in 2001, 2002, 2005 and 2008.
NATURAL GAS INDUSTRY OVERVIEW
North American Natural Gas Flows
Natural gas is transported from producing regions and Liquefied Natural Gas (LNG) import facilities to market hubs for distribution to natural gas consumers. The main producing
regions in North America are the Gulf of Mexico, Western Canada Sedimentary Basin (WCSB), Mid-Continent, Rockies, Permian basin, and San Juan basin. The largest consuming regions are the
Northeastern U.S. and the Midwest. Recent increases in the development of unconventional and shale gas have resulted in increases in overall North American natural gas production and increased
reserves. Over the past two years, significant new pipeline infrastructure has been added to move gas from producing regions to market areas, including the Rockies Express Pipeline (REX) which
transports gas from the Rockies to Ohio. New interstate natural gas pipelines sourcing supply basins in the Mid-Continent, along with the completion of REX, have increased the supply of
natural gas into Eastern markets. As a result, the level of competition in these market regions from alternate sources of supply has increased and caused a general reduction in basis differential
between producing and market regions. This impacts the transportation value on pipelines, including our pipeline systems. Additional pipeline projects have been proposed, including projects to move
additional gas supply into western market regions, which are expected to continue to impact overall North American natural gas flows. Additionally, development of new producing regions, such as the
Marcellus shale in the eastern U.S., will also impact North American natural gas flows.
2009 ANNUAL REPORT
17
Demand
North America
Demand for natural gas transportation service on a pipeline system is directly related to demand for natural gas in the markets served by that system. Factors that may impact
demand for natural gas include:
-
-
weather
conditions;
-
-
economic
conditions;
-
-
government
regulation;
-
-
the
availability and price of alternative energy sources versus availability and price of natural gas;
-
-
natural
gas storage inventories for the markets served;
-
-
fuel
conservation measures; and
-
-
technological
advances in fuel economy and energy generation devices.
Some
of the factors have an immediate impact on natural gas demand, while others are longer term. Natural gas demand fluctuates from year to year, as well as seasonally, as
a result of the factors described above. North American demand for natural gas declined in 2009 with the economic downturn. We expect that demand in 2010 will be relatively unchanged but will increase
in the long term as economic growth returns. The relative environmental merits of natural gas versus other carbon based forms of energy are also expected to increase the demand for natural gas. The
impact of natural gas demand on the demand for natural gas transportation service on any one pipeline system will depend upon changes in demand for natural gas in the market areas which that pipeline
serves.
Other
factors that may impact demand for natural gas transportation service on any one system include:
-
-
the
availability of natural gas supply at the pipeline system's receipt points;
-
-
the
ability and willingness of natural gas shippers to utilize that pipeline system over alternative pipelines;
-
-
the
relative transportation rates; and
-
-
the
volume of natural gas delivered to the markets supplied by that system from other supply sources and storage facilities.
These
factors, and the impact on our pipeline systems, are discussed further under "Supply" and "Customers, Competition, and Contracting".
Our
pipeline systems are exposed to risk when marketing available capacity. This occurs when existing transportation contracts expire and when there is available capacity on
the pipeline system. Customers with expiring contracts can, depending on the market, either extend their contract commitments, renegotiate for shorter terms and/or discounted rates, or they may choose
not to renew their contract. Customers with competitive alternatives analyze the market price spread, or basis differential, between receipt and delivery points along the pipeline to determine their
expected gross margin. The anticipated margin and its variability are important determinants of the transportation rate customers are willing to pay and the transportation routes they choose to ship
their gas. Depending on supply and market conditions, a customer can contract for long-term firm transportation, short-term firm transportation, or interruptible transportation
services.
Our Pipeline Systems
Contracted capacity and system throughput are measures of demand for natural gas transportation services. The trend in the amount of design capacity that is contracted gives an
indication of the trend in revenue generation. The trend in system throughput generally gives an indication of the extent to which design capacity is being utilized. The table
18
TC PIPELINES,
LP
below
provides historical information on the average throughput and contracted capacity as a percentage of design capacity for our pipeline systems from the past three years:
Year Ended December 31
|
|
2009
|
|
2008
|
|
2007
|
|
|
Contracted Capacity
(a)
|
|
|
|
|
|
|
|
Average Throughput (MMcf/d)
|
|
|
|
|
|
|
|
Great Lakes
(b)
|
|
100%
|
|
100%
|
|
100%
|
|
|
|
1,992
|
|
2,143
|
|
2,270
|
|
Northern Border
|
|
68%
|
|
90%
|
|
97%
|
|
|
|
1,708
|
|
2,041
|
|
2,247
|
|
North Baja
(c)
|
|
|
|
|
|
|
|
|
Southbound
|
|
79%
|
|
88%
|
|
95%
|
|
|
Northbound
|
|
64%
|
|
53%
|
|
n/a
|
|
|
|
257
|
|
278
|
|
247
|
|
Tuscarora
|
|
99%
|
|
98%
|
|
96%
|
|
|
|
93
|
|
82
|
|
77
|
|
-
(a)
-
Contracted
capacity percentage is calculated based upon contracted capacity compared to design capacity for Northern Border, North Baja northbound
transportation and Tuscarora, compared to average design capacity for Great Lakes, and compared to FERC licensed capacity for North Baja southbound transportation.
-
(b)
-
The
average throughput for Great Lakes includes periods prior to the February 22, 2007 acquisition by us of a 46.45 per cent general
partner interest in Great Lakes.
-
(c)
-
Due
to North Baja's bi-directional nature, it can contract for both southbound and northbound capacity separately. North Baja's ability to
provide northbound transportation services commenced April 2008, but as there have been no northbound gas flows to date, average throughput reflects only southbound deliveries.The average
throughput for North Baja includes periods prior to the July 1, 2009 acquisition by us of a 100 per cent interest in North Baja.
Great Lakes provides transportation services to Midwest and Northeast U.S. markets, as well as Eastern Canadian markets. The
transportation services provided by Great Lakes are principally related to storage injection and withdrawal activity from storage centers in Michigan and Ontario as Great Lakes provides a critical
link between these storage centers and consuming markets. Demand for natural gas in the markets served by Great Lakes declined in 2009 due to the economic environment's negative impact on industrial
and electric generation demand. However, this demand is expected to recover slowly in the near term and grow over the long term, primarily due to the anticipated growth in demand for natural gas fired
power generation. Demand for transportation services on Great Lakes remained relatively constant until 2009 when high storage levels and the economic recession dampened demand for Great Lakes
transportation services. Underutilization of contracts reflected the reduced demand for transportation from Canadian supply sources during 2009. This is discussed further under "Customers, Competition
and Contracting".
Northern
Border provides transportation services to Midwest U.S. markets directly and through major interconnections with other interstate natural gas pipelines at
Ventura and Harper, Iowa and the Chicago market hub. Demand for natural gas in the markets served by Northern Border was negatively impacted by the economic environment in 2009 and although these
impacts may continue into 2010, overall demand for natural gas is expected to grow over the long term. Demand for transportation on Northern Border decreased in 2008 as a result of new volumes of
natural gas being delivered to its Ventura market area from the Rockies basin by a competing pipeline. The new supply volumes moved from the Ventura market area further east with the completion of REX
in 2009 and natural gas prices at Ventura improved, which improved market conditions for Northern Border at Ventura. Additional supply into Eastern markets from new pipeline projects which went into
service in 2009, including the completion of REX, resulted in other supplies being displaced into the Chicago market. Demand for WCSB natural gas supply in the Chicago market has
2009 ANNUAL REPORT
19
subsequently
declined, resulting in reduced demand for transportation to Chicago on the eastern leg of Northern Border's system in 2009. This is discussed further under "Customers, Competition and
Contracting".
North
Baja was initially constructed to provide transportation services to markets in northern Baja California, Mexico through its interconnection with Gasoducto Bajanorte.
Demand for natural gas in this market has been relatively flat over the past three years but is expected to grow over the long term. Demand for transportation services on North Baja is expected to
grow slowly over time as new loads develop in Mexico that prefer to be served by U.S sourced gas. The facility modifications (bi-directional capability) that were completed in
April 2008 enable North Baja to serve natural gas demand in the southwestern U.S. through northbound transportation services when the Energia Costa Azul LNG terminal receives LNG cargos.
Although long-term contracts for northbound and southbound transportation services do not fully contract the pipeline capacity, the bi-directional capabilities of the system
result in a continued high demand for transportation services on the North Baja pipeline system.
Tuscarora
provides transportation services to markets in Oregon, Northern California and Northern Nevada. Demand for natural gas in these markets has grown over the last
three years due primarily to increased demand from electric generation companies and local distribution companies (LDCs). The major shippers on Tuscarora's system require transportation capacity to
meet their obligations to their customers but are not necessarily required to flow any gas through the system. As a result, Tuscarora's throughput is not indicative of its revenue generation. This is
discussed further under "Customers, Competition and Contracting".
Seasonality
North America
North American demand for natural gas is seasonal. In general, demand tends to be higher in the winter months for heating requirements and in the summer for power generation
demand to meet increased air conditioning or cooling requirements. The winter season is considered to be November through March, and the peak summer season is considered to be July through September.
Weather conditions throughout North America can significantly impact regional natural gas supply and demand. Moderate winter and summer temperatures can lead to a decline in the demand for
transportation service due to reduced demand for natural gas.
The
North American natural gas industry uses natural gas storage to balance the impacts of relatively steady natural gas supply with the seasonality of demand for natural
gas. In the spring and fall, when there is less demand for heating and cooling requirements, gas continues to be shipped through pipelines and is put into storage near market areas and in producing
regions for future use. Available storage capacity combined with price spreads between current and future pricing during certain periods of the year may make it more profitable to store the gas for
use in the future when the price for natural gas may be more favorable.
Gas
in storage in producing regions, such as the WCSB, may impact the supply of natural gas for transportation to market areas. During periods of storage injection, there
will be less supply available for transportation to market areas. Conversely, storage withdrawal provides additional supplies of natural gas for transportation to markets.
Gas
in storage near market areas also impacts the demand for transportation services. Transportation services are required to transport the natural gas from producing
regions to the market area. When the natural gas is in storage near the market area, the transportation required to meet market demand is reduced.
Levels
of natural gas in storage in North America have been growing over the past three years and were at five year highs at the end of 2009. As inventory levels in storage
fields approach maximum capacity, the demand for additional natural gas and associated transportation services is reduced. Market areas are less dependent upon supply from producing regions to meet
short-term demand when there is adequate natural gas stored nearby.
The
revenue associated with capacity that is contracted under long-term firm contracts is not impacted by seasonal throughput variations. The amount of
uncontracted (or available) transportation capacity as well as transportation
20
TC PIPELINES,
LP
capacity
under short-term contracts on a pipeline system determines the extent to which seasonal demand will impact a pipeline system's revenue. Revenues for pipeline systems that have a
higher ratio of long-term contracts (contracts with a duration of at least one year) will be impacted less by seasonal demand. Conversely, for those pipeline systems with more available
capacity, or operating under short-term contracts, fluctuations in demand between seasons can impact revenue. Additionally, a pipeline can generate revenue with interruptible or daily
sales of available capacity if a firm transportation customer does not utilize all of their contracted capacity. Pipeline systems which have a tariff that includes seasonal rates for
short-term service may be able to mitigate the potential negative impact of seasonal fluctuations in demand.
Our Pipeline Systems
Great Lakes
Great Lakes' design day capacity at the receipt point near Emerson, Manitoba
is approximately 2.5 billion cubic feet per day (Bcf/day) during the winter due to the ability to increase flow through gas turbine driven compressors during periods of low ambient
temperatures and 2.3 Bcf/day during the summer when ambient temperatures are higher.
The
transportation value across the Great Lakes pipeline system is normally at its highest in conjunction with storage fill requirements and electric power generation
demand. Great Lakes is connected to approximately 880 Bcf of working gas storage located at the Eastern end of the Great Lakes system in Michigan and Ontario, Canada. The demand for Great
Lakes' long haul transportation service is normally at its highest when natural gas is being delivered to storage areas. The high demand period usually begins in the spring and extends through most of
the summer. High levels of natural gas in storage throughout 2009 reduced the demand for Great Lakes' transportation services to fill market storage.
During
the winter, there is also strong demand for Great Lakes' services to meet the peak winter heating demand requirements of Northern Minnesota, Northern Wisconsin and
Michigan. These deliveries are met through Great Lakes' short haul, long haul, and backhaul transportation services from storage fields in Michigan and Ontario, Canada.
Great
Lakes experiences significant winter volatility in the utilization of its long haul transportation contracts due to downstream constraints on the Union Gas Limited and
TransCanada pipeline systems. When there are increases in natural gas withdrawn from the Eastern Michigan and Ontario, Canada storage fields to serve U.S. Northeast and Eastern Canadian
markets, constraints increase on downstream pipelines. These constraints may reduce shippers' ability to use Great Lakes' transportation services to serve Eastern markets and may reduce demand for
Great Lakes' transportation services during certain peak winter periods.
Approximately
90 per cent of Great Lakes' average design capacity was contracted on a long-term firm basis in 2009, compared to
89 per cent in 2008. As a result, Great Lakes had limited exposure to fluctuations in revenue due to seasonality. Reductions in the level of capacity under long-term
contracts will increase exposure to fluctuations in revenue from seasonal and short-term demand for transportation services. See further discussion under "Contracting" in this section for changes to
Great Lakes' contracting profile.
Northern Border
Demand for Northern Border's transportation services has
traditionally been the strongest during peak winter months to serve heating demand and peak summer months to serve electric cooling demand and storage injection.
Approximately
42 per cent of Northern Border's design capacity was contracted on a long-term firm basis in 2009, compared to
65 per cent in 2008. As a result, Northern Border has increased exposure to fluctuations in revenue due to seasonal demand factors.
Some
of Northern Border's exposure may be mitigated by its seasonal rate structure for short-term service that provides for higher maximum rates during
anticipated peak usage periods and lower maximum rates during anticipated periods of reduced demand. Approximately 27 per cent of Northern Border's design capacity was contracted on a
short-term basis in 2009 compared to 24 per cent in 2008.
2009 ANNUAL REPORT
21
North Baja
and
Tuscarora
Seasonal
fluctuations in revenue are minimal for these pipeline systems because their capacity is contracted on a long-term basis. See further discussion under "Contracting" in this section.
Supply
North America
The primary source of natural gas transported by our pipeline systems, except North Baja, is the WCSB. For this reason, the continuous supply of Canadian natural gas is crucial
to the long-term financial condition of our pipeline systems.
The
WCSB has remaining discovered natural gas reserves of approximately 61 trillion cubic feet and a reserves-to-production ratio of
approximately 11 years at current levels of production. Supply from the WCSB has declined in recent years due to reduced drilling activity in the basin related to lower natural gas prices,
higher supply costs, including higher royalties, and competition for capital from other North American gas production basins that have lower exploration costs. Drilling in the WCSB is expected to
recover in the ensuing years assuming that gas prices stabilize and that exploration and development costs become more economical.
The
net amount of natural gas exiting the WCSB is a significant factor affecting the volume of natural gas transported by our pipeline systems, except North Baja. "Gas
exiting the WCSB" is the term we use to represent the net of the supply of and demand for natural gas in the WCSB region. WCSB supply is made up of WCSB production with injections into WCSB storage
reducing net supply, and withdrawals from WCSB storage increasing supply. Gas exiting the WCSB is determined by:
-
-
WCSB
natural gas production levels;
-
-
Western
Canadian demand for WCSB natural gas; and
-
-
Western
Canadian storage capacity for WCSB natural gas and demand for storage injection.
The
extent to which gas exiting the WCSB will be transported on each pipeline system is affected by:
-
-
demand
for WCSB natural gas in various U.S. consumer markets;
-
-
available
transportation capacity and related market pricing options on our competitors' pipelines;
-
-
natural
gas from other supply sources that can be transported to our customer markets;
-
-
the
natural gas market price spread between the Alberta Hub in Canada and the applicable downstream market which reflects the relative supply of and demand for WCSB natural
gas in Canada and in the U.S.; and
-
-
storage
capacity in the U.S. and Canada and the related demand for storage injection or withdrawal.
Our Pipeline Systems
Great Lakes receives natural gas primarily from its interconnection with the TransCanada Mainline pipeline system. Gas received from the interconnection with the TransCanada
Mainline pipeline system near Emerson, Manitoba, Canada is WCSB supply. Great Lakes also transports natural gas from its interconnection with TransCanada's ANR pipeline system (ANR) and from storage
facilities. ANR is interconnected with numerous other pipelines, primarily sourcing gas from the Gulf of Mexico and Mid-Continent regions. The gas received from Great Lakes'
interconnection with ANR accounted for approximately 12 per cent of the natural gas Great Lakes transported in 2009.
Northern
Border receives natural gas primarily from its interconnection with one of TransCanada's pipelines at the Canadian border near Port of Morgan, Montana. Gas received
from this interconnection is WCSB supply. Northern Border also transports natural gas produced in the Williston Basin of Montana and North Dakota and the Powder River Basin of Wyoming and Montana,
which accounted for approximately 11 per cent of the natural gas Northern Border transported in 2009. Synthetic gas produced at the Dakota Gasification plant in North Dakota accounted
for another approximately eight per cent of the natural gas transported by Northern Border in 2009.
22
TC PIPELINES,
LP
TransCanada
is pursuing the Bison Pipeline Project, which is a proposed new interstate natural gas pipeline extending from the Powder River Basin producing region in Wyoming
to an interconnection with the Northern Border system in Morton County, North Dakota. The FERC issued a Final Environmental Impact Statement in December 2009 and the project is in the final
stages of the regulatory process. Pending these approvals, TransCanada
expects to commence construction in May 2010 and expects to place the project into service in late 2010. If completed, this project would bring approximately 407 MMcf/d of additional
supply from the Powder River Basin to Northern Border, which would increase Northern Border's supply diversity.
North
Baja receives natural gas from its interconnections with El Paso, which is primarily gas originating from the West Texas or Southern Rocky Mountain supply regions, and
Gasoducto Bajanorte, which would originate from the Costa Azul LNG facility in Mexico. To date, no gas has been transported on North Baja from its interconnection with Gasoducto Bajanorte.
Tuscarora
receives natural gas from its interconnection with GTN. GTN is interconnected with WCSB supply as well as natural gas from the Rockies and other
U.S. basins. A second interstate pipeline with the potential to interconnect to Tuscarora, Ruby Pipeline LLC (Ruby), is currently under development. If Ruby is constructed, it will
increase Tuscarora's access to natural gas from the Rockies and other U.S. basins.
CUSTOMERS, COMPETITION AND CONTRACTING
Customers
Our pipeline systems transport natural gas for a variety of customers including other natural gas pipelines, LDCs, industrial companies, electric power generation companies,
natural gas producers, and natural gas marketers. Each type of customer has a different reason for using certain natural gas transportation services and routes. LDCs, industrial companies and electric
power generation companies typically require a secure and reliable supply of natural gas over a sustained period of time to meet the needs of their customers. These types of shippers typically enter
into long-term firm transportation contracts to ensure a ready supply of natural gas and sufficient transportation capacity to meet their obligations to their customers over the life of
their contracts with their customers. Natural gas producers typically enter into firm transportation contracts to ensure that they will have sufficient capacity to deliver their product to market
centers. Natural gas marketers typically use transportation services to capitalize on natural gas price volatility and therefore tend to contract for shorter terms to increase their flexibility.
Great Lakes
The largest customer for Great Lakes' capacity is TransCanada, through
its Canadian mainline pipeline system. This capacity is used by TransCanada customers to transport WCSB gas to Eastern Canadian and U.S. markets. TransCanada's ANR pipeline system also holds
capacity on Great Lakes to integrate its Michigan storage locations with its Wisconsin pipeline segments. Great Lakes customers also include various LDCs, natural gas marketers and producers. Great
Lakes' customer profile is becoming more heavily weighted towards natural gas marketers and less towards producers and end users, such as industrial customers and LDCs.
For
the year ended December 31, 2009, contracts with TransCanada and its affiliates represented approximately 49 per cent of Great Lakes' revenue. Great
Lakes did not have any other customers contributing more than 10 per cent of its 2009 revenues. TransCanada has elected to turn back contracts for 361 MDth/d of capacity as of
October 31, 2010. This is discussed further under "Contracting".
Northern Border
Northern Border's main customers are natural gas producers and
marketers. Other customers include industrial facilities, LDCs and electric power generating companies.
For
the year ended December 31, 2009, contracts with BP Canada Energy Marketing Corp. and Tenaska Marketing Ventures represented approximately
17 per cent and 11 per cent, respectively, of Northern Border's revenue. Northern Border did not have any other customers contributing more than 10 per cent
of its 2009 revenues.
2009 ANNUAL REPORT
23
North Baja
North Baja's main customers are electric power generating companies and
natural gas marketers.
North
Baja's revenues are dependent upon a relatively small group of customers. For the year ended December 31, 2009, the following shippers had contracts which
contributed revenues in excess of 10 per cent of North Baja's overall revenues (including the period prior to the Partnership's July 1, 2009 acquisition of North Baja):
Sempra LNG Marketing Corp.
|
32%
|
|
|
Shell Energy North America
|
19%
|
|
|
Energia Azteca
|
15%
|
|
|
Gasoducto Rosarito
|
12%
|
|
|
Termoelectrical de Mexicali
|
11%
|
|
|
Tuscarora
Tuscarora's main customers are a power generation
company and an LDC, along with a variety of industrial, commercial, and other companies.
For
the year ended December 31, 2009, contracts with Sierra Pacific Power Company and Southwest Gas Corporation contributed approximately 76 per cent
and 11 per cent, respectively, of Tuscarora's revenue. Tuscarora did not have any other customers contributing more than 10 per cent of its 2009 revenues.
Competition
Competition among natural gas pipelines is based primarily on transportation rates and proximity to natural gas supply areas and markets. Our pipeline systems face competition
at both the supply and market ends of their pipeline systems. At the supply end, other pipelines access the WCSB and provide alternative routes for shippers to access markets served by our systems or
take gas to markets not served by our pipeline systems. Competition at the market end comes from WCSB natural gas which may be transported through alternative pipeline systems as well as from natural
gas sourced from other U.S. supply basins, including shale gas, which can be transported by other pipelines into our pipeline systems' market areas. Our North Baja pipeline system is not
connected to the WCSB and therefore is not sensitive to WCSB competitive factors.
Reductions
in gas exiting the WCSB over recent years have resulted in excess pipeline capacity serving the WCSB. As a result, there has been an increase in competition for
gas exiting the WCSB. We anticipate there will be excess natural gas pipeline capacity serving the WCSB for the foreseeable future and therefore competition for gas exiting the WCSB will continue.
Commencing January 1, 2010, one of the main pipelines accessing the WCSB, the TransCanada Mainline pipeline system, increased its rates for firm transportation services by
40 per cent. This may improve the relative competitive position of the other pipelines accessing the WCSB, including our Great Lakes and Northern Border pipeline systems.
New
natural gas supplies from unconventional sources, such as shale, and new pipeline projects in the U.S. moving additional natural gas supply from the Rockies basin
and from the Barnett Shale have increased the supply competition in the markets served by our pipeline systems. This additional supply delivered to Midwest and Eastern markets is displacing
traditional supply in the markets served by our pipeline systems.
Great Lakes
Great Lakes' principal business comes from its position as a link in the
chain of pipelines that facilitate the transportation of natural gas from WCSB to Midwest and Northeast U.S. markets and Eastern Canadian markets. Natural gas is transported by TransCanada from
Western Canada to near Emerson, Manitoba, Canada. Great Lakes provides transportation from Emerson to the TransCanada system at St. Clair, Ontario. TransCanada transports the gas received at
St. Clair to Dawn, Ontario, Canada and points further east. The primary competition for Great Lakes is the alternate route from Western Canada to Dawn on TransCanada's Mainline. Other routes
from Western Canada to Ontario, Canada, are the Foothills Pipeline to Northern Border to Vector Pipeline route, or the Alliance Pipeline which
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also
interconnects with the Vector Pipeline. In addition, gas can be delivered to the markets served by Great Lakes by competing pipelines that have access to alternate sources of supply from the
Rockies, Mid-Continent and Gulf Coast.
Northern Border
Northern Border's system competes for natural gas supply with other
pipelines that transport WCSB natural gas to markets in the West, Midwest and East in North America. The pipeline systems that offer primary competition in these markets include Alliance Pipeline,
Great Lakes, GTN, and other pipelines that interconnect with the TransCanada Mainline for WCSB supply. Northern Border also has competition in its market areas from other pipelines that have access to
natural gas storage facilities, and alternate sources of supply from the Rockies, Mid-Continent, Permian Basin and Gulf Coast, as well as LNG. The pipeline systems that deliver natural gas
from competing supply sources include Northern Natural Gas Company in Northern Border's Ventura, Iowa market area and ANR, Midwestern Gas Transmission Company and Natural Gas Pipeline of America in
the Chicago market region.
Increased
competition in the Chicago market can impact the Ventura market. In the face of this competition, Northern Border customers with firm service to the Chicago market
may increase deliveries to the Ventura market, thereby reducing Northern Border's ability to capture additional transportation revenues to Ventura.
The
combination of growing supply from the Rockies and shale developments reaching the Chicago market region through new and available pipeline capacity, and reductions in
demand resulting from the current economic environment has negatively impacted Northern Border's ability to contract available capacity to Ventura and Harper. The impact of these competitive factors
is expected to continue in 2010. Northern Border's contracting position is discussed further under "Contracting".
North Baja
North Baja's southbound deliveries into Mexico will compete with LNG
deliveries from the Energia Costa Azul terminal when supply is received at that terminal. Shippers retain contracts on North Baja to be able to provide service to several power plants in Baja
California, Mexico at times when LNG sourced gas from the Costa Azul terminal is unavailable. As well, North Baja provides a critical path for LNG from the Energia Costa Azul terminal to reach markets
in the southwestern United States, once cargos of LNG are received at this terminal.
Tuscarora
Tuscarora's primary competition in the Northern Nevada natural gas
transportation market is with Paiute Pipeline Company (Paiute), owned by Southwest Gas Co. Paiute interconnects with Northwest Pipeline Corp. at the Nevada-Idaho border and transports natural
gas from British Columbia, Canada and from the Rockies to the Northern Nevada market.
Contracting
Transportation contracts mature at varying times and for varying amounts of throughput capacity. As existing contracts on our pipeline systems approach their expiration dates,
efforts are made to extend and/or renew the contracts. The ability to extend and/or renew expiring contracts will depend upon competitive alternatives, the regulatory environment, and market and
supply factors. The length of new or renegotiated contracts will be affected by current market price spreads, transportation rates, competitive conditions, levels of available pipeline capacity, and
judgments concerning future market trends and volatility. Customer liquidity and capital constraints can also impact the length of contracts. If market conditions are not favorable at the time of
renewal, transportation capacity may remain available until market conditions become more favorable. Subject to regulatory requirements, our pipeline systems attempt to recontract or remarket their
capacity at the maximum rates allowed under their tariffs. However, a pipeline system may discount capacity under certain circumstances in order to maximize revenue.
Increased
competition within the North American natural gas industry has resulted in a trend towards shorter term contracting as customers assess and choose the markets
which optimize their netback prices.
2009 ANNUAL REPORT
25
Great Lakes
For the year ended December 31, 2009,
Great Lakes' average contracted capacity compared to average design capacity was 100 per cent. Great Lakes had long-term firm transportation contracts for
89 per cent of its average design capacity with a weighted average remaining contract life of 2.0 years, as at January 31, 2010. On November 1, 2010, the
per cent of average design capacity contracted on a firm basis decreases to 68 per cent.
Great
Lakes had approximately 990 MDth/d of long haul capacity expiring on October 31, 2010, of which 831 MDth/d, representing 36 per cent
of Great Lakes' average design capacity, was contracted with TransCanada. On November 3, 2009, Great Lakes and TransCanada renewed contracts through October 31, 2011 for
470 MDth/d of capacity, or 20 per cent of average design capacity, some at a slightly discounted rate, and agreed that Great Lakes would provide other transportation services.
TransCanada elected to turn back 361 MDth/d, or 16 per cent of average design capacity, as of October 31, 2010. Of the remaining long haul capacity expiring on
October 31, 2010, 125 MDth/d was turned back.
In
addition to the long haul capacity expiries, Great Lakes has an additional 110 MDth/d of short haul capacity under contract expiring on October 31, 2010.
The cost and revenue study filed by Great Lakes with the FERC on February 4, 2010 reflects the increased risk of de-contracting on the Great Lakes system. Great Lakes is discounting
transportation capacity as needed to optimize revenue. Refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
Northern Border
For the year ended December 31, 2009,
Northern Border's average contracted capacity compared to design capacity was 68 per cent. Some of this capacity was sold at a discount to maximize overall revenue on the Port of Morgan,
Montana to the Ventura and Harper, Iowa portions of the pipeline. As of January 31, 2010, Northern Border had long-term firm transportation contracts for 69 per cent
of its design capacity in the first quarter of 2010, decreasing to 36 per cent beginning in the second quarter of 2010 following contract maturities. The weighted average remaining
contract life at January 31, 2010 was 1.9 years. Northern Border expects to continue to discount transportation capacity as needed to optimize revenue. Refer to Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
Shippers
on the Bison Pipeline project, a project sponsored by TransCanada, have executed 10 year contracts for approximately 407 MMcf/d of capacity on the
Northern Border system from Port of Morgan, Montana to Ventura, Iowa, commencing on the in-service date of the Bison Pipeline project. If the Bison Pipeline project is completed, this
would increase Northern Border's average contracted capacity and weighted average contract life.
North Baja
Due to North Baja's bi-directional nature, it has the ability
to accept receipts at both ends of its system. North Baja's average contracted capacity for the year ended December 31, 2009 was 79 per cent of southbound capacity and
64 per cent of northbound capacity. As at January 31, 2010, North Baja had long-term firm transportation contracts for 79 per cent of its capacity for
southbound receipts and 64 per cent of its capacity for northbound receipts, with a combined weighted average remaining life of the contracts of 16.7 years.
Tuscarora
Tuscarora's average contracted capacity for the
year ended December 31, 2009 was 99 per cent. Tuscarora had long-term firm transportation contracts for approximately 97 per cent of its design capacity
with a weighted average remaining contract life of 10.6 years, as at January 31, 2010.
REGULATORY ENVIRONMENT
Government Regulation
Great Lakes, Northern Border, North Baja and Tuscarora are regulated under the Natural Gas Act of 1938, Natural Gas Policy Act of 1978, and Energy Policy Act of 2005, which
give the FERC jurisdiction to regulate virtually all aspects of their businesses, including:
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-
-
transportation
of natural gas;
-
-
rates
and charges;
-
-
terms
of service and service contracts with customers, including creditworthiness requirements;
-
-
certification
and construction of new facilities;
-
-
extension
or abandonment of service and facilities;
-
-
accounts
and records;
-
-
depreciation
and amortization policies;
-
-
acquisition
and disposition of facilities;
-
-
initiation
and discontinuation of services; and
-
-
standards
of conduct for business relations with certain affiliates.
Rate Proceeding, Great Lakes
On November 19, 2009, the FERC issued an order in
FERC Docket No. RP10-149 (November 2009 Order) instituting an investigation pursuant to Section 5 of the Natural Gas Act (GL Rate Proceeding). The FERC alleged, based
on a review of certain historical information, that Great Lakes' revenues might substantially exceed Great Lakes' actual cost of service and therefore may be unjust and unreasonable. On
February 4, 2010, Great Lakes filed a cost and revenue study (GL Cost and Revenue Study) in response to the November 2009 Order. The GL Cost and Revenue Study supports Great
Lakes' current rates, and shows that if Great Lakes filed to reset its rates, these rates should be above Great Lakes' current rates. The GL Cost and Revenue Study reflects the increased risk of
de-contracting on the Great Lakes system which
may result in decreases to overall long-term, daily and short-term firm transportation revenues, and interruptible transportation revenues, as compared to prior periods.
In
the absence of a settlement, a hearing in the GL Rate Proceeding is scheduled for early August 2010 and an initial decision by the Administrative Law Judge is
expected in November 2010. Should the FERC determine as a result of these proceedings, that Great Lakes' rates are not just and reasonable, the FERC could order Great Lakes to reduce
its rates prospectively.
Rate Case, Northern Border
In November 2006, the FERC approved the settlement
with Northern Border's customers of its 2005 rate case effective January 1, 2007. The settlement established maximum long-term mileage-based rates and charges for transportation on
Northern Border's system. The settlement also provided for seasonal rates for short-term transportation services. Pursuant to the terms of the settlement, there was a moratorium on the
parties to the settlement of raising any proceeding regarding Northern Border's currently effective rates until January 1, 2010 and Northern Border must file a rate case on or before
December 31, 2012.
Cost and Revenue Study, Tuscarora
As a result of an obligation to file a cost
and revenue study with the FERC, the Public Utilities Commission of Nevada and Sierra Pacific Power Company agreed to a settlement with Tuscarora, which was approved by the FERC in July 2006.
The settlement resulted in a firm transportation rate of $0.40/decatherm per day (Dth/d) beginning June 1, 2006 and included a moratorium on all rate actions before the FERC by any party to the
settlement until May 31, 2010. The settlement includes a moratorium by the settlement parties on rate actions related to expansion projects where Tuscarora proposes to price the expansion at
the settlement rate.
Cost and Revenue Study, North Baja
North Baja's
jurisdictional rates were established as part of its original certificate authorization in January 2002. North Baja subsequently filed a cost and revenue study (as required by its
certificate authorization) in August 2004, which was accepted by the FERC in December 2004 without change to North Baja's approved rates. North Baja continues to operate under the rates
approved in 2004 and has no requirement to file a new rate proceeding.
2009 ANNUAL REPORT
27
The
FERC initiates regulatory changes through orders intended to create a more competitive environment in the natural gas marketplace. Among the most important of these
orders on our pipelines are:
Income Tax Allowance
In December 2007, the FERC issued an order which upheld
and clarified its methodology for determining a partnership's income tax allowance in a rate case. In the future,
partnerships will be required to prove (1) that their partners have an actual or potential income tax liability, which is determined by the partner's obligation to file a return that
recognizes either a taxable gain or loss; (2) their partners' marginal Federal income tax rates, if higher than the commission's default rates of 28 per cent for individuals and
34 per cent for corporations; and (3) the partners' marginal state income tax rates. If the FERC were to disallow a portion of the income tax allowance for one of our pipeline
systems in a rate case, it may cause its recourse rate to be set at a level that is lower than the level otherwise in effect.
Composition of Proxy Groups for Rates of Return Determinations
In July 2007,
the FERC issued a policy statement proposing to update its standards regarding the composition of proxy groups for determining the appropriate returns on equity (ROE) for natural gas and oil
pipelines, which is used by pipelines to establish rates for services. In April 2008, the FERC issued a policy statement (2008 Policy Statement) that allows master limited partnerships (MLPs)
to be included in a proxy group used to determine a pipeline's ROE. The 2008 Policy Statement provides that there should be no cap on the level of distributions included in the current Discounted Cash
Flow (DCF) methodology for MLPs, but there should be an adjustment to the long-term growth rate used to calculate DCF for an MLP (halving the long-term GDP factor which has a
one-third weighting in the total growth rate computation in the DCF methodology).
The
impact of applying this new policy to each of our pipeline systems will not be known until each pipeline system files a rate case.
Energy Affiliates
In October 2008, the FERC issued Order No. 717,
Standards of Conduct for Transmission Providers, which amended the regulations adopted on an interim basis in Order No. 690 to refocus the rules on the areas where there is the greatest
potential for abuse; the day-to-day transmission transactions and operations that may involve marketing affiliates. This order identifies those affiliate relationships where
there is the greatest potential and risk for undue discrimination and preference between a natural gas pipeline company and their marketing affiliates. The rule subjects the natural gas pipeline
company to certain restrictions to function independently and not act as a conduit of transmission information to a marketing affiliate.
Promotion of a More Efficient Capacity Release Market Docket No.
RM08-1
In June 2008, the FERC issued a final rule to modify capacity release regulations (Capacity Release Final
Rule). The Capacity Release Final Rule, in addition to other items, allows market-based pricing for short-term capacity releases by shippers through a permanent lifting of the maximum rate
cap on short-term capacity releases (of one year or less terms). The Capacity Release Final Rule was effective July 30, 2008.
While
implementation of the Capacity Release Final Rule is not expected to have a significant impact on our pipeline systems, the Interstate Natural Gas Association of
America (INGAA), of which our pipeline systems are members, filed in July 2008 a request for rehearing of the Capacity Release Final Rule, contending that as the FERC removed the rate cap for
short-term released capacity, it should also remove the rate cap for short-term pipeline capacity. INGAA notes that short-term released capacity and
short-term pipeline capacity compete in the same market, and argues that removing the rate cap for short-term released capacity and maintaining the cap for
short-term pipeline capacity results in a bifurcated and distorted short-term capacity market. In November 2008, the FERC issued Order
No. 712-A addressing requests for clarification and rehearing. In that order, the FERC denied INGAA's request for rehearing and continued to maintain that the maximum rate ceilings
for pipeline short-term transactions is necessary to protect against the potential exercise of market power. On January 15, 2009, INGAA filed an appeal of FERC's order which is
pending before the U.S. Court of Appeals D.C. Circuit.
Compliance with Statutes, Regulations, and Orders Docket No.
PL09-1-000
In October 2008, the FERC issued a "Policy Statement on Compliance" to provide additional
guidance to the public on compliance with governing statutes,
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regulations
and orders. The policy statement sets forth the following factors which will be considered when deciding to reduce or eliminate civil penalties for violations: 1) the role of senior
management in fostering compliance; 2) effective preventive measures to ensure compliance; 3) prompt detection, cessation, and reporting of violations; and 4) remediation efforts.
Environmental Matters
All of our pipeline systems' operations are subject to stringent and complex federal, state, and local laws and regulations governing environmental protection, including air
emissions, water quality, wastewater discharges, and solid waste management. Such laws and regulations generally require natural gas pipelines to obtain and comply with a wide variety of environmental
registrations, licenses, permits, and other approvals. These laws and regulations also can restrict or impact business activities in many ways, such as restricting the way wastes are handled or
disposed of; requiring remedial action to mitigate pollution conditions that may be caused by its operations or that are attributable to former operators; and enjoining some or all of the operations
of facilities deemed in non-compliance with permits issued pursuant to such environmental laws and regulations. Failure to comply with these laws and regulations may result in the
assessment of administrative, civil and/or criminal penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations.
Waste Management
The operations of our pipeline systems generate hazardous and
non-hazardous solid wastes that are subject to the federal Resource Conservation and Recovery Act (RCRA) and comparable state laws, which impose detailed requirements for the handling,
storage, treatment and disposal of hazardous and non-hazardous solid wastes. For instance, RCRA prohibits the disposal of certain hazardous wastes on land without prior treatment, and
requires generators of wastes subject to land disposal restrictions to provide notification of pre-treatment requirements to disposal facilities that are in receipt of these wastes.
Generators of hazardous wastes also must comply with certain standards for the accumulation and storage of hazardous wastes, as well as with recordkeeping and reporting requirements applicable to
hazardous waste storage and disposal activities.
Site Remediation
The Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA), also known as "Superfund", and comparable state laws and regulations impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons
considered to be responsible
for the release of hazardous substances into the environment. These persons include the current and past owner or operator of the site where the release occurred, and anyone who disposed or arranged
for the disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have
been released into the environment, for damages to natural resources and for the costs of certain health studies.
Our
pipeline systems currently own or lease properties that for many years have been used for the transportation and compression of natural gas. These properties and the
substances released on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, our pipeline systems could be required to remove any previously disposed wastes, including waste
disposed of by prior owners or operators; remediate contaminated property, including groundwater contamination, whether from prior owners or operators or other historic activities or spills; or
perform remedial closure operations to prevent future contamination.
Air Emissions
The Clean Air Act (CAA) and comparable state laws regulate emissions of
air pollutants from various industrial sources, including compressor stations, and also impose various monitoring and reporting requirements. Such laws and regulations may require
pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in an increase of existing air emissions; application for,
and strict compliance with, air permits containing various emissions and operational limitations; or the utilization of specific emission control technologies to limit emissions.
By
letter dated December 28, 2009, the U.S. Environmental Protection Agency (EPA) required Great Lakes to provide information regarding its natural gas
compressor stations in the states of Minnesota, Wisconsin and Michigan as part of
2009 ANNUAL REPORT
29
the
EPA's investigation of Great Lakes compliance with the CAA. Great Lakes is in the process of preparing its response and providing the information, all of which is due by
May 29, 2010. The results of this information request is not determinable at this time.
On
February 2, 2009, Northern Border received a Notice of Violation (NOV) from the EPA alleging that Northern Border was in violation of certain regulations pursuant
to the CAA regarding a compressor station on its system. Northern Border disputes the NOV. At this time, Northern Border is unable to reasonably estimate the cost of any associated corrective action
or the possibility or amount of any penalty, but does not expect such amounts to be material to its financial condition.
Climate Change
The U.S. Congress is actively considering legislation to reduce
emissions of greenhouse gases. In addition, several states have developed initiatives to regulate emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission
inventories and/or regional greenhouse gas cap and trade programs. The EPA has released a finding that said that greenhouse gases are air pollutants under the CAA. The EPA has drafted regulations to
reduce greenhouse gas emissions. It is uncertain whether the EPA will proceed with adopting final rules or whether the regulation of greenhouse gases will be addressed in federal legislation.
Passage
of climate control legislation or other regulatory initiatives by Congress or various states of the U.S. or the adoption of regulations by the EPA or analogous state
agencies that regulate or restrict emissions of greenhouse gases, including methane or carbon dioxide, in areas in which our pipeline systems conduct business, could result in changes to the
consumption and demand for natural gas. This could have adverse effects on our business, financial position, results of operations and prospects. Such changes could increase the costs of our pipeline
systems' operations, including costs to operate and maintain facilities, install new emission controls, acquire allowances to authorize our pipeline systems' greenhouse gas emissions, pay any new
taxes related to greenhouse gas emissions, and administer and manage a greenhouse gas emissions program. While we may be able to include some or all of such increased costs in the rates charged by our
pipelines or to our customers, such recovery of costs is uncertain and may depend on events beyond our control including the outcome of future rate proceedings before the FERC, and the provisions of
any final legislation.
Water Discharges
The Clean Water Act (CWA) and analogous state laws impose strict
controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the U.S. The discharge of pollutants into regulated waters is
prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and
fill material into regulated waters, including wetlands, unless authorized by an appropriately issued permit. Federal and state regulatory agencies may impose administrative, civil and criminal
penalties for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.
Activities on Federal Lands
Natural gas transportation activities are subject to the
National Environmental Policy Act (NEPA). NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions having the potential to significantly impact the
environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if
necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. The current activities of our pipeline systems, as well as any proposed
plans for future activities, on federal lands are subject to the requirements of NEPA.
Safety Matters
Pipeline Safety
The operations of our pipeline systems are also regulated by the
U.S. Department of Transportation with respect to their design, installation, testing, construction, operation, replacement and management. The Transportation Security Administration oversees
the regulation related to the security of our pipeline systems. The Pipeline Safety Improvement Act of 2002 requires pipeline companies to perform integrity assessments on pipeline
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segments
that exist in densely populated areas or near specifically identified sites that are designated as high consequence areas. Pipeline companies are required to perform the integrity assessments
within ten years of the date of enactment and perform subsequent integrity assessments on a seven-year cycle. In addition to the pipeline integrity tests, pipeline companies must implement
a qualification program to make certain that employees are properly trained.
In
general, there are proposed and existing industry regulations related to the operation of our pipeline systems with respect to safety and environmental standards that
could increase our costs in the future. Such increases in costs cannot be accurately estimated at this time.
Title to Properties
We believe that our pipeline systems hold all rights, titles and interests in their respective pipeline systems. With respect to real property, our pipeline systems own sites
for compressor stations, meter stations, pipeline field offices, microwave towers and a corporate office. Our pipeline systems also derive interests from leases, easements,
rights-of-way, permits and licenses from landowners or governmental authorities permitting land use for construction and operation of their pipelines.
Great Lakes
Approximately 74 miles of Great Lakes' pipeline system are located
within the boundaries of three Indian reservations: the Leech Lake Chippewa Indian Reservation and the Fond du Lac Chippewa Indian Reservation in Minnesota, and the Bad River Chippewa Indian
Reservation in Wisconsin. In 1968, Great Lakes obtained right-of-way across allotted lands located within each of the reservation's boundaries. All of the allotted lands are
subject to a 50 year easement granted by the Bureau of Indian Affairs (BIA) for and on behalf of the individual Indian owners or the reservations. These tracts are subject to
right-of-way permits issued by the BIA that expire in 2018. Also, the Great Lakes pipeline crosses approximately 1,000 feet in two tracts in Lower Michigan, which are
located within the Chippewa Indian Reservation, under perpetual easements.
Northern Border
Approximately 90 miles of Northern Border's pipeline system
are located within the boundaries of the Fort Peck Indian Reservation in Montana. In 1980, Northern Border entered into a pipeline right-of-way lease with the Fort Peck Tribal
Executive Board on behalf of the Assiniboine and Sioux Tribes of the Fort Peck Indian Reservation. This pipeline right-of-way lease granted Northern Border the right to
construct and operate its pipeline on certain tribal lands. The pipeline right-of-way lease expires in 2011, with an option to renew the pipeline
right-of-way lease through 2061. In conjunction with obtaining a right-of-way across tribal lands located within the exterior boundaries of the Fort
Peck Indian Reservation, Northern Border also obtained right-of-way across allotted lands located within the reservation boundaries. Most of the allotted lands are subject to a
perpetual easement granted by the BIA for and on behalf of the individual Indian owners or obtained through condemnation. Several tracts are subject to a right-of-way grant
that expires in 2015.
Insurance
The Partnership's operations and activities are insured under TransCanada insurance programs, including property insurance, liability, automobile liability and workers
compensation, in amounts which management believes are reasonable and appropriate.
Employees
The Partnership does not have any employees. In addition, none of our pipeline systems directly employ any of the persons responsible for managing or operating the pipeline
systems or for providing them with services related to their day-to-day business affairs. Subsidiaries of TransCanada are the operators of our pipeline systems, in addition to
providing services to the Partnership.
2009 ANNUAL REPORT
31
AVAILABLE INFORMATION
Our website is www.tcpipelineslp.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those
reports, as soon as reasonably practicable after electronically filing or furnishing such reports with the Securities and Exchange Commission (SEC). Information contained on our web site is not part
of this report.
Item 1A. Risk Factors
Cautionary Statement Regarding Forward-Looking Information
A number of statements made by TC PipeLines, LP (the Partnership) in this Form 10-K filing are forward-looking and relate to, among
other things, anticipated financial performance, regulatory actions, 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. All forward-looking statements are based on the Partnership's current beliefs as well as assumptions made by and information
currently available to the Partnership. These statements reflect the Partnership's current views with respect to future events. The Partnership assumes no obligation to update any such forward looking
statements to reflect events or circumstances occurring after the date hereof. Words such as "anticipate," "believe," "estimate," "expect," "plan," "intend," "forecast," and similar expressions,
identify forward-looking statements. By its nature, such forward-looking information is subject to various risks and uncertainties, including the risk factors discussed below, which could cause the
Partnership's 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.
Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are
subject are similar to those that would be faced by a corporation engaged in a similar business. All of the information included in this report and any subsequent reports we may file with the SEC or
make available to the public should be carefully considered and evaluated before investing in any securities issued by us.
Each of the risks and uncertainties described below could lead to events or circumstances that may have a material adverse effect on our business,
financial condition, results of operations and cash flows, including our ability to make distributions to our unitholders.
The risks referred to herein disclose risks inherent in the Partnership and our pipeline systems.
Risks Inherent in Our Business
The long-term financial conditions of our pipeline systems, except North Baja, are dependent on the continued availability of gas exiting
the WCSB and the market demand for these volumes. Competition from pipelines that deliver natural gas from other supply sources to our pipeline systems' market areas could cause our pipeline systems
to discount their rates or otherwise experience a reduction in their revenues.
The development of additional natural gas reserves requires 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 our pipeline systems. High exploration and
production costs, low prices for natural gas, regulatory limitations such as royalty frameworks, and competition for capital from other North American gas production basins that have lower exploration
costs has adversely affected the development of additional reserves in Western Canada and the production in the WCSB in 2009 and may continue to do so in 2010.
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Gas
exiting the WCSB depends in part on the internal demand for Western Canadian natural gas. Western Canadian demand may increase as a result of increased demand for
natural gas fired electricity generation and other industrial requirements, including the development of oil sands projects, which may require substantial amounts of natural gas. This higher internal
demand may reduce the amount of gas available for downstream markets. In the longer term, a portion of the Alberta Hub gas supply may come from the development of recently discovered natural gas shale
resources such as Montney and Horn River in Western Canada and from proposed gas pipelines from the North Slope of Alaska and the Mackenzie Delta of Canada. Cancellation, changes in route, and delays
in the construction of such pipelines or such projects could adversely affect gas exiting the WCSB in the long term.
If
the availability of Alberta Hub natural gas was to decline, existing shippers on our pipeline systems, except North Baja, may be unlikely to extend their contracts and
our pipeline systems may be unable to find replacement shippers for lost capacity. Furthermore, additional natural gas reserves may not be developed in commercial quantities and in sufficient amounts
to fill the capacities of each of our pipeline systems.
Customers
may not extend their contracts or contract for transportation if the cost of delivered natural gas from other producing regions into the markets served by our
pipeline systems is lower than the cost of natural gas delivered by our pipeline systems.
An
increase in competition in the key markets served by our pipeline systems could arise from new ventures or expanded operations from existing competitors. The combination
of growing supply from the Rockies and shale developments reaching the Chicago market region through both new and available pipeline capacity and demand destruction from the economic environment has
the potential to maintain competitive pressures on WCSB supply into the Midwest. Northern Border is fully contracted on its Eastern system that deliveries gas to Chicago; however, any reduction in
flows to this market will impact the supply and demand fundamentals at the Ventura market.
Northern Border has experienced reduced demand for its transportation services due to these competitive factors with only 68 per cent of its capacity contracted in 2009, down from
90 per cent in 2008, and certain of Great Lakes capacity has not been renewed beyond 2010 with 486 thousand dekatherms per day (MDth/d) of long haul capacity and approximately
110 MDth/d of short haul capacity under contracts expiring on October 31, 2010.
Our
financial performance depends to a large extent on the capacity contracted on our pipeline systems. Decreases in the volumes transported by our pipeline systems, whether
caused by supply or demand factors in the markets these pipeline systems serve, competition or otherwise, can directly and adversely affect our business, financial position, results of operations, and
ability to make distributions.
Our pipeline systems may not be able to maintain existing customers or acquire new customers when the current shipper contracts expire or customers may
recontract for shorter periods or at less than maximum rates.
The ability to extend and replace contracts on terms comparable to prior contracts or on any terms at all could be adversely affected by factors, including:
-
-
the
available supply of natural gas in Canada and the U.S.;
-
-
competition
from alternative sources of supply in the U.S.;
-
-
competition
from other pipelines, including through their transportation rates or through their access to upstream supplies, as well as the proposed construction by other
companies of additional pipeline capacity;
-
-
the
price of, and demand for, natural gas in markets served by our pipeline systems;
-
-
the
liquidity and willingness of shippers to contract for transportation services; and
-
-
regulatory
actions.
Ongoing
changes in these factors and customers' ability to adjust to changing market conditions may cause Great Lakes and Northern Border to sell a significant portion of
available capacity on a short-term basis. The weighted average lives of Great Lakes' and Northern Border's contracts have generally declined over time. As at January 31, 2010, the
2009 ANNUAL REPORT
33
weighted
average remaining lives of Great Lakes' and Northern Border's contracts were 2.0 years and 1.9 years, respectively. Some of Great Lakes capacity has not been renewed beyond 2010
with 486 MDth/d of long haul capacity and approximately 110 MDth/d of short haul capacity under contracts expiring on October 31, 2010.
Additionally,
when the forward natural gas basis differentials do not support maximum rates, Great Lakes and Northern Border sell portions of their capacity at discounted
rates. Great Lakes' and Northern Border's inability to renew existing contracts at maximum rates, or at all, or to enter into new long-term shipper contracts for upcoming excess capacity
will have an adverse impact on their revenues and, as a result, cash distributions made to us.
Our pipeline systems are subject to regulation by agencies, including the FERC, which could have an adverse impact on our ability to establish
transportation rates that would allow recovery of the full cost of operating our pipeline systems, including a reasonable return, and our ability to make distributions.
Under the Natural Gas Act (NGA), interstate transportation rates must be just, reasonable and not unduly discriminatory. Our pipeline systems are subject to extensive
regulation by the FERC, the U.S. Department of Transportation, and other federal, state and local regulatory agencies. Regulatory actions taken by these agencies have the potential to adversely
affect our pipeline systems' profitability. Federal regulation extends to such matters as:
-
-
rates
and charges;
-
-
operating
terms and conditions of service including creditworthiness requirements;
-
-
types
of services our pipeline systems may offer to their customers;
-
-
construction
of new facilities;
-
-
extension
or abandonment of service and facilities;
-
-
accounts
and records;
-
-
depreciation
and amortization policies;
-
-
income
tax allowance policies;
-
-
acquisition
and disposition of facilities;
-
-
initiation
and discontinuation of services;
-
-
standards
of conduct business relations with certain affiliates; and
-
-
integrity
and safety of our pipeline systems and related operations.
Given
the extent of regulation by the FERC and potential changes to regulations, we cannot predict:
-
-
the
federal regulations under which our pipeline systems will operate in the future;
-
-
the
effect that regulation will have on financial position, results of operations and cash flows of our pipeline systems and ourselves; or
-
-
whether
our cash flow will be adequate to make distributions to unitholders.
Tuscarora
is currently operating under a rate settlement which precludes a party to the rate settlement from bringing any rate actions prior to May 31, 2010. Northern
Border is required to file a new rate proceeding on or before December 31, 2012.
The
FERC has instituted an investigation (GL Rate Proceeding), pursuant to Section 5 of the NGA, against Great Lakes alleging that Great Lakes' revenues might
substantially exceed Great Lakes' actual cost of service and therefore may be unjust and unreasonable. Great Lakes filed a cost and revenue study in the GL Rate Proceeding that shows that restated
rates on Great Lakes' system should be above Great Lakes' current rates. The cost and revenue study reflects the increased risk of de-contracting on the Great Lakes system which may result
in decreases to overall long-term, daily and short-term firm transportation revenues, and interruptible transportation revenues, as compared to prior periods.
34
TC PIPELINES,
LP
In
the absence of a settlement, a hearing in the GL Rate Proceeding is scheduled for early August 2010 and an initial decision by the Administrative Law Judge is
expected in November 2010. Should the FERC determine as a result of these proceedings, that Great Lakes' rates are not just and reasonable; the FERC could order Great Lakes to reduce its rates
prospectively, which could adversely affect the cash distributions made to us.
Action
by the FERC on currently pending regulatory matters as well as matters arising in the future could adversely affect our pipeline systems' abilities to establish or
charge rates that would cover future increase in their costs, such as additional costs related to environmental matters including any climate change regulation, or even to continue to collect rates
that cover current costs, including a reasonable return. We cannot assure unitholders that our pipeline systems will be able to recover all of their costs through existing or future rates.
Should
our pipeline systems fail to comply with all applicable FERC administered statutes, rules, regulations and orders, our pipeline systems could be subject to
substantial penalties and fines. Under the Energy Policy Act of 2005, the FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1 million per day
for each violation.
Finally,
we cannot give any assurance regarding the future regulations under which our pipeline systems will operate their natural gas transportation businesses or the
effect such regulations could ultimately have on our financial condition, results of operations and cash flows.
If our pipeline systems do not maintain their respective rate bases, the amount of revenue attributable to the return on the rate base they collect from
their shippers will decrease over time.
Our 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. In the absence of additions to the rate base through capital expenditures, the amount they collect from customers, as a result of a rate case, decreases as the
rate base declines due to, among other things, depreciation and amortization.
Cash distributions are dependent primarily on our cash flow, financial reserves and working capital borrowings.
Cash distributions are not dependent solely on our profitability, which is affected by non-cash items. Therefore, we may make cash distributions during periods when
losses are reported and may not make cash distributions during periods when we report profits.
Factors
that affect the actual amount of cash that we will have available for distribution to our unitholders include the following:
-
-
the
amount of cash set aside and the adjustment in reserves made by our general partner in its sole discretion;
-
-
the
level of capital expenditures made by our pipeline systems;
-
-
the
required principal and interest payments on our debt, retirement of debt and other liabilities including cost of acquisitions;
-
-
the
amount of cash distributed to us by the entities in which we own a non-controlling interest;
-
-
our
ability to borrow funds and access capital markets, including the issuance of debt and equity securities; and
-
-
restrictions
on distributions contained in debt agreements.
We are dependent on our pipeline systems to generate sufficient cash to enable us to pay distributions.
The amount of cash we have on a quarterly basis to distribute to our common unitholders depends upon numerous factors, most of which are beyond our control and the control of
our general partner, including:
-
-
the
rates charged and the volumes under contract for the transportation services of our pipeline systems;
-
-
the
quantities of natural gas available for transport and the demand for natural gas;
2009 ANNUAL REPORT
35
-
-
legislative
or regulatory action affecting demand for and supply of natural gas, and the rates our pipeline systems are allowed to charge in relation to their operating
costs;
-
-
the
level of our pipeline systems' operating costs; and
-
-
the
creditworthiness of our pipeline systems' shippers.
The recent global economic and financial market crisis has had and may continue to have a negative effect on our business.
The recent global economic and financial market crisis caused, among other things, a general tightening in the credit markets, lower levels of liquidity, increases in the rates
of default and bankruptcy, lower consumer and business spending, lower consumer net worth, and reduced energy demand. Although, general economic conditions are improving, recovery for certain sectors
will be slower. As a result of the economic weakness, there has been less demand for natural gas by residential, industrial and other users, which has had a negative effect on the business of our
pipeline systems and our results of operations, financial condition and liquidity. Many natural gas producers, natural gas marketing companies, and end users have been negatively affected by the
current economic conditions, as evidenced by reduced drilling and natural gas development in the WCSB, which is a critical natural gas supply source for our pipeline systems, except North Baja.
Current or potential shippers may be unable to fund contracts or meet the creditworthiness requirements of our pipeline systems or they may reduce the amount or length of their transportation
commitments on our pipeline systems, all of which could impact demand for transportation services on our pipeline systems, and may cause reduced revenue and increased customer payment delays or
defaults. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given the high percentage of fixed costs associated with
our operations.
Although
there are indications of some recovery in the credit and financial markets, there can be no assurance that market conditions will continue to improve in the near
future or that any improvements will be sustained or that our results will not be materially and adversely affected. Such conditions make it difficult to forecast operating results, make business
decisions and identify and address material business risks. The foregoing conditions may also impact the valuation of certain long-lived or intangible assets, including goodwill, that are
subject to impairment testing, potentially resulting in impairment charges which may be material to our financial condition or results of operations.
If we do not identify opportunities for accretive growth through organic growth projects or acquisitions, or our pipeline systems do not successfully
complete expansion projects or make and integrate acquisitions that are accretive, our future growth may be limited.
A principal focus of our strategy is to continue to grow the cash distributions on our units by expanding our business. Our ability to grow depends on our ability to undertake
acquisitions and organic growth projects, and the ability of our pipelines systems to complete expansion projects and make and integrate acquisitions that result in an increase in cash per unit
generated from operations.
If any significant shipper fails to perform its contractual obligations, our pipeline systems' respective cash flows and financial condition could be
adversely impacted.
At any time, each of our pipeline systems may have customers that account for more than ten per cent of their revenue. The loss of all or even a portion of the revenues
associated with these customers, as a result of competition, creditworthiness or otherwise, could have a material adverse effect on the financial condition, results of operations and cash flows of our
pipeline systems, unless they were able to contract for comparable volumes from other customers at favorable rates.
Sierra
Pacific Power Company and Southwest Gas Corporation are Tuscarora's largest shippers, with firm contracts for approximately 76 per cent and
11 per cent, respectively, of Tuscarora's revenue. NV Energy Inc. (formerly known as Sierra Pacific Resources) and its subsidiary, Sierra Pacific Power Company, have
non-investment grade credit ratings.
36
TC PIPELINES,
LP
Our pipeline systems' pipeline integrity testing programs and any necessary pipeline repairs, or preventative or remedial measures may impose
significant costs and liabilities.
The U.S. Department of Transportation has adopted regulations that require pipeline operators to develop integrity management programs to comprehensively evaluate their
pipelines, and take measures to protect pipeline segments located in what the regulations refer to as "high consequence areas", where a leak or rupture could do the most harm. The final rule resulted
from the enactment of the Pipeline Safety Improvement Act of 2002. At this time, we cannot predict the total costs of compliance with this rule because those costs will depend on the extent of the
pipeline testing and any subsequent repairs found to be necessary. Our pipeline systems completed the required 50 per cent inspection of their respective pipelines highest priority
highest consequence segments of lines in 2007. Inspection of the remaining 50 per cent of high consequence areas as mandated by regulation is expected to be completed, as required, by
2012. After that point, the inspection of high consequence areas is required to reoccur every seven years. Once 100 per cent of our pipeline systems' high consequence areas have been
inspected, we will have a better understanding of the total ongoing costs. Our pipeline systems will continue their pipeline integrity testing programs to assess and maintain the integrity of the
pipelines. The results of this work could cause our pipeline systems to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure their
continued safe and reliable operation. Additionally, any failure to comply with these regulations could subject our pipeline systems to penalties and fines. If these costs were significantly higher
than estimated, our cash available for distribution may be correspondingly reduced.
Our pipeline systems' operations are regulated by federal, state and local agencies responsible for environmental protection and operational safety, and
costs of environmental compliance and the costs of environmental liabilities could exceed our estimates.
Risks of substantial costs and liabilities are inherent in pipeline operations and each of our pipeline systems may incur substantial costs and liabilities in the future as a
result of stricter environmental and safety laws, regulations, and enforcement policies and claims for personal or property damages resulting from our pipeline systems' operations. Moreover, new,
stricter environmental laws, regulations or enforcement policies could be implemented that significantly increase our pipeline systems' compliance costs or the cost of any remediation of environmental
contamination that may become necessary, and these costs could be material. For instance, we may be required to obtain and maintain permits and approvals issued by various federal, state and local
governmental authorities; limit or prevent releases of materials from our operations in accordance with these permits and approvals; and install pollution control equipment. Also, under certain
environmental laws and regulations, we may be exposed to substantial liabilities for any pollution or contamination that may result from our operations.
With
respect to climate change related policy, in December 2009 the Environmental Protection Agency (EPA) signed two findings regarding six greenhouse gas (GHG)
emissions in response to the 2007 US Supreme Court decision that these emissions are covered under the Clean Air Act (CAA). The Endangerment Finding and the Cause or Contribute Finding both allow the
EPA to implement regulations that restrict the releases of specified GHG emissions. On September 30, 2009, the EPA released the proposed Prevention of Significant Deterioration and Title V
Greenhouse Gas Tailoring Rule. The rule proposes new thresholds for GHG emissions that define when Clean Air Act permits under the New Source Review and title V operating permits programs would
be required for new or existing industrial facilities. Under the Title V operating permits program, EPA is proposing a major source emissions applicability threshold of 25,000 tons per year of
carbon dioxide CO2e for existing industrial facilities. Facilities with GHG emissions below this threshold would not be affected. New or modified facilities with GHG emissions that trigger the
Prevention of Significant Deterioration permitting requirements would need to apply for revisions to their operating permits to incorporate the best available control technologies and energy
efficiency measures to minimize GHG emissions. The EPA's Mandatory Reporting of Greenhouse Gases; Final Rule became effective December 29, 2009. The program requires monitoring and reporting of
GHG emissions from specified sources emitting over 25,000 metric tonnes per year.
The
U.S. Congress is also actively considering federal legislation to reduce domestic greenhouse gas emissions. The House of Representatives passed the American Clean
Energy and Security Act H.R. 2454 in June 2009. The HR.2454 legislation along with a series of other climate bills, including the Carbon Limits and Energy for America's
2009 ANNUAL REPORT
37
Renewal
Act, are now under consideration by the Senate. These proposals could be rejected by the Senate, or could be significantly amended before being approved. At a regional level, several states
have already taken legal measures to reduce emissions of greenhouse gases. At this time it is unknown what the future environmental compliance costs relating to greenhouse gas activities will be at
federal and state levels. Various federal and state legislative proposals have been made over the last several years and it is possible that legislation will be enacted in the future that could
negatively impact the operations of our pipeline systems, result in increased costs and reduce our income if our pipeline systems cannot recover any increased costs in their rates.
Our pipeline systems' indebtedness may limit their ability to borrow additional funds, make distributions to us or capitalize on business opportunities.
As at December 31, 2009, Great Lakes, Northern Border and Tuscarora had $411.0 million, $565.0 million and $57.3 million of debt outstanding,
respectively. Of the debt outstanding, Great Lakes, Northern Border and Tuscarora have $19.0 million, $nil and $53.4 million of debt maturing in 2010, respectively. Their respective
levels of debt could have important consequences to Great Lakes, Northern Border and Tuscarora, including the following:
-
-
their
ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may
not be available on favorable terms;
-
-
they
will need a portion of their cash flow to make interest payments on the debt, reducing the funds that would otherwise be available for operations, future business
opportunities and distributions to us, which will reduce our ability to make distributions to our unitholders;
-
-
their
debt level may make them more vulnerable to competitive pressures or a downturn in our business or the economy generally; and
-
-
their
debt level may limit their flexibility in responding to changing business and economic conditions.
Our
pipeline systems' ability to service their debt will depend upon, among other things, future financial and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors, some of which are beyond their control.
In
addition, under the terms of these financing arrangements, our pipeline systems are prohibited from making cash distributions during an event of default under their debt
instruments. Under Great Lakes' debt instruments, Great Lakes has limitations on the level of indebtedness and has other restrictions, including a general prohibition against liens on pipeline
facilities. Provisions in Northern Border's debt instruments limit its ability to incur indebtedness and engage in specific transactions. This could reduce its ability to capitalize on business
opportunities that arise in the course of its business. Under Tuscarora's debt instruments, Tuscarora has granted a security interest in certain of its transportation contracts, which is available to
noteholders upon an event of default. In addition, the Partnership's third party credit facility requires us to maintain certain financial ratios and contains restrictions on incurring additional debt
and making distributions to unitholders.
Capital and credit market conditions may adversely affect the Partnership's and/or our pipeline systems' access to capital and cost of capital.
Access to capital markets is important to the Partnership to enable it to execute its business strategies, which include seeking opportunities to undertake accretive
acquisitions and organic growth projects, and maximize the value of our existing portfolio of pipeline systems. Access to capital markets is also important to our pipeline systems' ability to meet
liquidity and capital resource requirements. Additionally, market conditions may impact the ability of our pipeline systems to access capital markets for debt under reasonable terms.
Beginning
in September 2008, the general economic and capital market conditions in the United States and other parts of the world deteriorated significantly
and adversely affected access to capital and increased the cost of capital. Although capital market conditions improved in the second half of 2009, if conditions in the U.S. capital markets do
not continue to improve or worsen, the Partnership's and our pipeline systems' future cost of debt and equity capital, and future access to capital markets could be adversely affected.
38
TC PIPELINES,
LP
We do not own a controlling interest in Great Lakes or Northern Border and we may be unable to cause certain actions to take place unless the other
partner agrees. As a result, we will be unable to control the amount of cash we will receive from those operations and we could be required to contribute significant cash to fund our share of their
operations. If we fail to make these contributions our ownership interest would be diluted.
The major policies of Great Lakes and Northern Border are established by each of their Management Committees.
Great
Lakes' Management Committee consists of four appointed members, two of whom are designated by us and two of whom are designated by TransCanada. All decisions by the
Management Committee require unanimous consent. An Executive Committee consists of two appointed members: one Partnership Committee Member and one TransCanada Committee Member, who also serves as the
president of Great Lakes. The Executive Committee has all of the powers of the Management Committee in the management of Great Lakes' business. Because of these provisions, without the concurrence of
TransCanada, we may be unable to cause Great Lakes to take or not to take certain actions, even though those actions may be in the best interest of us or Great Lakes.
Northern
Border's Management Committee consists of four members, two of whom are designated by us and two of whom are designated by an affiliate of ONEOK Partners. The
Management Committee requires the affirmative vote of a majority of the partners' ownership interests to act on most activities. Certain activities require the unanimous consent of the committee, such
as the filing of the application for regulatory authority to
construct and operate new facilities and any changes to the cash distribution policy. Because of these provisions, without the concurrence of ONEOK, we may be unable to cause Northern Border to take
or not to take certain actions, even though those actions may be in the best interest of us or Northern Border.
Great
Lakes and Northern Border may require us to make additional capital contributions. Our funding of these capital contributions would reduce the amount of cash otherwise
available for distribution to our unitholders. Additionally, in the event we elect not to, or are unable to, make a required capital contribution to Great Lakes or Northern Border; our ownership
interest would be diluted.
Our pipeline systems' operations are subject to operational hazards and unforeseen interruptions, which could adversely affect their businesses and for
which they may not be adequately insured.
Our pipeline systems' operations are subject to all of the risks and hazards typically associated with the operation of natural gas transportation pipeline systems. Operating
risks include, but are not limited to, leaks, pipeline ruptures, the breakdown or failure of equipment or processes, and the performance of pipeline facilities below expected levels of capacity and
efficiency. Other operational hazards and unforeseen interruptions include adverse weather conditions, accidents, the collision of equipment with our pipeline systems' pipeline facilities (which may
occur if a third party were to perform excavation or construction work near these facilities), and catastrophic events such as explosions, fires, earthquakes, floods or other similar events beyond our
pipeline systems' control. It is also possible that our pipeline systems' infrastructure facilities could be direct targets or indirect casualties of an act of terrorism. A casualty occurrence might
result in injury or loss of life, extensive property damage or environmental damage. Liabilities incurred, and interruptions to the operation of our pipeline systems' facilities, for short or extended
durations, caused by such an event, could reduce revenues generated by our pipeline systems and increase expenses, thereby impairing their ability to meet their obligations. Insurance proceeds may not
be adequate to cover all liabilities or expenses incurred or revenues lost. Should one of our pipeline systems experience such an event, it may have an adverse impact on our results of operations and
cash flow.
Our pipeline systems do not own all of the land on which their pipelines and facilities are located, which could disrupt their operations.
Our pipeline systems do not own all of the land on which their pipelines and facilities are located, and they are, therefore, subject to the risk of increased costs to maintain
necessary land use. They obtain the rights to construct and operate certain of our pipelines and related facilities on land owned by third parties, governmental agencies and Indian reservations for a
specific period of time. Their loss of these rights, through their inability to renew right-of-way contracts or otherwise, or increased costs to renew such rights, could have a
material adverse effect on their financial condition, results of operations and cash flows.
2009 ANNUAL REPORT
39
If we were to lose TransCanada's management expertise, we would not have sufficient stand-alone resources to operate.
TransCanada, through wholly-owned subsidiaries, is the operator of all our pipeline systems. We do not presently have sufficient stand-alone management resources to operate
without services provided by TransCanada. Additionally, should we lose the services of TransCanada, we may not be able to replace those services for the same cost and our costs could increase.
Further, we would not be able to evaluate potential growth opportunities and successfully complete acquisitions without TransCanada's resources.
Our pipeline systems may undertake or be dependent upon expansion and build projects which involve significant risks that could adversely affect
our business.
Our pipeline systems have expansion and new build projects planned or underway. Additionally, expansion and new build projects, such as TransCanada's Bison Pipeline Project
that would potentially deliver gas to Northern Border, are subject to a variety of factors outside their control. Factors such as weather, natural disasters, delays in obtaining key materials and
difficulties in obtaining permits and rights-of-way or other regulatory approvals, as well as the performance by third party contractors may result in increased costs or delays
in construction. Cost overruns or delays in completing a project could result in reduced transportation rates and liquidated damages to customers, as well as lost revenue opportunities. In addition,
we cannot be certain that, if completed, these projects will perform in accordance with our expectations. Each of these risks could have a material adverse effect on our results of operations and
cash flows.
Risks Inherent in an Investment in the Partnership
The Partnership's indebtedness may limit its ability to borrow additional funds, make distributions or capitalize on business opportunities. The
conditions of the U.S. and international credit markets may adversely affect our ability to obtain credit or draw on our current credit facility.
As of December 31, 2009, the Partnership had $541.3 million of debt outstanding, including the revolving credit and term loan agreement (Senior Credit Facility)
and Senior Notes. This substantial level of debt could have important consequences to the Partnership including the following:
-
-
our
ability to obtain additional financing, if necessary, for working capital, acquisitions or other purposes may be impaired or such financing may not be available on
favorable terms;
-
-
we
will need a portion of our cash flow to make interest payments on the debt, reducing the funds that would otherwise be available for operations, future business
opportunities and distributions to our unitholders; and
-
-
our
debt level may limit our flexibility in responding to changing business and economic conditions.
Our
ability to service our debt will depend upon, among other things, the future financial and operating performance of our pipeline systems, which will be affected by
prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control.
If
the financial institutions that have extended credit commitments to us and our pipeline systems are adversely affected by the conditions of the U.S. and international
capital markets, they may become unable to fund borrowings under their credit commitments, which could have a material and adverse impact on our financial condition and our ability to borrow
additional funds, if needed.
In
addition, our credit facilities contain restrictive covenants that may prevent us from engaging in certain transactions that are deemed beneficial. These agreements
require us to comply with various affirmative and negative covenants and maintaining certain financial ratios. There are restrictions and covenants with respect to:
-
-
entering
into mergers, consolidations and sales of assets;
-
-
granting
liens;
-
-
material
amendments to the Partnership's partnership agreement;
40
TC PIPELINES,
LP
-
-
incurring
additional debt; and
-
-
distributions
to unitholders.
Any
future debt may contain similar restrictions.
Increases in interest rates and general volatility in the financial markets and economy could adversely affect our business, our common unit price,
results of operations, cash flows and financial condition.
As of December 31, 2009, the partnership had $484.0 million outstanding under the Senior Credit Facility
(2008 $475.0 million), all of which is initially exposed to variable interest rates. As a result, our results of operations, cash flows and financial
condition could be materially adversely affected by significant increases in interest rates. From time to time, we may enter into interest rate swap arrangements, which decrease our exposure to
variable interest rates. At December 31, 2009, the variable interest rate exposure related to $375.0 million of the $484.0 million outstanding debt under the Senior Credit
Facility was mitigated by fixed interest rate swap arrangements.
An
increase in interest rates may also cause a corresponding decline in demand for yield-based equity investments such as our common units. Any such reduction in demand for
our common units resulting from other more attractive investment opportunities may cause the trading price of our common units to decline.
We do not have the same flexibility as other types of organizations to accumulate cash and equity to protect against illiquidity in the future.
Unlike a corporation, our partnership agreement requires us to make quarterly distributions to our unitholders of all available cash, reduced by any amounts of reserves for
commitments and contingencies, including capital and operating costs and debt service requirements. The value of our units and other limited partner interests may decrease in direct correlation with
decreases in the amount we distribute per unit. Accordingly, if we experience a liquidity problem in the future, we may not be able to recapitalize by issuing more equity.
Unitholders have limited voting rights and do not control our general partner.
The general partner is our manager and operator. Unlike the holders of common stock in a corporation, holders of common units have only limited voting rights on matters
affecting our business. Unitholders have no right to elect our general partner on an annual or other continuing basis. Our general partner may not be removed except by the vote of the holders of at
least 66
2
/
3
per cent of the outstanding units and upon the election of a successor general partner by the vote of the holders of a majority of the outstanding common units. These
required votes would include the votes of units owned by our general partner and its affiliates. The ownership of an aggregate of 37.0 per cent of the outstanding units by our general
partner and its affiliates has the practical effect of making removal of our general partner difficult.
In
addition, the partnership agreement contains some provisions that may have the effect of discouraging a person or group from attempting to remove our general partner or
otherwise change our management. If our general partner is removed as our general partner under circumstances where cause does not exist and units held by our general partner and its affiliates are
not voted in favor of that removal:
-
-
any
existing arrearages in the payment of the minimum quarterly distributions on the common units will be extinguished; and
-
-
our
general partner will have the right to convert its general partner interests and its incentive distribution rights into common units or to receive cash in exchange for
those interests.
These
provisions may diminish the price at which the common units will trade under some circumstances. The partnership agreement also contains provisions limiting the
ability of unitholders to call meetings of unitholders or to acquire information about our operations, as well as other provisions limiting the unitholders' ability to influence the manner or
direction of management. Further, if any person or group other than our general partner or its affiliates or a direct transferee of our general partner or its affiliates acquires beneficial ownership
of 20 per cent or more of any class of units then outstanding, that person or group will lose voting rights with respect to all of its units. As a result,
2009 ANNUAL REPORT
41
unitholders
will have limited influence on matters affecting our operations, and third parties may find it difficult to attempt to gain control of us, or influence our activities.
We may issue additional common units without unitholder approval, which would dilute the existing unitholders' interest. In addition, issuance of
additional common units may increase the risk that we will be unable to pay the full minimum quarterly distribution on all common units.
Our general partner can cause us to issue additional common units, without the approval of unitholders, in the following circumstances:
-
-
under
employee benefit plans, if any;
-
-
upon
conversion of the general partner interests and incentive distribution rights into common units as a result of the withdrawal of our general partner; or
-
-
in
connection with acquisitions or capital improvements that are accretive to our cash flow on a per unit basis.
In
addition, we may issue an unlimited number of limited partner interests of any type without the approval of the unitholders. Based on the circumstances of each case, the
issuance of additional common units or securities ranking senior to or on a parity with the common units may dilute the value of the interests of the then-existing holders of common units
in the net assets of the Partnership and dilute the interests of unitholders in distributions by the Partnership. Our partnership agreement does not give the unitholders the right to approve the
issuance by us of equity securities ranking junior to the common units at any time.
Any
increase in the number of outstanding common units will increase the percentage of the aggregate minimum quarterly distribution payable to the common unitholders, which
will in turn have the effect of increasing the risk that we will be unable to pay the minimum quarterly distribution in full on all the common units.
Unitholders may not have limited liability in some circumstances.
The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some states. If it
were to be determined that:
-
-
the
Partnership had been conducting business in any state without compliance with the applicable limited partnership statute, or
-
-
the
right or the exercise of the right by the unitholders as a group to remove or replace our general partner, to approve some amendments to the partnership agreement or to
take other action under the partnership agreement constituted participation in the "control" of the Partnership's business,
then
unitholders could be held liable in some circumstances for the Partnership's obligations to the same extent as a general partner. In addition, under some circumstances
a unitholder may be liable to the Partnership for the amount of a distribution for a period of three years from the date of the distribution.
Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.
If our general partner and its affiliates, who currently own an aggregate of approximately 37.0 per cent of our common units, come to own
80 per cent or more of the common units, the general partner will have the right, but not the obligation, which it may assign to any of its affiliates or us, to acquire all of the
remaining common units held by unaffiliated persons at a price generally equal to the then current market price of the common units. As a consequence, unitholders may be required to sell their common
units at a time when they may not desire to sell them or at a price that is less than the price they would desire to receive upon sale. Unitholders may also incur a tax liability upon a sale of
their units.
42
TC PIPELINES,
LP
Without the consent of each unitholder, Great Lakes, Northern Border, North Baja or Tuscarora might be converted into a corporation, which would result
in Great Lakes, Northern Border, North Baja or Tuscarora, as the case may be, being subject to corporate income taxes.
If it becomes unlawful to conduct the business of Great Lakes, Northern Border or Tuscarora as a partnership and some other conditions are satisfied, the business and assets of
Great Lakes, Northern Border or Tuscarora, as the case may be, will automatically be transferred to a corporation without the vote or consent of unitholders. Therefore, unitholders would not receive a
proxy or consent solicitation statement in connection with that transaction. However, we believe that it is unlikely that circumstances requiring an automatic transfer will occur. A transfer to
corporate form would result in Great Lakes, Northern Border, North Baja or Tuscarora being subject to corporate income taxes and would likely be materially adverse to their, and therefore, our results
of operations and financial condition.
TransCanada controls our general partner, which has sole responsibility for conducting our business and managing our operations.
TC PipeLines GP, our general partner, and its affiliates have limited fiduciary responsibilities and may have conflicts of interest with respect to our partnership, and they may favor
their own interests to the detriment of our unitholders.
The directors and officers of TC PipeLines GP and its affiliates have duties to manage TC PipeLines GP in a manner that is beneficial to its
stockholders. At the same time, TC PipeLines GP has duties to manage our partnership in a manner that is beneficial to us. Therefore, TC PipeLines GP's duties to us may
conflict with the duties of its officers and directors to its stockholders. Such conflicts may include, among others, the following:
-
-
expenditures,
borrowings, issuances of additional common units and reserves in any quarter may affect the level of cash available to pay quarterly distributions to
unitholders and TC PipeLines GP;
-
-
under
our partnership agreement, TC PipeLines GP determines which costs incurred by it and its affiliates are reimbursable by us;
-
-
affiliates
of TC PipeLines GP may compete with us in certain circumstances;
-
-
TC PipeLines GP
may limit our liability and reduce their fiduciary duties, while also restricting the remedies available to our unitholders for actions that
might, without the limitations, constitute breaches of fiduciary duty. As a result of purchasing our units, unitholders are deemed to consent to some actions and conflicts of interest that might
otherwise constitute a breach of fiduciary or other duties under applicable law;
-
-
we
do not have any employees and we rely solely on TC PipeLines GP and its affiliates to conduct our business, and
-
-
TransCanada,
through wholly-owned subsidiaries, is the operator of all of our pipeline systems. This operator role along with its ownership interests in our pipeline systems
may force TransCanada to make decisions that may conflict as operator and/or owner of these systems.
Cost reimbursements due to our general partner may be substantial and could reduce our cash available for distribution.
Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates, including officers and directors of the general partner, for all
expenses incurred by our general partner and its affiliates on our behalf. During the year ended December 31, 2009, we paid fees and reimbursements to our general partner in the amount of
$2.1 million (2008 $2.1 million). Our general partner in its sole discretion will determine the amount of these expenses. In addition, our general
partner and its affiliates may provide us services for which we will be charged reasonable fees as determined by the general partner. The reimbursement of expenses and the payment of fees could
adversely affect our ability to make distributions.
If we were found to be an "investment company" under the Investment Company Act of 1940, our contracts may be voidable and our offers of securities may
be subject to rescission.
If we were deemed to be an unregistered "investment company" under the Investment Company Act, our contracts may be voidable and our offers of securities may be subject to
rescission, and we may also be subject to other materially adverse consequences.
2009 ANNUAL REPORT
43
Our
assets include a 46.45 per cent general partner interest in Great Lakes and a 50 per cent general partner interest in Northern Border. We
could be deemed to be an "investment company" under the Investment Company Act if these interests constituted an "investment security", as defined in the Investment Company Act. If we were deemed to
be an "investment company", then we would be required to be registered as an investment company under the Investment Company Act. In that case, there would be a substantial risk that we would be in
violation of the Investment Company Act because of the practical inability to register under the Investment Company Act.
Moreover,
treatment of us as an investment company would prevent our qualification as a partnership for federal income tax purposes in which case we would be treated as a
corporation for federal income tax purposes. As a result, we would pay federal income tax on our taxable income at the corporate tax rate, distributions would generally be taxed again as corporate
distributions and none of our income, gains, losses or deductions would flow through to unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution would
be substantially reduced. Therefore, treatment of us as an investment company would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the value of our common units.
Tax Risks to Common Unitholders
The Internal Revenue Service (IRS) could treat us as a corporation, which would substantially reduce the cash available for distribution
to unitholders.
The anticipated after-tax benefit of an investment in us depends largely on our classification as a partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us.
If
we were treated as a corporation for federal income tax purposes, we would pay federal and state income taxes on our income at the applicable corporate tax rate.
Distributions would generally be taxed again to unitholders as corporate distributions, and no income, gains, losses, deductions or credits would flow through to unitholders. Because a tax would be
imposed upon us as an entity, the cash available for distribution to unitholders would be substantially reduced. Our treatment as a corporation would result in a material reduction in the anticipated
cash flow and after-tax return to unitholders and thus would likely result in a substantial reduction in the value of the common units.
Current
laws may change so as to cause us to be taxable as a corporation for federal income tax purposes or otherwise to be subject to entity level taxation. Our partnership
agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us 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. These changes would include a decrease in
distributions to reflect the impact of that law on us.
If our pipeline systems were to become subject to a material amount of entity-level taxation for state tax purposes, then our pipeline systems'
operating cash flow and cash available for distribution to us and for other business needs would be reduced.
Our pipeline systems are held in operating partnerships, which are generally treated as flow-through entities for income tax purposes, and as such the income from
our pipeline systems generally has not been subject to income tax at the entity level. Several states have either adopted or are evaluating a variety of ways to subject partnerships to entity level
taxation. For example, in 2009, Great Lakes recorded a Michigan business tax of $5.4 million relating to a partnership level tax, adopted by Michigan in 2008, of which the Partnership's share
of the tax was $2.5 million. Imposition of such taxes on our pipeline systems will reduce the cash available for distribution to us and for other business needs by our pipeline systems, and
adversely affect the amount of funds available for distribution to our unitholders.
We have not requested an IRS ruling with respect to our tax treatment.
We have not requested a ruling from the IRS with respect to any tax matter affecting us. The IRS may adopt positions that differ from the positions we take. It may be necessary
to resort to administrative or court proceedings in an effort
44
TC PIPELINES,
LP
to
sustain some or all of our counsel's conclusions or the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which the
common units trade. In addition, the costs of any contest with the IRS will be borne directly or indirectly by some or all of the unitholders and the general partner.
Unitholders may be required to pay taxes on income from us even if they receive no cash distributions.
Unitholders may be required to pay federal income taxes and, in some cases, state and local income taxes on their allocable share of our income, whether or not they receive
cash distributions from us. Unitholders may not receive cash distributions equal to their allocable share of our taxable income or even the tax liability that results from that income.
Tax gains or losses on the disposition of common units could be different than expected.
If unitholders sell their common units, they will recognize a gain or loss equal to the difference between the amount realized and their tax basis in those common units. Prior
distributions in excess of the total net taxable income that unitholders were allocated for a common unit which decreased their tax basis in that common unit will, in effect, become taxable income if
the common unit is sold at a price greater than their tax basis in that common unit, even if the price is less than the original cost. A substantial portion of the amount realized, whether or not
representing a gain,
may be ordinary income to unitholders. If the IRS successfully contests some conventions we use, unitholders could recognize more gain on the sale of common units than would be the case under those
conventions without the benefit of decreased income in prior years.
Tax-exempt and non-U.S. investors may have adverse tax consequences from owning common units.
An investment in common units by tax-exempt entities and foreign persons raises issues unique to these persons. For example, virtually all of our income allocated
to organizations which is exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them.
Distributions to foreign persons will be reduced by withholding taxes, and foreign persons will be required to file federal income tax returns and pay tax on their share of our taxable income.
We treat a purchaser of common units as having the same tax benefits without regard to the actual common units purchased. A successful IRS challenge
could adversely affect the value of the common units.
To maintain uniformity of the economic and tax characteristics of our common units, we have adopted depreciation and amortization conventions that do not conform to all aspects
of specified Treasury Regulations. A successful challenge to those conventions by the IRS could adversely affect the amount of tax benefits available to unitholders or could affect the timing of tax
benefits or the amount of gain from the sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to unitholders' tax returns.
We have adopted certain valuation methodologies that may result in a shift of income, gain, loss and deduction between the general partner and the
unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
For income tax purposes and pursuant to the Partnership Agreement, when we issue additional units or engage in certain other transactions, we determine the fair market value of
our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. If our valuation methodology were not sustained upon
an IRS challenge, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Our valuation methodology
is also used in certain computations and allocations relating to Section 743(b) adjustments and Section 751 deemed sale tax effects.
A
successful IRS challenge to these methods, calculations or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It
also could affect the amount of gain from our unitholders' sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders' tax
returns without the benefit of additional deductions.
2009 ANNUAL REPORT
45
The sale or exchange of 50 per cent or more of the total interest in our capital and profits will result in the termination of our
partnership for federal income tax purposes.
We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50 per cent or more of the total interests in our
capital and profits within a 12-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of
depreciation deductions allowable in computing our taxable income.
Unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of an investment
in our common units.
In addition to federal income taxes, unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance
or intangible taxes that are imposed by the various jurisdictions in which we do business or own property. We may be required to withhold income taxes with respect to income allocable or distributions
made to our unitholders. In addition, unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of the jurisdictions in which we do
business or own property and may be subject to penalties for failure to comply with those requirements. We currently own assets and conduct business in Arizona, California, Illinois, Indiana, Iowa,
Michigan, Minnesota, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota, Texas, and Wisconsin. Each of these states except for Nevada, South Dakota, and Texas, currently impose personal
income taxes on individuals. Generally, these states also impose income taxes on corporations and other entities. It is the unitholders' responsibility to file all required U.S. federal, state
and local tax returns. Counsel has not rendered an opinion on the state or local tax consequences of an investment in us.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
A description of our properties and the properties of our pipeline systems is included in Part 1, Item "Business", and is incorporated herein by reference.
We
believe that our pipeline systems have satisfactory title to the properties owned and used in their businesses, subject to liens for taxes not yet payable, liens incident
to minor encumbrances, liens for credit arrangements and easements and restrictions that do not materially detract from the value of these properties, our interests in these properties, or the use of
these properties in our pipeline systems' businesses. We believe that our pipeline systems' properties are adequate and suitable for the conduct of their business in the future.
Item 3. Legal Proceedings
Great Lakes Rate Case (RP10-149-000).
In November 2009, the FERC issued an order
instituting an investigation, pursuant to Section 5 of the Natural Gas Act, to determine whether the rates currently charged by Great Lakes are just and reasonable. On February 4, 2010,
Great Lakes filed a cost and revenue study (GL Cost and Revenue Study) in response to the November 2009 Order. The GL Cost and Revenue Study supports Great Lakes' current rates and shows
that if Great Lakes filed to reset its rates, these rates should be above Great Lakes' current rates. The GL Cost and Revenue Study reflects the increased risk of de-contracting on the
Great Lakes system which may result in decreases to overall long-term, daily and short-term firm transportation revenues, and interruptible transportation revenues, as compared
to prior years. In the absence of a settlement, a hearing is scheduled for early August 2010 and an initial decision by the Administrative Law Judge is expected in November 2010. Should
the FERC determine as a result of these proceedings, that Great Lakes' rates are not just and reasonable; the FERC could order Great Lakes to reduce its
46
TC PIPELINES,
LP
rates
prospectively. Great Lakes has expressed interest in entering into settlement discussions with the FERC staff and interveners, which includes certain of its shippers.
TransCanada
owns a 53.55 percent partner interest in Great Lakes. TransCanada, Great Lakes' largest shipper, and ANR, an affiliate of Great Lakes and a shipper on
Great Lakes, have filed interventions in the GL Rate Proceeding.
Great Lakes v. Essar Steel Minnesota LLC, et.al. (Essar).
In October 2009, Great Lakes filed suit
in the U.S. District Court, District of Minnesota, against Essar for breach of contract. Essar is a party to a transportation contract for a term starting July 1, 2009 through
March 31, 2024. The total contract value is $33.7 million. Essar has refused to honor their contractual obligations. Great Lakes is seeking recovery of all sums due, including all future
sums due under the contract.
In
addition to the above written matters, we and our pipeline systems are named defendants in lawsuits and governmental proceedings that arise in the ordinary course of
our business.
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, 2009.
2009 ANNUAL REPORT
47
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The common units representing limited partner interests in the Partnership have been quoted on the NASDAQ Global Select Market since May 1999 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 Global Select 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.
|
|
Price Range
|
|
|
|
|
|
Cash Distributions
Declared per
Common Unit
|
|
|
|
High
|
|
Low
|
|
|
2009
|
|
|
|
|
|
|
|
First Quarter
|
|
$30.44
|
|
$23.62
|
|
$0.705
|
|
Second Quarter
|
|
$36.43
|
|
$29.71
|
|
$0.730
|
|
Third Quarter
|
|
$39.14
|
|
$34.82
|
|
$0.730
|
|
Fourth Quarter
|
|
$41.10
|
|
$35.17
|
|
$0.730
|
|
2008
|
|
|
|
|
|
|
|
First Quarter
|
|
$37.30
|
|
$31.60
|
|
$0.700
|
|
Second Quarter
|
|
$36.96
|
|
$33.75
|
|
$0.705
|
|
Third Quarter
|
|
$34.98
|
|
$30.42
|
|
$0.705
|
|
Fourth Quarter
|
|
$31.72
|
|
$18.82
|
|
$0.705
|
|
As of February 18, 2010, there were 100 registered holders of common units and approximately 21,500 beneficial owners
of common units, including common units held in street name.
The
Partnership currently has 46,227,766 common units outstanding, of which 29,142,935 are held by the public, 11,287,725 are held by TransCan
Northern Ltd., and 5,797,106 are held by TC PipeLines GP, Inc. The common units represent an aggregate 98 per cent limited partner interest and the
general partner interest represents an aggregate two per cent general partner interest in the Partnership.
The
general partner receives two per cent of all cash distributions in regards to its general partner interest and is also entitled to incentive distributions as
described below. The holders of common units (unitholders) receive the remaining portion of the cash distribution. The Partnership's quarterly cash distributions to its unitholders comprise 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 a quarter less the amount of
cash reserves that are necessary or appropriate, in the reasonable discretion of the general partner, to:
-
-
provide
for the proper conduct of the business of the Partnership (including reserves for future capital expenditures and for anticipated credit needs);
-
-
comply
with applicable laws or any Partnership debt instrument or agreement; and
-
-
provide
funds for cash distributions to unitholders and the general partner in respect of any one or more of the next four quarters.
The
incentive distribution provisions were amended in July 2009. As a result, the general partner receives 15 per cent of quarterly amounts distributed
in excess of $0.81 per common unit, and a maximum of 25 per cent of quarterly amounts distributed in excess of $0.88 per common unit, provided the balance has been first distributed to
unitholders
48
TC PIPELINES,
LP
on
a pro rata basis. The amounts that trigger incentive distributions at various levels are subject to adjustment in certain events, as described in the partnership agreement.
In
2009, the Partnership made cash distributions to unitholders and the general partner that amounted to $117.0 million compared to $108.6 million in 2008.
These payments represented $0.705 per common unit for the quarters ended December 31, 2008 and March 31, 2009, and $0.73 per common unit for the quarters ended June 30, 2009 and
September 30, 2009. On February 12, 2010, the Partnership paid a cash distribution of $34.4 million to unitholders and the general partner, representing a cash distribution of
$0.73 per common unit for the quarter ended December 31, 2009. The distribution was allocated in the following manner: $33.7 million to the holders of common units as of the close of
business on January 31, 2010 (including $4.2 million to the general partner as holder of 5,797,106 common units and $8.2 million to TransCanada Corporation as indirect
holder of 11,287,725 common units), and $0.7 million to the general partner in respect of its two per cent general partner interest.
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."
(millions of dollars, except per unit amounts)
|
|
2009
(a)
|
|
2008
(a)
|
|
2007
(a)(b)
|
|
2006
(a)(c)
|
|
2005
(a)
|
|
|
|
Income Data
(for the year ended December 31)
|
|
|
|
|
|
|
|
|
|
|
Equity income from investment in Great Lakes
|
|
59.1
|
|
57.3
|
|
49.0
|
|
|
|
|
|
|
Equity income from investment in Northern Border
|
|
40.3
|
|
65.3
|
|
61.2
|
|
56.6
|
|
45.7
|
|
|
Equity income from investment in Tuscarora
|
|
|
|
|
|
|
|
5.9
|
|
7.5
|
|
|
Transmission revenues
|
|
67.9
|
|
64.5
|
|
49.8
|
|
23.0
|
|
20.3
|
|
|
Financial charges, net and other
|
|
(29.3
|
)
|
(34.6
|
)
|
(38.7
|
)
|
(21.7
|
)
|
(6.6
|
)
|
|
Net income
|
|
106.1
|
|
123.0
|
|
94.7
|
|
49.1
|
|
52.8
|
|
|
Basic and diluted net income per unit
|
|
$2.34
|
|
$2.73
|
|
$2.48
|
|
$2.39
|
|
$2.70
|
|
|
|
Cash Flow Data
(for the year ended December 31)
|
|
|
|
|
|
|
|
|
|
|
Cash distribution paid per unit
|
|
$2.870
|
|
$2.775
|
|
$2.565
|
|
$2.325
|
|
$2.300
|
|
|
|
Balance Sheet Data
(at December 31)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
1,675.1
|
|
1,701.1
|
|
1,732.4
|
|
1,008.1
|
|
547.1
|
|
|
Long-term debt (including current maturities)
|
|
541.3
|
|
536.8
|
|
573.4
|
|
468.1
|
|
13.5
|
|
|
Partners' equity
|
|
1,103.5
|
|
875.6
|
|
900.1
|
|
303.9
|
|
301.6
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6 of the Partnership's Financial Statements included elsewhere in this report.
-
(b)
-
The
Partnership acquired a 46.45 per cent interest in Great Lakes on February 22, 2007. The equity method is used to account for the
Partnership's investment in Great Lakes.
-
(c)
-
The
Partnership acquired an additional 20 per cent interest in Northern Border on April 6, 2006. The Partnership accounted for its
investment in Tuscarora using the equity method until December 19, 2006 and began consolidating Tuscarora's operations upon acquisition of the additional 49 per cent general
partner interest.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussions of the financial condition and results of operations of the Partnership and its pipeline systems should be read in conjunction with the financial
statements and notes thereto of the Partnership, Great Lakes and Northern Border 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, Great Lakes and Northern Border. The discussion
below includes forward-
2009 ANNUAL REPORT
49
looking
statements that are subject to risks and uncertainties that may result in actual results differing from the statements we make. These risks and uncertainties are discussed further in
Part 1, Item 1A. "Risk Factors".
OVERVIEW
TC PipeLines, LP was formed in 1998 as a Delaware limited partnership by TransCanada to acquire, own and participate in the management of energy infrastructure
businesses in North America. Our strategic focus is on delivering stable, sustainable cash distributions to our unitholders and finding opportunities to increase cash distributions while maintaining a
low risk profile.
To
date, our investments have been in interstate natural gas pipeline systems that transport natural gas to a variety of markets in the United States, Eastern Canada
and Mexico. Our pipeline systems derive their operating revenue from the transportation of natural gas. They are regulated by the FERC and are operated by TransCanada. Our investments are summarized
below.
|
|
Ownership
|
|
System Specifications
|
|
|
|
Percentage
|
|
Date Acquired
|
|
Miles
|
|
Capacity (MMcf/d)
|
|
Great Lakes
|
|
46.45
|
|
February 2007
|
|
2,115
|
|
2,300 (summer design)
2,500 (winter design)
|
|
Northern Border
|
|
30.00
|
|
May 1999
|
|
|
|
|
|
|
|
20.00
|
|
April 2006
|
|
1,249
|
|
2,374 (design)
|
|
|
|
50.00
|
|
|
|
|
|
|
|
North Baja
|
|
100.00
|
|
July 2009
|
|
80
|
|
500 (FERC licensed southbound)
600 (northbound design)
|
|
Tuscarora
|
|
49.00
|
|
September 2000
|
|
|
|
|
|
|
|
49.00
|
|
December 2006
|
|
240
|
|
230 (design)
|
|
|
|
2.00
|
|
December 2007
|
|
|
|
|
|
|
|
100.00
|
|
|
|
|
|
|
|
Year in Review
Equity Issuances:
In 2009, we issued a total of 11,371,680 common units in three
transactions (1) a private placement on July 1, 2009 to our general partner in consideration for the restructuring of the incentive distribution rights; (2) a private placement on
July 1, 2009 to an affiliate of TransCanada, as part of the financing for the North Baja acquisition; and (3) a public offering on November 18, 2009, the proceeds of which were
used to pay down debt.
North Baja Acquisition:
We acquired 100 per cent of North Baja on
July 1, 2009 from TransCanada for a purchase price of approximately $271 million. We agreed to purchase an expansion project (Yuma Lateral) which is expected to be completed in
March 2010 for an additional sum up to $10 million. Because North Baja was acquired from an affiliate, the acquisition was accounted for as a transaction between entities under common
control, similar to a pooling of interests, whereby the assets and liabilities of North Baja were recorded at TransCanada's carrying value and the Partnership's historical financial information was
recast to include North Baja for all periods presented on a consolidated basis.
IDR Restructuring:
The Partnership entered into an exchange agreement with its general
partner whereby the Partnership issued 3,762,000 new common units to the general partner and provided for revised incentive distribution rights (Revised IDRs) in exchange for the cancellation
of the incentive distribution rights available to the general
50
TC PIPELINES,
LP
partner
(Old IDRs) under the Amended and Restated Agreement of Limited Partnership of the Partnership. Under the terms of the Revised IDRs, the distributions to the general partner were reset
to two per cent, down from the general partner distribution levels of the Old IDRs at 50 per cent (for combined general partner interest and incentive distribution
interest). The incentive distribution levels of the Revised IDRs will result in increased combined distributions to the general partner (for general partner interest and incentive distribution
interest) of 15 per cent and a maximum of 25 per cent when quarterly distributions increase to $0.81 and $0.88 per common unit, or $3.24 and $3.52 per common unit on an
annualized basis, respectively.
Partnership Agreement Amended and Restated:
The Partnership's Amended and Restated
Agreement of Limited Partnership was amended and restated effective July 1, 2009 to reflect the Revised IDRs.
Northern Border Performance:
Our equity income from Northern Border decreased
$25.0 million, of which $22.0 million was as a result of reduced revenues due to increased competition and lower demand in the North American natural gas markets.
Great Lakes Contracting:
On November 3, 2009, Great Lakes and TransCanada
extended contracts until October 31, 2011 for 470 MDth/d of long haul capacity, which would have expired on October 31, 2010. Great Lakes has 486 MDth/d of long haul
capacity and 110 MDth/d of short haul capacity under contracts expiring on October 31, 2010.
Great Lakes Rate Proceeding:
On November 19, 2009, the FERC issued an order in
FERC Docket No. RP10-149 (November 2009 Order) instituting an investigation, pursuant to Section 5 of the Natural Gas Act (GL Rate Proceeding) against three pipeline
companies, including Great Lakes. The FERC alleged, based on a review of certain historical information, that revenues might substantially exceed the pipelines' actual cost of service and therefore
may be unjust and unreasonable. In the absence of a settlement, a hearing in the GL Rate Proceeding is scheduled for early August 2010 and an initial decision by the Administrative Law Judge is
expected in November 2010. Should the FERC determine as a result of these proceedings, that Great Lakes' rates are not just and reasonable, the FERC could order Great Lakes to reduce
its rates prospectively.
FACTORS THAT IMPACT OUR BUSINESS
Our general partner interests in Great Lakes and Northern Border, and ownership of North Baja and Tuscarora represent our only material assets at December 31, 2009. As a
result, we are dependent upon our pipeline systems for our results of operations and all of our available cash. Key factors that impact our business are the cash flows received from our
investments and our ability to maintain a strong and balanced financial position. These factors determine our ability to maintain a prudent level of available cash to make distributions to our
unitholders, fund future growth, and broaden our asset base in a disciplined and focused manner. Cash flows from our investments are dependent upon the ability of Great Lakes and Northern Border to
make distributions to us and of North Baja and Tuscarora to generate positive operating cash flows.
We
believe our strong financial position, including available unused capacity on our credit facility, gives us the capacity to pursue opportunities to grow in a sustained
and disciplined manner for the long-term benefit of our unitholders.
FACTORS THAT IMPACT THE BUSINESS OF OUR PIPELINE SYSTEMS
Our pipeline systems provide natural gas transportation services to their customers. The majority of these services are provided through firm service transportation contracts
with a reservation charge to reserve pipeline capacity, regardless of use, for the term of the contract. The revenues associated with capacity under firm service transportation contracts are not
subject to fluctuations caused by changing supply and demand conditions, competition, and customers.
2009 ANNUAL REPORT
51
The
following table provides information with respect to the revenue composition for our pipeline systems for the year ended December 31, 2009 as well as an
indication of the proportion of capacity subscribed under firm contracts and their weighted average remaining contract life as at January 31, 2010.
|
|
|
|
2009 Revenue Composition
|
|
|
|
|
|
|
|
|
|
As at January 31, 2010
|
|
|
|
|
Firm Contracts
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
Contract Life
(in Years)
(c)
|
|
|
|
Our
Ownership
Interest
|
|
Capacity
Reservation
Charges
|
|
Variable
Usage Fees
|
|
Interruptible
Contracts &
Other
Services
|
|
Firm
Contracted
Capacity %
(a)
|
|
Great Lakes
|
|
46.45%
|
|
97%
|
|
2%
|
|
1%
|
|
89%
|
|
2.0
|
|
Northern Border
|
|
50%
|
|
85%
|
|
10%
|
|
5%
|
|
69%
|
|
1.9
|
|
North Baja
|
|
100%
|
|
97%
|
|
2%
|
|
1%
|
|
79% southbound
(b)
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
64% northbound
|
|
|
|
Tuscarora
|
|
100%
|
|
100%
|
|
0%
|
|
0%
|
|
97%
|
|
10.6
|
|
-
(a)
-
Firm
contracted capacity is calculated based upon contracted capacity compared to design capacity for Northern Border, North Baja northbound transportation
and Tuscarora, compared to average design capacity for Great Lakes, and compared to FERC licensed capacity for North Baja southbound transportation.
-
(b)
-
Due
to North Baja's bi-directional nature, it can contract for both southbound and northbound capacity separately.
-
(c)
-
Weighted
average remaining contract life is weighted based upon maximum daily quantity (MDQ) in the contracts.
Key factors that impact the business of our pipeline systems are the level of capacity under firm contracts, supply of and demand for
natural gas in the markets in which our pipeline systems operate, competition, and customers and the mix of services they require. Government regulation of natural gas pipelines is also a major factor
impacting the business of our pipeline systems. These factors are discussed in more detail below.
When
there is capacity that is not contracted under firm service transportation contracts, there is exposure to fluctuations in earnings caused by changes in the above key
factors. Our North Baja and Tuscarora pipeline systems have little risk of fluctuations in revenues as a result of their strong contracted capacity position and long-term contract lives.
As well, our North Baja pipeline system does not transport WCSB natural gas and is therefore not impacted by WCSB supply conditions.
Government
regulation of natural gas pipelines includes, among others, regulation of the terms of and rates for interstate natural gas transportation services, environmental
issues, pipeline safety and integrity.
Natural Gas Supply and Demand
Decreased demand for natural gas in North America related to the economic environment, combined with increased production from U.S. shale gas developments and high
levels of natural gas in storage have contributed to weaker commodity prices for natural gas over the last year. This trend is expected to continue in 2010.
The
primary source of natural gas transported by our pipeline systems, excluding North Baja, is the WCSB. Gas exiting the WCSB is dependent upon WCSB natural gas production
levels, demand for natural gas in Western Canada, and natural gas storage capacity and demand for natural gas storage injection in Western Canada. Gas exiting the WCSB was lower in 2009 compared to
2008, due mainly to a decrease in production. Decreases in WCSB production are expected to continue in 2010 as a result of a decline in drilling and exploration activity for natural gas in 2008 and
2009 as well as some voluntary production curtailments by WCSB producers in 2009, mainly due to lower natural gas prices. Decreases in WCSB production are also related to higher supply costs,
including higher royalties, and competition
52
TC PIPELINES,
LP
for
capital from other North American basins that have lower exploration costs and lower end market transportation costs.
Factors
which may support increased WCSB production in the future include strengthening gas prices, which would support continued exploration and development of new fields
in Western Canada by WCSB natural gas producers. Drilling in the WCSB is expected to recover in the ensuing years if gas prices stabilize and that exploration and development costs become more
economical. Over the long term, we expect WCSB natural gas producers will direct significant resources toward development of unconventional resources such as coalbed methane and shale gas. Additional
natural gas supply from the Alberta Hub is expected to be available in the future when new pipeline projects associated with the Montney and Horn River shale gas regions in Western Canada are
constructed, or if the longer term potential associated with the proposed development of the Mackenzie Delta in Northern Canada and the North Slope in Alaska is realized.
Levels
of Western Canadian natural gas in storage in 2009 were at five year highs. U.S. working gas storage levels were also at record highs. The high demand period
for storage injection usually begins in the spring and extends through most of the summer. However, due to the high levels of natural gas already in storage in Western Canada at the beginning of the
2009 storage injection season, lower amounts of gas were injected during the traditional storage injection period than in previous years. Normally, lower levels of injection into Western Canadian gas
storage results in more WCSB gas available for export; however, this was offset by less WCSB production in 2009. The high U.S. gas storage levels are negatively impacting the demand for natural
gas in the market areas that storage serves, as well as reducing demand for transportation services related to storage injection. High overall storage levels have a dampening effect on natural gas
prices which in turn reduces ongoing production. As the demand for natural
gas increases, both through short-term weather related demand as well as over the long term from other natural gas demand factors, it is expected that the levels of natural gas in storage
will be reduced and the demand for this type of transportation service will increase.
Continued
strengthening of the North American economy and decreased natural gas inventories resulting from reduced production levels and cold winter weather related demand
are factors that would positively affect natural gas prices in the near term.
North
America's demand for natural gas is expected to rise when the economy returns to growth mode. The relative environmental merits of natural gas versus other carbon
based forms of energy are also expected to increase the demand for natural gas.
There
was an increase in U.S. natural gas production in 2009 compared to 2008, mainly due to the enhanced productivity of new wells being drilled to develop
unconventional resources in the lower-48 States. Production from natural gas basins other than the WCSB represents supply competition for WCSB natural gas. Overall,
U.S. natural gas production is expected to decrease somewhat in 2010 compared to recent years. Production from individual natural gas basins in North America will depend on factors including
natural gas drilling activity, well production rates, and relative operating costs with reduced natural gas drilling activity in North America as a whole expected to contribute to lower production
overall.
The
changing geography and quantity of supply from various basins have resulted in new pipeline projects which have impacted and will continue to impact the overall natural
gas transportation infrastructure and the relative competitive positions of our pipeline systems.
Demand for Transportation Services and Contracting
Demand for natural gas transportation service on our pipeline systems is directly related to the activity in the natural gas markets served by these systems. Factors that may
impact demand for transportation service on any one system include the availability of natural gas supply at the pipeline system's receipt points, the ability and willingness of natural gas shippers
to utilize that system over alternative pipelines, relative transportation rates, and the volume of natural gas
2009 ANNUAL REPORT
53
delivered
to markets supplied by that system from other supply sources and storage facilities. The impact of changes in demand for natural gas transportation services on operating revenues for our
pipeline systems is dependent upon the extent to which capacity has been contracted under long-term firm contracts. Contracted capacity and system throughput are measures of demand for
natural gas transportation services.
The
reduced level of gas exiting the WCSB has resulted in excess pipeline capacity serving the WCSB. We anticipate there will be excess natural gas pipeline capacity serving
the WCSB for the foreseeable future and therefore competition for gas exiting the WCSB will continue. In this environment, there is little incentive for shippers to make long-term
commitments for capacity and the trend towards shorter term contracts is expected to continue for Great Lakes and Northern Border. As a result, there may be increased volatility and seasonality with
respect to throughput and revenues for these pipelines.
Prevailing
market conditions and dynamic competitive factors in North America, particularly reduced gas exiting the WCSB, increased supply from other supply basins to our
pipeline systems' market areas, and the economic environment affecting the demand for natural gas, will continue to impact the value of transportation on our pipeline systems and their ability to
market available capacity.
Great Lakes
Great Lakes' average contracted capacity was 100 per cent of its average design capacity for 2009, consistent with 2008. As at January 31, 2010,
89 per cent of its average design capacity was contracted on a firm basis with a weighted average remaining contract life of 2.0 years. On November 1, 2010, the
per cent of average design capacity contracted on a firm basis decreases to 68 per cent.
Great
Lakes had approximately 990 MDth/d of long haul capacity expiring on October 31, 2010, of which 831 MDth/d, representing 36 per cent
of Great Lakes' average design capacity, was contracted with TransCanada. On November 3, 2009, Great Lakes and TransCanada renewed contracts through October 31, 2011 for
470 MDth/d of capacity, or 20 per cent of average design capacity, some at a slightly discounted rate, and agreed that Great Lakes would provide other transportation services.
TransCanada elected to turn back 361 MDth/d, or 16 per cent of average design capacity, as of October 31, 2010. Of the remaining long haul capacity expiring on
October 31, 2010, 125 MDth/d was turned back.
In
addition to the long haul contract expiries, Great Lakes has an additional 110 MDth/d of short haul capacity under contracts expiring on October 31, 2010.
The cost and revenue study filed by Great Lakes with the FERC on February 4, 2010 reflects the increased risk of de-contracting on the Great Lakes system. Great Lakes is discounting
transportation capacity as needed to optimize revenue. Great Lakes' revenue may decline in 2010 if it is unable to recontract its expiring capacity.
Throughput
on Great Lakes' pipeline system in 2009 decreased to 1,992 MMcf/d compared to 2,143 MMcf/d in 2008 primarily due to underutilization of
long-term firm contracts by Great Lakes' major shipper, TransCanada, related to the early fill of storage during the traditional summer storage-fill season, lower power
generation demand due to the cooler than normal summer weather in the market areas served by Great Lakes, and decreased overall demand related to the economic environment. The underutilization of the
long-term firm contracts was offset by daily sales of firm services in 2009. Decreases in throughput related to underutilization of long-term firm contracts have a minimal
impact on revenue earned from these contracts. When the level of long-term firm contracts decreases beginning in November 2010, Great Lakes
may experience increased volatility in revenues as a result of changes in throughput. As well, we do not expect the same level of opportunity for daily sales of firm services related to available
capacity resulting from contract underutilization in 2010.
54
TC PIPELINES,
LP
Northern Border
Northern Border's average contracted capacity was 68 per cent of its design capacity for 2009, compared to 90 per cent for 2008. Competition for
supply from the WCSB and increased deliveries of natural gas to Midwest markets from other supply sources has impacted Northern Border's ability to contract available capacity. Northern Border's
capacity to Chicago is substantially under contract for multiple years, but as there is incremental supply in the Chicago market, shippers with capacity to Chicago may choose an alternate delivery
point, which is having a negative impact on Northern Border's ability to contract upstream capacity. Northern Border expects to continue to discount transportation capacity as needed to optimize
revenue. As at January 31, 2010, Northern Border had approximately 69 per cent of its design capacity contracted for the first quarter of 2010, decreasing to
36 per cent beginning in the second quarter of 2010 following contract maturities. The weighted average remaining life of Northern Border's contracts at January 31, 2010 was
1.9 years.
The
Midwest markets served by Northern Border continued to be impacted in 2009 by incremental supply delivered from the Rockies natural gas basin on the Rockies Express
Pipeline. The combination of growing supply from the Rockies and from ongoing shale gas developments reaching the Chicago market region through new and available pipeline capacity, together with
reductions in natural gas demand resulting from the current economic environment, has negatively impacted demand for Northern Border's transportation services. Throughput on Northern Border's pipeline
system in 2009 decreased to 1,708 MMcf/d compared to 2,041 MMcf/d in 2008. These supply and demand factors have the potential to maintain competitive pressures in the Midwest markets on
WCSB sourced natural gas, as discussed further under "Competition".
TransCanada
is pursuing the Bison Pipeline Project that will extend from the Powder River Basin producing region in Wyoming to an interconnection with the Northern Border
system in Morton County, North Dakota. The FERC issued a Final Environmental Impact Statement in December 2009 and the project is in the final stages of the regulatory process. Pending these
approvals, TransCanada expects to commence construction in May 2010 and the project is expected to go into service in late 2010. If completed, this project would increase Northern Border's
supply diversity. Shippers on the Bison Pipeline Project have executed 10 year contracts for approximately 407 MMcf/d of capacity on the Northern Border system from Port of Morgan,
Montana to Ventura, Iowa, commencing on the in-service date of the Bison Pipeline Project. If the Bison Pipeline Project is completed, this would increase Northern Border's average
contracted capacity and weighted average contract life.
Competition
There is currently increased competition amongst natural gas pipelines for gas exiting the WCSB due to excess pipeline capacity. Factors impacting the competition for gas
exiting the WCSB include levels of firm transportation contracts on each pipeline, demand for natural gas in the regions served by each pipeline, and relative transportation values on each pipeline.
In the short term, factors impacting the competition for gas exiting the WCSB include high natural gas storage levels in Eastern Canada, Michigan and California, and changes in basis differential for
each of the pipelines accessing the WCSB resulting from changes in the North American gas flows related to new pipeline infrastructure. As well, commencing January 1, 2010, one of the main
pipelines accessing the WCSB, the TransCanada Mainline pipeline system, increased its rates for firm transportation services by 40 per cent. This may improve the relative competitive
position of the other pipelines accessing the WCSB, including our Great Lakes and Northern Border pipeline systems.
Our
pipeline systems compete primarily with other interstate and intrastate pipelines in the transportation of natural gas. Competition among natural gas pipelines is based
primarily on transportation charges and proximity to natural gas supply areas and markets. Changes in North American natural gas flow patterns as a result of recent and proposed pipeline projects are
changing the supply competition in the markets served by our pipeline systems. Supply competition from other natural gas sources has impacted demand for transportation on our pipeline systems. Supply
competition in the Midwest markets from the Rockies Express Pipeline, along with deliveries from other supply sources via interconnecting pipelines negatively impacted Northern Border's flows and
sales of available capacity in 2009 and are
2009 ANNUAL REPORT
55
expected
to continue to impact demand for Northern Border's transportation services in 2010. As well, growth in supplies available from other natural gas producing regions has impacted prices for
natural gas delivered to some of the markets our pipeline systems serve relative to other market regions.
Government Regulation
Federal Energy Regulatory Commission
Natural gas transportation is regulated by the FERC
and other federal and state regulatory agencies, including the Department of Transportation. FERC regulatory policies govern the rates that pipelines are permitted to charge customers for interstate
transportation of natural gas. The operation and maintenance of our pipeline systems are also regulated by the federal and state regulatory agencies.
The
FERC-approved rate designs used by our pipeline systems are based upon firm service and interruptible services. Customers with firm service transportation
agreements pay a fee known as a reservation charge to reserve pipeline capacity, regardless of use, for the term of their contracts. Firm service transportation customers may also pay a variable fee
that is based on the distance and volume of natural gas they transport. Customers with interruptible service transportation agreements may utilize available capacity on a pipeline system after firm
service transportation requests are satisfied. Interruptible service customers are assessed a variable fee
based on distance and the volume of natural gas they transport. The majority of our pipeline systems' revenue is generated by firm service transportation agreements.
On
November 19, 2009, the FERC issued an order in FERC Docket No. RP10-149 instituting an investigation pursuant to Section 5 of the Natural
Gas Act. The FERC alleged, based on a review of certain historical information, that Great Lakes' revenues might substantially exceed Great Lakes' actual cost of service and therefore may be unjust
and unreasonable. On February 4, 2010, Great Lakes filed a cost and revenue study (GL Cost and Revenue Study) in response to the November 2009 Order. The GL Cost and Revenue Study
supports Great Lakes' current rates, shows that if Great Lakes filed to reset its rates, these rates should be above Great Lakes' current rates. The GL Cost and Revenue Study reflects the increased
risk of de-contracting on the Great Lakes system which may result in decreases to overall long-term, daily and short-term firm transportation revenues, and
interruptible transportation revenues, as compared to prior periods.
In
the absence of a settlement, a hearing in the GL Rate Proceeding is scheduled for early August 2010 and an initial decision by the Administrative Law Judge is
expected in November 2010. Should the FERC determine as a result of these proceedings, that Great Lakes' rates are not just and reasonable; the FERC could order Great Lakes to reduce its rates
prospectively. Great Lakes' has expressed interest in pursuing settlement discussions with the FERC and interveners with the aim of bringing certainty to Great Lakes rates.
TransCanada
Corporation owns a 53.55 percent interest in Great Lakes. TransCanada, Great Lakes' largest shipper, and ANR, an affiliate of Great Lakes and a shipper on
Great Lakes, have filed interventions in the GL Rate Proceeding.
Climate Change
Passage of climate control legislation or other regulatory initiatives
by Congress or various states of the U.S. or the adoption of regulations by the EPA or analogous state agencies that regulate or restrict emissions of greenhouse gases, including methane or carbon
dioxide, in areas in which our pipeline systems conduct business, could result in changes to the consumption and demand for natural gas. This could have adverse effects on our business, financial
position, results of operations and prospects. Such changes could increase the costs of our pipeline systems' operations, including costs to operate and maintain facilities, install new emission
controls, acquire allowances to authorize our pipeline systems' greenhouse gas emissions, pay any new taxes related to greenhouse gas emissions, and administer and manage a greenhouse gas emissions
program. While we may be able to include some or all of such increased costs in the rates charged by our pipelines or to our customers, such recovery of costs is uncertain and may depend on events
beyond our control including the outcome of future rate proceedings before the FERC, and the provisions of any final legislation. See Item 1.
"Business Environmental Matters".
56
TC PIPELINES,
LP
HOW WE EVALUATE OUR OPERATIONS
We evaluate our business primarily on the basis of the underlying operating results for each of our pipeline systems, along with a measure of Partnership cash flows. This
measure does not have any standardized meaning prescribed by U.S. generally accepted accounting principles (GAAP). It is, therefore, considered to be a non-GAAP measure and is
unlikely to be comparable to similar measures presented by other entities. Partnership cash flows is the sum of net income, cash distributions received from Great Lakes and Northern Border, cash flows
provided by North Baja's operating activities, and cash flows provided by Tuscarora's operating activities, less equity income from investments in Great Lakes and Northern Border, North Baja's net
income and Tuscarora's net income, net of general partner distributions.
RESULTS OF OPERATIONS OF TC PIPELINES, LP
The general partner interests in Great Lakes and Northern Border, and ownership of North Baja and Tuscarora were our only material sources of income in 2009; therefore, our
results of operations and Partnership cash flows were influenced by and reflect the same factors that influenced the financial results of Great Lakes, Northern Border, North Baja and Tuscarora. See
Item 1. "Business".
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions which cannot be known with
certainty, that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions
also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ. The following
summarizes the
Partnership's and our pipeline systems' accounting policies and estimates, and should be read in conjunction with Note 2 of the Partnership's Financial Statements included elsewhere in
this report.
We
account for our investments in Great Lakes and Northern Border using the equity method of accounting. The equity method of accounting is appropriate where the investor
does not control an investee, but rather is able to exercise significant influence over the operating and financial policies of an investee. We are able to exercise significant influence over our
investments in Great Lakes and Northern Border because of our ownership interests and our representation on the Great Lakes and Northern Border management committees.
We
account for our investments in North Baja and Tuscarora using the consolidation method, as we wholly-own both entities.
Regulation
Our pipeline systems' accounting policies conform to
Accounting Standards Codification (ASC) 980 Regulated
Operations
. Our pipeline systems consider several factors to evaluate their continued application of the provisions of ASC 980 such as potential deregulation of their
pipelines; anticipated changes from cost-based ratemaking to another form of regulation; increasing competition that limits their ability to recover costs; and regulatory actions that
limit rate relief to a level insufficient to recover costs.
Certain
assets that result from the ratemaking process are reflected on Northern Border's balance sheet as regulatory assets. If Northern Border determines future recovery
of these assets is no longer probable as a result of discontinuing application of ASC 980 or other regulatory actions, Northern Border would be required to write off the regulatory assets at that
time. As of December 31, 2009, Northern Border reflected regulatory assets of $20.1 million on its balance sheet (2008 $21.7 million).
These assets are being amortized as directed by the FERC in Northern Border's previous regulatory proceedings over varying time periods up to 43 years.
2009 ANNUAL REPORT
57
As
at December 31, 2009 and 2008, Great Lakes, North Baja and Tuscarora did not have any regulatory assets or liabilities recorded on their respective
balance sheets.
Contingencies
Our pipeline systems' accounting for contingencies covers a variety of business activities, including contingencies for legal and environmental liabilities. Our pipeline
systems accrue for these contingencies when their assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered and an amount can be reasonably
estimated in accordance with
ASC 450 Contingencies
. Our pipeline systems base their estimates on currently
available facts and their estimates of the ultimate outcome or resolution. Actual results may differ from our pipeline systems' estimates resulting in an impact, positive or negative, on earnings and
cash flow.
Impairment of Long-Lived Assets and Goodwill
We assess our long-lived assets for impairment based on
ASC 360-10-35 Property, Plant, and
Equipment Overall Subsequent Measurement
. A long-lived asset is tested for
impairment whenever events or changes in circumstances indicate that its carrying amount may exceed its fair value. Fair value is a market-based measure of the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We
assess our goodwill for impairment at least annually, based on
ASC
350 Intangibles Goodwill and Other
. An initial assessment is made by comparing the fair value of
the operations with goodwill, as determined in accordance with ASC 350, to the book value of each reporting unit. If the fair value is less than the book value, an impairment is indicated, and we must
perform a second test to measure the amount of the impairment. In the second test, we calculate the implied fair value of the goodwill by deducting the fair value of all tangible and intangible net
assets of the operations with goodwill from the fair value determined in step one of the assessment. If the carrying value of the goodwill exceeds this calculated implied fair value of the goodwill,
we will record an impairment charge. At December 31, 2009 and 2008, we had $130.2 million of goodwill recorded on our balance sheet related to the North Baja and Tuscarora acquisitions.
No impairment of goodwill existed at December 31, 2009.
Impact of New Accounting Standards
ASC 260-10-55 Earnings Per
Share Overall Implementation Guidance and Illustrations Master Limited
Partnerships
is effective for fiscal years beginning after December 15, 2008. The Partnership adopted the provisions of ASC
260-10-55 effective January 1, 2009. Refer to Note 10 for the impact to the Partnership's financial statements.
ASC 805 Business Combinations
was issued in December 2007 and replaces prior
guidance. ASC 805 retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business
combination, with the objective of
improving the relevance and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. The requirements of this standard
will impact the accounting for business combinations subsequent to January 1, 2009.
NET INCOME
The Partnership uses the non-GAAP financial measure 'Net income prior to recast' as a financial performance measure. Net income prior to recast excludes North
Baja's net income for periods prior to July 1, 2009, the date on which the Partnership acquired North Baja. The acquisition of North Baja from TransCanada was accounted for as a transaction
under common control, similar to a pooling of interests, whereby the Partnership's historical financial information was recast to include the net income of North Baja for all periods presented, which
included income which did not accrue to the Partnership's general partner interest or to the Partnership's common units, but rather accrued to North Baja's former parent.
58
TC PIPELINES,
LP
Net
income prior to recast is presented to enhance investors' understanding of the way management analyzes the Partnership's financial performance. Net income prior to
recast is provided as a supplement to GAAP financial results and is not meant to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
To
supplement our financial statements, we have presented a comparison of the earnings contribution components from each of our investments. We have presented net income in
this format to enhance investors' understanding of the way management analyzes our financial performance. We believe this summary provides a more meaningful comparison of our net income to prior
years, as we account for our partially-owned pipeline systems using the equity method. The presentation of this additional information is not meant to be considered in isolation or as a substitute for
results prepared in accordance with GAAP.
The
shaded areas in the tables below disclose the results from Great Lakes and Northern Border, representing 100 per cent of each entity's operations for the
given period.
Year Ended December 31, 2009
(millions of dollars)
|
|
Total
|
|
Other Pipes
(a)
|
|
Corporate
(b)
|
|
Great Lakes
|
|
Northern
Border
(c)
|
|
|
Transmission revenues
|
|
50.9
|
|
50.9
|
|
|
|
289.7
|
|
249.2
|
|
Operating expenses
|
|
(7.9
|
)
|
(7.9
|
)
|
|
|
(66.5
|
)
|
(70.8 )
|
|
General and administrative
|
|
(6.2
|
)
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
36.8
|
|
43.0
|
|
(6.2
|
)
|
223.2
|
|
178.4
|
|
Depreciation
|
|
(10.9
|
)
|
(10.9
|
)
|
|
|
(58.5
|
)
|
(61.9 )
|
|
Financial charges, net and other
|
|
(27.5
|
)
|
(4.1
|
)
|
(23.4
|
)
|
(31.9
|
)
|
(34.4 )
|
|
Michigan business tax
|
|
|
|
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127.4
|
|
82.1
|
|
|
|
|
|
|
|
|
|
|
Equity income
|
|
99.4
|
|
|
|
|
|
59.1
|
|
40.3
|
|
|
Net income prior to recast
|
|
97.8
|
|
28.0
|
|
(29.6
|
)
|
59.1
|
|
40.3
|
|
|
North Baja's contribution prior to
acquisition
(d)
|
|
8.3
|
|
8.3
|
|
|
|
|
|
|
|
|
Net income
(d)
|
|
106.1
|
|
36.3
|
|
(29.6
|
)
|
59.1
|
|
40.3
|
|
|
Year Ended December 31, 2008
(millions of dollars)
|
|
Total
|
|
Other Pipes
(a)
|
|
Corporate
(b)
|
|
Great Lakes
|
|
Northern
Border
(c)
|
|
|
Transmission revenues
|
|
31.6
|
|
31.6
|
|
|
|
287.1
|
|
293.1
|
|
Operating expenses
|
|
(5.4
|
)
|
(5.4
|
)
|
|
|
(67.1
|
)
|
(78.0 )
|
|
General and administrative
|
|
(4.1
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
22.1
|
|
26.2
|
|
(4.1
|
)
|
220.0
|
|
215.1
|
|
Depreciation
|
|
(6.9
|
)
|
(6.9
|
)
|
|
|
(58.5
|
)
|
(61.1 )
|
|
Financial charges, net and other
(e)
|
|
(30.1
|
)
|
(4.3
|
)
|
(25.8
|
)
|
(32.6
|
)
|
(21.8 )
|
|
Michigan business tax
|
|
|
|
|
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123.4
|
|
132.2
|
|
|
|
|
|
|
|
|
|
|
Equity income
|
|
122.6
|
|
|
|
|
|
57.3
|
|
65.3
|
|
|
Net income prior to recast
|
|
107.7
|
|
15.0
|
|
(29.9
|
)
|
57.3
|
|
65.3
|
|
|
North Baja's contribution prior to
acquisition
(d)
|
|
15.3
|
|
15.3
|
|
|
|
|
|
|
|
|
Net income
(d)
|
|
123.0
|
|
30.3
|
|
(29.9
|
)
|
57.3
|
|
65.3
|
|
|
2009 ANNUAL REPORT
59
Year Ended December 31, 2007
(millions of dollars)
|
|
Total
|
|
Other Pipes
(a)(f)
|
|
Corporate
(b)
|
|
Great Lakes
(g)
Feb 23 - Dec 31
|
|
Northern
Border
(c)
|
|
|
Transmission revenues
|
|
27.2
|
|
27.2
|
|
|
|
236.2
|
|
309.4
|
|
Operating expenses
|
|
(4.9
|
)
|
(4.9
|
)
|
|
|
(53.7
|
)
|
(83.5 )
|
|
General and administrative
|
|
(3.4
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
18.9
|
|
22.3
|
|
(3.4
|
)
|
182.5
|
|
225.9
|
|
Depreciation
|
|
(6.3
|
)
|
(6.3
|
)
|
|
|
(49.4
|
)
|
(60.7 )
|
|
Financial charges, net and other
|
|
(33.8
|
)
|
(4.4
|
)
|
(29.4
|
)
|
(27.6
|
)
|
(41.1 )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105.5
|
|
124.1
|
|
|
|
|
|
|
|
|
|
|
Equity income
|
|
110.2
|
|
|
|
|
|
49.0
|
|
61.2
|
|
|
Net income prior to recast
|
|
89.0
|
|
11.6
|
|
(32.8
|
)
|
49.0
|
|
61.2
|
|
|
North Baja's contribution prior to
acquisition
(d)
|
|
5.7
|
|
5.7
|
|
|
|
|
|
|
|
|
Net income
(d)
|
|
94.7
|
|
17.3
|
|
(32.8
|
)
|
49.0
|
|
61.2
|
|
|
-
(a)
-
"Other
Pipes" includes the results of North Baja and Tuscarora.
-
(b)
-
"Corporate"
includes the costs of the Partnership, but excludes the costs of its subsidiaries.
-
(c)
-
The
Partnership owns a 50 per cent general partner interest in Northern Border. Equity income from Northern Border includes the
twelve-year amortization of a $10.0 million transaction fee paid to the operator of Northern Border at the time of the additional 20 per cent acquisition in
April 2006.
-
(d)
-
The
acquisition of North Baja from TransCanada was accounted for as a transaction between entities under common control, similar to a pooling of interests,
whereby the assets and liabilities of North Baja were recorded at TransCanada's carrying value and the Partnership's historical financial information was recast to include North Baja for all periods
presented on a consolidated basis.
-
(e)
-
In
2008, Northern Border's financial charges, net and other, included a $16.2 million gain on the sale of Bison Pipeline LLC (Bison).
-
(f)
-
The
Partnership owns a 100 per cent general partner interest in Tuscarora following the acquisition of an additional two per cent
interest on December 31, 2007.
-
(g)
-
The
Partnership acquired a 46.45 per cent general partner interest in Great Lakes on February 22, 2007; therefore, the amounts for
2007 only include results for the period from February 23 to December 31, 2007.
Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008
Net income decreased $16.9 million to $106.1 million in 2009 compared to $123.0 million in 2008. Excluding the contribution from North Baja prior to the
acquisition, net income prior to recast decreased $9.9 million to $97.8 million in 2009 compared to $107.7 million in 2008. This decrease was primarily due to lower equity income
from Northern Border, partially offset by the contribution from North Baja since the acquisition. North Baja contributed $11.6 million to the Partnership's net income subsequent to its
acquisition on July 1, 2009.
Equity
income from Northern Border was $40.3 million in 2009, a decrease of $25.0 million compared to 2008. A portion of this decrease in equity income was due
to the Partnership's $8.1 million share of Northern Border's gain recorded on the sale of Bison in 2008. Excluding the gain, Northern Border's 2009 net income decreased $33.9 million
compared to 2008 primarily due to decreased transmission revenues, partially offset by lower operating expenses and financial charges. Northern Border's transmission revenues decreased
$43.9 million due to reductions in contracted capacity compared to 2008. Demand for Northern Border's transportation services, and therefore ability to contract capacity, has continued to be
negatively impacted by increased U.S. natural gas supplies being transported to the Midwestern and Eastern markets from new U.S. supply sources, including the Rockies Basin and southern
shale gas, which is displacing demand for gas from traditional natural gas sources including the WCSB. Reduced overall demand for natural gas related to the economic environment is also affecting
demand for Northern Border's transportation. Operating expenses decreased $7.2 million in 2009 compared to 2008 primarily due to decreased property taxes and
60
TC PIPELINES,
LP
lower
general and administrative costs. Excluding the gain recorded on the sale of Bison in 2008, financial charges, net and other decreased $3.5 million in 2009 compared to 2008 primarily due
to lower interest rates and average debt outstanding.
Net
income from Other Pipes, which includes results from North Baja and Tuscarora, was $36.3 million in 2009, an increase of $6.0 million compared to 2008.
Excluding the contribution from North Baja prior to the acquisition, net income from Other Pipes, prior to recast, was $28.0 million, an increase of $13.0 million. This increase was
primarily due to the acquisition of North Baja which contributed $11.6 million to net income in 2009, as well as increased transmission revenues from a full year of operation of Tuscarora's
Likely compressor station expansion that went into service in April 2008.
Equity
income from investment in Great Lakes was $59.1 million in 2009, an increase of $1.8 million compared to $57.3 million in 2008. The increase in
equity income was primarily due to increased transmission revenues and decreased operating expenses. Transmission revenues increased primarily due to increased sales of short-term
services, partially offset by decreased reservation revenues resulting from re-negotiation of contracts at lower rates and non-renewal of services. Operating expenses decreased
primarily due to lower compressor fuel use tax, lower property taxes, and lower transition costs. These decreases in operating expenses were offset by increased repairs and overhauls.
Costs
at the Partnership level were $29.6 million in 2009, a decrease of $0.3 million compared to 2008. This decrease was primarily due to lower financial
charges, net and other, partially offset by increased operating expenses. The decrease in financial charges, net and other, was a result of lower interest rates, partially offset by higher average
debt outstanding and losses on interest rate derivatives. Operating expenses increased primarily due to transaction costs relating to the North Baja acquisition and the concurrent IDR restructuring.
Year Ended December 31, 2008 Compared with the Year Ended December 31, 2007
Net income increased $28.3 million to $123.0 million in 2008 compared to $94.7 million in 2007. The accounting treatment of the North Baja acquisition
resulted in $15.3 million and $5.7 million recorded in the Partnership's net income for 2008 and 2007, respectively, for the years prior to our July 1, 2009 acquisition. Net
income prior to recast increased $18.7 million to $107.7 million in 2008 compared to $89.0 million in 2007. This increase was primarily due to higher income from each of our
pipeline systems, combined with a reduction in financial charges, net and other at the Partnership level.
Equity
income from investment in Great Lakes was $57.3 million in 2008, an increase of $8.3 million compared to $49.0 million for the period
February 23 to December 31, 2007. The increase in equity income was primarily due to the timing of the Great Lakes acquisition, which resulted in less than a full year of income
contribution in 2007. In addition, Great Lakes experienced an overall increase in transmission revenues in 2008 as compared to 2007, offset by increased operating expenses and the implementation of
Michigan Business Tax. Transmission revenues increased primarily due to increased sales of short-term firm transportation services at higher average transportation rates, as well as
increased sales of interruptible transportation services and storage related services, offset by decreased long-term services. Operating expenses increased primarily due to integration
costs related to its acquisition, employee benefit costs, and pipeline inspection costs, partially offset by decreased property and other non-income taxes and lower main engine repair
costs. In 2008, Great Lakes recorded Michigan Business Tax of $5.5 million.
Equity
income from investment in Northern Border was $65.3 million in 2008, an increase of $4.1 million compared to 2007. The increase in equity income was
primarily due to the Partnership's $8.1 million share of Northern Border's gain on the sale of Bison. Excluding this gain, Northern Border's net income decreased $4.0 million compared to
the prior year due to a $16.3 million decrease in transmission revenues, partially offset by decreased financial charges and operating expenses. Northern Border's transmission revenues
decreased in 2008 compared to the prior year primarily due to a decrease in contracted capacity as natural gas supply transported from the Rockies basin into the Mid-Continent market on
the Western segment of the Rockies Express Pipeline impacted demand. Interest expense decreased in 2008 compared to the prior year due to lower interest rates. Operating expenses decreased in 2008
compared to 2007 primarily due to decreased property taxes and a $2.3 million transition related charge in 2007
2009 ANNUAL REPORT
61
related
to the reimbursement for shared equipment and furnishings, partially offset by increased electric compressor charges.
Net
income from Other Pipes was $30.3 million in 2008, an increase of $13.0 million compared to 2007. The accounting treatment of the North Baja acquisition
resulted in $15.3 million and $5.7 million recorded in the Partnership's net income for 2008 and 2007, respectively, for the years prior to our July 1, 2009 acquisition. Net
income from Other Pipes, prior to recast, was $15.0 million in 2008, an increase of $3.4 million compared to 2007. This increase was primarily due to increased transmission revenues
related to a full year of operation of Tuscarora's Likely compressor station expansion that went into service in April 2008.
Costs
at the Partnership level were $29.9 million in 2008, a decrease of $2.9 million compared to 2007. This decrease related primarily to lower financial
charges as a result of lower interest rates and average debt outstanding, partially offset by losses on interest rate derivatives.
PARTNERSHIP CASH FLOWS
The Partnership uses the non-GAAP financial measures 'Partnership cash flows' and 'Partnership cash flows before general partner distributions' as they provide a
measure of cash generated during the period to evaluate our cash distribution capability. As well, management uses these measures as a basis for recommendations to our general partner's board of
directors regarding the distribution amount to be declared each quarter. Partnership cash flow information is presented to enhance investors' understanding of the way that management analyzes the
Partnership's financial performance.
The
Partnership calculates Partnership cash flows as net income, less North Baja's net income contribution prior to acquisition, plus operating cash flows from the
Partnership's wholly-owned subsidiaries, North Baja and Tuscarora, and cash distributions received in excess of equity income from the Partnership's equity investments, Great Lakes and Northern
Border, net of distributions declared to the general partner. Partnership cash flows before general partner distributions represent Partnership cash flows prior to distributions declared to the
general partner.
Partnership
cash flows and Partnership cash flows before general partner distributions are provided as a supplement to GAAP financial results and are not meant to be
considered in isolation or as substitutes for financial results prepared in accordance with GAAP.
62
TC PIPELINES,
LP
Non-GAAP Measures
Reconciliations of Net Income to Net Income Prior to Recast and Partnership Cash Flows
Year Ended December 31
(millions of dollars except per common unit amounts)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Net income
(a)
|
|
106.1
|
|
123.0
|
|
94.7
|
|
North Baja's contribution prior to acquisition
(a)
|
|
(8.3
|
)
|
(15.3
|
)
|
(5.7
|
)
|
|
|
Net income prior to recast
|
|
97.8
|
|
107.7
|
|
89.0
|
|
|
|
Add:
|
|
|
|
|
|
|
|
Cash distributions from Great Lakes
(b)
|
|
72.5
|
|
73.9
|
|
61.3
|
|
Cash distributions from Northern Border
(b)
|
|
75.7
|
|
90.7
|
|
86.3
|
|
Cash flows provided by North Baja's operating activities
|
|
15.7
|
|
|
|
|
|
Cash flows provided by Tuscarora's operating activities
|
|
23.7
|
|
21.5
|
|
17.6
|
|
|
|
|
|
187.6
|
|
186.1
|
|
165.2
|
|
Less:
|
|
|
|
|
|
|
|
Equity income from investment in Great Lakes
|
|
(59.1
|
)
|
(57.3
|
)
|
(49.0
|
)
|
Equity income from investment in Northern Border
|
|
(40.3
|
)
|
(65.3
|
)
|
(61.2
|
)
|
North Baja's net income
|
|
(11.6
|
)
|
|
|
|
|
Tuscarora's net income
|
|
(16.4
|
)
|
(15.0
|
)
|
(11.6
|
)
|
|
|
|
|
(127.4
|
)
|
(137.6
|
)
|
(121.8
|
)
|
|
|
Partnership cash flows before general partner distributions
|
|
158.0
|
|
156.2
|
|
132.4
|
|
General partner distributions
(c)
|
|
(7.8
|
)
|
(12.7
|
)
|
(9.2
|
)
|
|
|
Partnership cash flows
|
|
150.2
|
|
143.5
|
|
123.2
|
|
|
|
Cash distributions declared
|
|
(123.6
|
)
|
(110.8
|
)
|
(101.0
|
)
|
Cash distributions declared per common unit
(d)
|
|
$2.895
|
|
$2.815
|
|
$2.630
|
|
Cash distributions paid
|
|
(117.0
|
)
|
(108.6
|
)
|
(86.7
|
)
|
Cash distributions paid per common unit
(d)
|
|
$2.870
|
|
$2.775
|
|
$2.565
|
|
-
(a)
-
The
acquisition of North Baja from TransCanada was accounted for as a transaction between entities under common control, similar to a pooling of interests,
whereby the assets and liabilities of North Baja were recorded at TransCanada's carrying value and the Partnership's historical financial information was recast to include North Baja for all periods
presented on a consolidated basis.
-
(b)
-
In
accordance with the cash distribution policies of the respective pipeline systems, cash distributions from Great Lakes and Northern Border are based on
their respective prior quarter financial results, except that the distribution paid by Northern Border in the third quarter of 2008 included a special distribution of $16.4 million (Partnership
share $8.2 million) related to the sale of Bison.
-
(c)
-
General
partner distributions represent the cash distributions declared to the general partner with respect to its two per cent interest plus an
amount equal to incentive distributions. Prior to 2009, General partner distributions were based on the cash distributions paid during the quarter to the general partner. As a result of the
retrospective application of ASC 260-10-55, General partner distributions for the years ended December 31, 2008 and 2007 increased from $11.8 million to
$12.7 million and from $7.7 million to $9.2 million, respectively.
-
(d)
-
Cash
distributions declared per common unit and cash distributions paid per common unit are computed by dividing cash distributions, after the deduction of
the general partner's allocation, by the number of common units outstanding. The general partner's allocation is computed based upon the general partner's two per cent interest plus an amount
equal to incentive distributions.
2009 ANNUAL REPORT
63
Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008
Partnership cash flows increased $6.7 million to $150.2 million in 2009 compared to $143.5 million in 2008. This increase was primarily due to
$15.7 million of cash flows provided by North Baja's operating activities since the Partnership's July 1, 2009 acquisition, a decrease of $4.9 million in general partner
distributions resulting from the restructuring of IDRs on July 1, 2009 and an increase of cash flows provided by Tuscarora's operating activities of $2.2 million. These positive factors
were partially offset by decreased cash distributions from Northern Border of $15.0 million. Northern Border's decreased cash distributions were due to a special one-time
$8.2 million distribution for the proceeds received in connection with the sale of Bison in 2008 and lower net income in 2009 as compared to 2008, partially offset by a reduction in maintenance
capital expenditures.
The
Partnership paid distributions of $117.0 million in 2009, an increase of $8.4 million compared to 2008 due to an increase in the number of common units
outstanding, in addition to increases in quarterly per common unit distribution amounts.
Other Cash Flows
On July 1, 2009, the Partnership acquired North Baja with proceeds from equity issuances of $80.0 million, including the general partner's contribution to
maintain its two per cent interest, a $170.0 million draw on its revolving credit facility and cash on hand. In 2009, the Partnership made equity contributions to Northern Border
totaling $42.3 million to partially fund the repayment of Northern Border's $200.0 million of debt which matured on September 1, 2009 and to complete the Des Plaines Project. In
the fourth quarter of 2009, net proceeds from equity issuances of $185.5 million, including the general partner's contribution to maintain its two per cent interest, were used to repay
long-term debt outstanding on the Partnership's revolving portion of its senior credit facility.
Year Ended December 31, 2008 Compared with the Year Ended December 31, 2007
Partnership cash flows increased $20.3 million to $143.5 million in 2008 compared to $123.2 million in 2007. This increase was a result of increased cash
distributions from Great Lakes and Northern Border, increased cash flows provided by Tuscarora's operating activities and decreased costs at the Partnership level.
Cash
distributions from Great Lakes were $73.9 million in 2008, an increase of $12.6 million compared to 2007. The increase in cash distributions from Great
Lakes is due primarily to a full year of ownership in 2008. Cash distributions from Northern Border increased $4.4 million to $90.7 million in 2008 compared to 2007 due primarily to the
special distribution of $8.2 million received in relation to the gain on the sale of Bison. Cash flows provided by Tuscarora's operating activities were $21.5 million in 2008, an
increase of $3.9 million compared to 2007 primarily due to additional transmission revenues resulting from the Likely compressor station expansion. Costs at the Partnership level decreased by
$2.9 million to $29.9 million in 2008 compared to 2007 primarily due to lower financial charges as a result of lower interest rates and average debt outstanding, partially offset by
losses on interest rate derivatives.
The
Partnership paid distributions of $108.6 million in 2008, an increase of $21.9 million compared to 2007 due to an increase in the number of common units
outstanding, in addition to increases in quarterly per common unit distribution amounts.
Other Cash Flows
In 2008, Tuscarora made capital expenditures of $6.8 million that related primarily to the Likely compressor station expansion, compared to $13.2 million in 2007.
In February 2007, the Partnership acquired a 46.45 per cent interest in Great Lakes from El Paso Corporation for $733.0 million in cash. In April 2007, the
Partnership made a contribution of $7.5 million to Northern Border, representing the Partnership's 50 per cent share of a $15.0 million cash call issued by Northern Border.
In
2007, the proceeds from net equity issuances of $607.0 million, including the general partner's contribution to maintain its two per cent interest, were
used to acquire Great Lakes. The Partnership funded the balance of the acquisition cost with a draw on its revolving credit and term loan agreement. The Partnership repaid a net $36.6 million
of the outstanding balance on its debt in 2008.
64
TC PIPELINES,
LP
LIQUIDITY AND CAPITAL RESOURCES OF TC PIPELINES, LP
Overview
Our principal sources of liquidity include distributions received from our investments in Great Lakes and Northern Border, operating cash flows from North Baja and Tuscarora,
and our bank credit facility. The Partnership funds its operating expenses, debt service and cash distributions primarily with operating cash flow. Long-term capital needs may be met
through the issuance of long-term debt and/or equity.
Summary of the Partnership's Contractual Obligations
The Partnership's contractual obligations as of December 31, 2009 included the following:
|
|
Payments Due by Period
|
(millions of dollars)
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
More than
5 Years
|
|
|
|
Senior Credit Facility due 2011
|
|
484.0
|
|
|
|
484.0
|
|
|
|
|
|
|
7.13% Series A Senior Notes due 2010
|
|
48.2
|
|
48.2
|
|
|
|
|
|
|
|
|
7.99% Series B Senior Notes due 2010
|
|
4.4
|
|
4.4
|
|
|
|
|
|
|
|
|
6.89% Series C Senior Notes due 2012
|
|
4.7
|
|
0.8
|
|
3.9
|
|
|
|
|
|
|
Interest payments on Senior Credit Facility
(a)
|
|
35.2
|
|
18.6
|
|
16.6
|
|
|
|
|
|
|
Interest payments on Senior Notes
|
|
4.4
|
|
4.0
|
|
0.4
|
|
|
|
|
|
|
Fair value of derivative contracts
(b)
|
|
23.8
|
|
12.9
|
|
10.9
|
|
|
|
|
|
|
Operating leases
|
|
2.2
|
|
0.1
|
|
0.4
|
|
0.2
|
|
1.5
|
|
|
|
|
|
606.9
|
|
89.0
|
|
516.2
|
|
0.2
|
|
1.5
|
|
|
|
-
(a)
-
Interest
payments on Senior Credit Facility include the hedging effect of the derivative financial instruments placed on all of the outstanding debt. Refer
to the Interest Rate Swaps and Options section below for details of the hedges. The weighted average interest rate incurred for the quarter ended December 31, 2009 of 0.8983% was used to
calculate interest payments for all unhedged debt. The interest payment calculation assumes no principal repayments until maturity.
-
(b)
-
The
anticipated timing of settlement of the fair value of derivative contracts assumes no changes in interest rates from December 31, 2009.
North Baja
At the time of our acquisition of
North Baja, TransCanada had begun an expansion project of the North Baja pipeline from the Mexico/Arizona border to Yuma City, Arizona. We agreed to acquire the expansion facilities and contracts for
an additional sum up to $10.0 million, if TransCanada completed the project by June 30, 2010. The Yuma Lateral project is currently under construction and is expected to be completed in
March 2010. The purchase price has yet to be determined.
The Partnership's Debt and Credit Facilities
The Partnership has a $475.0 million senior term loan and a $250.0 million senior revolving credit facility (Senior Credit Facility) with a banking syndicate. In
accordance with the Senior Credit Facility agreement, once repaid, a senior term loan cannot be re-borrowed. In 2009, none of the senior term loan was repaid
(2008 $13.0 million); therefore, $475.0 million remained outstanding under the senior term loan at December 31, 2009. $9.0 million
was outstanding under the revolving portion of the Senior Credit Facility at December 31, 2009 (2008 $nil), leaving $241.0 million available for
future borrowings.
The
Senior Credit Facility matures on December 12, 2011, subject to two one-year extensions at the option of the Partnership and with the approval of a
majority of the lenders thereunder. Amounts borrowed may be repaid in part, or in full, prior to that time without penalty. Borrowings under the Senior Credit Facility bear interest based, at the
2009 ANNUAL REPORT
65
Partnership's
election, on the London Interbank Offered Rate (LIBOR) or the prime rate plus, in either case, an applicable margin. There was $484.0 million outstanding under the Senior Credit
Facility at December 31, 2009 (2008 $475.0 million). The interest rate on the Senior Credit Facility averaged 1.42 per cent for the
year ended December 31, 2009 (2008 3.75 per cent). After hedging activity, the interest rate incurred on the Senior Credit Facility
averaged 4.10 per cent for the year ended December 31, 2009 (2008 5.15 per cent). Prior to hedging activities, the interest
rate was 0.97 per cent at December 31, 2009 (2008 2.67 per cent).
The
Senior Credit Facility requires the Partnership to maintain a leverage ratio (debt to adjusted cash flow (net income plus cash distributions received,
extraordinary losses, interest expense, expense for taxes paid or accrued, depreciation and amortization less equity earnings and extraordinary gains)) of no more than 4.75 to 1.00 at the end
of any fiscal quarter. The permitted leverage ratio will increase to 5.50 to 1.00 for the first three fiscal reporting periods during any 12-month period immediately following the
consummation of specified material acquisitions. At December 31, 2009, the Partnership was in compliance with all of its financial covenants, in addition to the other covenants which include
restrictions on entering into mergers, consolidations and sales of assets, granting liens, material amendments to the Partnership Agreement, incurring additional debt and distributions
to unitholders.
Series A,
B and C Senior Notes are secured by Tuscarora's transportation contracts, supporting agreements and substantially all of Tuscarora's property. The
note purchase agreements contain certain provisions that include, among other items, limitations on additional indebtedness and distributions to partners. On December 21, 2010, the
Series A and B Senior Notes will mature. As market conditions dictate, the Partnership intends to refinance this debt with either fixed-rate or
variable-rate debt.
As
of February 26, 2010, the Partnership had $6.0 million of outstanding borrowings under the $250.0 million revolving portion of the Senior Credit
Facility, which expires on December 12, 2011.
Interest Rate Swaps and Options
The Partnership's long-term debt results in exposures to changing interest rates. The Partnership uses derivatives to assist in managing its exposure to interest
rate risk.
The
interest rate swaps and options are structured such that the cash flows match those of the Senior Credit Facility. The notional amount hedged was $375.0 million
at December 31, 2009 (2008 $475.0 million). $300.0 million of variable-rate debt is hedged by an interest rate swap
through December 12, 2011, where the weighted average fixed interest rate paid is 4.89 per cent. $75.0 million of variable-rate debt is hedged by an interest
rate swap during the period from February 29, 2008 through February 28, 2011, where the fixed interest rate paid is 3.86 per cent. $100.0 million of
variable-rate debt was hedged by an interest rate option through May 22, 2009 at an interest rate range between a weighted average floor of 4.09 per cent and a cap of
5.35 per cent. In addition to these fixed rates, the Partnership pays an applicable margin in accordance with the Senior Credit Facility agreement.
Under
ASC 820 Fair Value Measurements and Disclosures,
financial instruments are
recorded at fair value on a recurring basis and are categorized into one of three categories based upon a fair value hierarchy. The Partnership has classified all of its derivative financial
instruments as Level II where the fair value is determined by using valuation techniques that refer to observable market data or estimated market prices. At December 31, 2009, the fair
value of the interest rate swaps accounted for as hedges was negative $23.8 million (2008 negative $31.7 million), of which $12.9 million
is classified as a current liability (2008 $11.8 million). The fair value of the interest rate swaps was calculated using the year end interest rate;
therefore, it is expected that this fair value will fluctuate over the year as interest rates change. In 2009, the Partnership recorded interest expense of $15.1 million on the interest rate
swaps and options (2008 $6.9 million).
Capital Requirements
Northern Border's distribution policy adopted in 2006 defines minimum equity to total capitalization to be used by its management committee to establish the timing and amount
of required equity contributions. In accordance with this
66
TC PIPELINES,
LP
policy,
Northern Border required an equity contribution of $76.0 million in the third quarter of 2009, of which the Partnership's share was $38.0 million, to partially fund
$200.0 million of debt which matured on September 1, 2009. The Partnership financed this equity contribution with a combination of debt and operating cash flows. In the first quarter of
2009, the Partnership made an equity contribution of $4.3 million to Northern Border, representing the Partnership's 50 per cent share of an $8.6 million cash call issued
by Northern Border to complete the Des Plaines Project. In 2008, Northern Border did not require any equity contributions from its partners. In 2007, the Partnership made an equity contribution
of $7.5 million to Northern Border, representing the Partnership's 50 per cent share of a $15.0 million cash call issued by Northern Border to repay indebtedness.
In
2009, North Baja incurred $1.1 million of capital expenditures primarily related to minor growth projects.
In
2009, Tuscarora incurred $0.8 million of capital expenditures primarily related to the replacement of electric system components at the various compressor
stations. In 2008, Tuscarora incurred $6.8 million of capital expenditures (2007 $13.2 million), of which $6.7 million related to its
Likely compressor station expansion (2007 $12.2 million). These capital expenditures were funded with operating cash flows.
To
the extent the Partnership has any additional capital requirements with respect to our pipeline systems or makes acquisitions in the future, we expect to fund these
requirements with operating cash flows, debt and/or equity.
Cash Distribution Policy of the Partnership
The following table illustrates the percentage allocations of available cash from operating surplus between the common unitholders and our general partner based on the
specified target distribution levels. The percentage interests set forth below for our general partner include its two per cent general partner interest and incentive distribution rights
(IDRs), and assume our general partner has contributed any additional capital necessary to maintain its two per cent general partner interest. The distribution to the general partner
illustrated below, other than in its capacity as a holder of 5,797,106 common units that are in excess of its aggregate two per cent general partner interest, represents the IDRs.
|
|
|
|
Marginal Percentage
Interest in Distribution
|
|
|
|
|
Total Quarterly Distribution
per Unit Target Amount
|
|
Common
Unitholders
|
|
General
Partner
|
|
|
|
Minimum Quarterly Distribution
|
|
$0.45
|
|
98%
|
|
2%
|
|
|
First Target Distribution
|
|
above $0.45 up to $0.81
|
|
98%
|
|
2%
|
|
|
Second Target Distribution
|
|
above $0.81 up to $0.88
|
|
85%
|
|
15%
|
|
|
Thereafter
|
|
above $0.88
|
|
75%
|
|
25%
|
|
|
|
On July 1, 2009, in conjunction with the North Baja acquisition, the Partnership amended the IDRs held by the general partner
to eliminate the 50 per cent distribution threshold and replaced it with a new maximum distribution threshold of 25 per cent (for combined general partner interest
and incentive distribution interest).
2009 Fourth Quarter Cash Distribution
On January 19, 2010, the Board of Directors of the general partner declared the Partnership's fourth quarter 2009 cash distribution in the amount of $0.73 per common
unit. The fourth quarter cash distribution which was paid on February 12, 2010 to unitholders of record as of January 31, 2010, totaled $34.4 million and was paid in the following
manner: $33.7 million to common unitholders (including $4.2 million to the general partner as holder of 5,797,106 common units and $8.2 million to TransCanada as holder of
11,287,725 common units) and $0.7 million to
2009 ANNUAL REPORT
67
the
general partner in respect of its two per cent general partner interest. The cash distribution represents an annual cash distribution of $2.92 per common unit.
LIQUIDITY AND CAPITAL RESOURCES OF OUR PIPELINE SYSTEMS
Overview
Our pipeline systems' principal sources of liquidity are cash generated from operating activities, bank credit facilities and equity contributions from their partners. Our
pipeline systems fund operating expenses, debt service and cash distributions to partners primarily with operating cash flow.
Capital
expenditures are funded by a variety of sources, including cash generated from operating activities, borrowings under bank credit facilities, issuance of senior
unsecured notes or equity contributions from our pipeline systems' partners. The ability of our pipeline systems to access the debt capital markets under reasonable terms depends on their financial
position and general market conditions.
Our
pipeline systems believe that their ability to obtain financing at reasonable rates, together with their history of consistent cash flow from operating activities,
provide a solid foundation to meet their future liquidity and capital resource requirements. The Partnership's pipeline systems monitor the creditworthiness of their customers and have credit
provisions included in their tariffs, which allow them to request credit support as circumstances dictate.
Summary of Great Lakes' Contractual Obligations
Great Lakes' contractual obligations related to debt as of December 31, 2009 included the following:
|
|
Payments Due by Period
|
(millions of dollars)
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
More than
5 Years
|
|
|
|
8.74% series Senior Notes due 2010 to 2011
|
|
20.0
|
|
10.0
|
|
10.0
|
|
|
|
|
|
|
6.73% series Senior Notes due 2010 to 2018
|
|
81.0
|
|
9.0
|
|
18.0
|
|
18.0
|
|
36.0
|
|
|
9.09% series Senior Notes due 2012 to 2021
|
|
100.0
|
|
|
|
|
|
20.0
|
|
80.0
|
|
|
6.95% series Senior Notes due 2019 to 2028
|
|
110.0
|
|
|
|
|
|
|
|
110.0
|
|
|
8.08% series Senior Notes due 2021 to 2030
|
|
100.0
|
|
|
|
|
|
|
|
100.0
|
|
|
Interest payments on debt
|
|
322.9
|
|
31.4
|
|
58.3
|
|
52.3
|
|
180.9
|
|
|
|
|
|
733.9
|
|
50.4
|
|
86.3
|
|
90.3
|
|
506.9
|
|
|
|
Long-Term Financing
All of Great Lakes' outstanding debt securities are senior unsecured notes with similar terms except for interest rates, maturity dates and prepayment premiums.
Great
Lakes is required to comply with certain financial, operational and legal covenants. Under the most restrictive covenants in the Senior Note Agreements, approximately
$221.0 million of Great Lakes' partners' capital was restricted as to distributions as of December 31, 2009 (2008 $232.0 million). Great
Lakes was in compliance with all of its financial covenants at December 31, 2009.
The
aggregate estimated fair value of Great Lakes' long-term debt was $491.7 million for 2009. The aggregate annual required repayment of senior notes is
$19.0 million for each year 2010 through 2014. In 2009, interest expense related to Great Lakes' senior notes was $32.9 million
(2008 $34.2 million; 2007 $35.1 million).
68
TC PIPELINES,
LP
Other
Great Lakes has a cash management agreement with TransCanada whereby Great Lakes' funds are pooled with other TransCanada affiliates. The agreement also gives Great Lakes the
ability to obtain short-term borrowings to provide liquidity for Great Lakes' operating needs.
Summary of Northern Border's Contractual Obligations
Northern Border's contractual obligations related to debt, operating leases and other long-term obligations as of December 31, 2009, included
the following:
|
|
Payments Due by Period
|
(millions of dollars)
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
More than
5 Years
|
|
|
|
6.24% senior notes due 2016
|
|
100.0
|
|
|
|
|
|
|
|
100.0
|
|
|
7.50% senior notes due 2021
|
|
250.0
|
|
|
|
|
|
|
|
250.0
|
|
|
$250 million credit agreement due 2012
|
|
215.0
|
|
|
|
215.0
|
|
|
|
|
|
|
Interest payments on debt
|
|
264.2
|
|
26.3
|
|
51.7
|
|
50.0
|
|
136.2
|
|
|
Operating leases
|
|
67.1
|
|
2.2
|
|
3.8
|
|
3.8
|
|
57.3
|
|
|
Other long-term obligations
|
|
1.8
|
|
1.1
|
|
0.7
|
|
|
|
|
|
|
|
|
|
898.1
|
|
29.6
|
|
271.2
|
|
53.8
|
|
543.5
|
|
|
|
Interest Payments on Debt
The interest rate at December 31, 2009 of 0.52 per cent was used to calculate the interest payments on debt. The interest payment calculation assumes no
principal repayments until maturity.
Operating Leases
Northern Border is required to make future minimum payments for office space and rights-of-way under non-cancelable operating leases.
Other
Northern Border is required to pay $3.6 million over a five year period ending in 2011 under a transition services agreement between ONEOK Partners GP, LLC
(ONEOK Partners GP) and TransCanada, related to the reimbursement for shared assets acquired by ONEOK Partners to support the operations of Northern Border. In 2007, a charge of
$2.3 million was recorded in operations and maintenance expense and $1.3 million was recorded as plant, property and equipment.
Amended and Restated Credit Agreement
In April 2007, Northern Border entered into a $250.0 million amended and restated revolving credit agreement (2007 Credit Agreement) with certain financial
institutions. The 2007 Credit Agreement was used to refinance the outstanding indebtedness under Northern Border's $175.0 million revolving credit agreement dated as of May 2005 and was
used to repay all of the $150.0 million of its 6.25 per cent Senior Notes due May 2007. The 2007 Credit Agreement can also be used to finance permitted acquisitions, pay
related fees and expenses, issue letters of credit and provide for ongoing working capital needs and for other general business purposes, including capital expenditures.
At
December 31, 2009, based on the principal commitment amount of $250.0 million, available capacity under the 2007 Credit Agreement was $35.0 million.
Northern Border may, at its option, so long as no default or event of default has occurred and is continuing, elect to increase the capacity under its 2007 Credit Agreement by an aggregate amount not
to exceed $100.0 million, provided that lenders are willing to commit additional amounts. At Northern Border's
2009 ANNUAL REPORT
69
option,
the interest rate on the outstanding borrowings may be the lenders' base rate or the LIBOR plus an applicable margin that is based on its long-term unsecured credit ratings. The
2007 Credit Agreement permits Northern Border to specify the portion of the borrowings to be covered by specific interest rate options and to specify the interest rate period. The term of the
agreement is five years, with options for two one-year extensions.
Northern
Border's long-term debt arrangements contain covenants that restrict the incurrence of secured indebtedness or liens upon property by Northern Border.
Under the 2007 Credit Agreement, Northern Border is required to comply with certain financial, operational and legal covenants. Among other things, Northern Border is required to maintain a leverage
ratio (total debt to EBITDA (net income plus interest expense, income taxes, depreciation and amortization and all other non-cash charges)) of no more than 4.75 to 1. Pursuant to
the 2007 Credit Agreement, if one or more specified material acquisitions are consummated, the permitted leverage ratio is increased to 5.50 to 1 for the first three full calendar quarters
following the acquisition. At December 31, 2009, Northern Border was in compliance with all of its financial covenants.
The
fair value of Northern Border's variable rate debt was approximately the carrying value since the interest rates are periodically adjusted to reflect current market
conditions. As of December 31, 2009, Northern Border's outstanding borrowings under its credit agreement were $215.0 million
(2008 $181.0 million). The average interest rate on Northern Border's credit agreement at December 31, 2009 was 0.52 per cent
(2008 3.36 per cent).
Interest Rate Collar Agreement
In August 2007, Northern Border entered into a zero cost interest rate collar agreement (Collar Agreement) to limit the variability of the interest rate on
$140.0 million of variable-rate borrowings during the period from October 30, 2007 through October 30, 2009 to a range between a floor of 4.35 per cent
and a cap of 5.36 per cent. Northern Border designated the Collar Agreement as a cash flow hedge. At December 31, 2009, Northern Border's balance sheet reflected an unrealized
loss of approximately $nil (2008 $3.6 million) with a corresponding decrease to accumulated other comprehensive loss related to the changes in fair value
of the Collar Agreement since inception. In 2009, Northern Border recorded interest expense of $3.8 million under the Collar Agreement
(2008 $1.7 million). The hedge was effective for the years ended December 31, 2009, 2008 and 2007; therefore, it had no impact on income due to
hedge ineffectiveness.
Long-Term Financing Debt Securities
Northern Border periodically issues long-term debt securities to meet its capital resource requirements. All of Northern Border's outstanding debt securities are
senior unsecured notes with similar terms except for interest rates, maturity dates and prepayment premiums. The indentures of the notes do not limit the amount of unsecured debt Northern Border may
incur, but do restrict secured indebtedness.
On
August 26, 2009, Northern Border issued $100.0 million of 6.24 per cent Senior Notes due August 26, 2016. The proceeds, along with
equity contributions, borrowings under the 2007 Credit Agreement and cash generated from operating activities, were used to repay $200.0 million of 7.75 per cent Senior Notes due
September 1, 2009. Under the new Senior Notes, Northern Border may not at any time permit debt secured by liens to exceed 20 per cent of partners' capital and may not permit total
debt, at any time, to exceed 70 per cent of total capitalization. At December 31, 2009, Northern Border was in compliance with all of its financial covenants.
Northern
Border's senior notes issuances of $100.0 million due in 2016 and $250.0 million due in 2021 are borrowed at fixed interest rates of
6.24 per cent and 7.50 per cent, respectively. Northern Border intends to maintain the current schedule of maturities, which will result in no gains or losses on their
respective repayments. At December 31, 2009, the aggregate fair value of the outstanding senior notes was approximately $397.0 million
(2008 $447.0 million). In 2009, interest expense related to the senior notes was $31.3 million
(2008 $34.3 million).
70
TC PIPELINES,
LP
CASH FROM OUR PIPELINE SYSTEMS
Cash Distribution Policies of Great Lakes and Northern Border
Distributions to partners are made on a pro rata basis according to each general partner's ownership percentage, approximately one month following the end of a quarter.
Great Lakes' and Northern Border's respective management committees determine the amounts and timing of cash distributions, where the amounts of such distributions are based on available cash flow as
determined by a prescribed formula. Any changes to, or suspension of, Great Lakes' or Northern Border's cash distribution policy requires the unanimous approval of their respective management
committee.
Great
Lakes' distribution policy is to distribute 100 per cent of distributable cash flow based generally on earnings before current income taxes and
depreciation less debt repayments and capacity capital expenditures. This defined formula is subject to management committee approval and can be modified to ensure minimum cash balances, equity
balances and ratios are maintained.
Northern
Border's distribution policy is to distribute 100 per cent of the distributable cash flow based on earnings before interest, taxes, depreciation and
amortization less interest expense and maintenance capital expenditures and adopted certain changes related to equity contributions. The changes defined minimum equity to total capitalization ratios
to be used by the Northern Border management committee to determine the amount of required equity contributions, timing of the required contributions, and for any shortfall due to the inability to
refinance maturing debt to be funded by equity contributions.
On
February 1, 2010, a cash distribution of $33.7 million was declared and paid by Great Lakes for the fourth quarter of 2009, of which the Partnership's
46.45 per cent share was $15.7 million. On February 1, 2010, a cash distribution of $32.8 million was declared and paid by Northern Border for the fourth quarter of
2009, of which the Partnership's 50 per cent share was $16.4 million.
Investing Activities for our Pipeline Systems
Capital spending for maintenance of existing facilities and growth projects were as follows for each of our investments:
Year Ended December 31
(millions of dollars)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Great Lakes
(a)
:
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
5.5
|
|
12.3
|
|
16.7
|
|
|
|
Growth
|
|
2.8
|
|
|
|
|
|
|
|
Great Lakes' capital spending
|
|
8.3
|
|
12.3
|
|
16.7
|
|
|
|
Northern Border:
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
6.7
|
|
8.4
|
|
10.6
|
|
|
|
Growth
|
|
4.4
|
|
12.1
|
|
|
|
|
|
Northern Border's capital spending
|
|
11.1
|
|
20.5
|
|
10.6
|
|
|
|
Tuscarora:
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
0.2
|
|
0.1
|
|
0.1
|
|
|
|
Growth
|
|
0.6
|
|
6.7
|
|
13.1
|
|
|
|
Tuscarora's capital spending
|
|
0.8
|
|
6.8
|
|
13.2
|
|
|
|
North Baja:
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
0.3
|
|
12.8
|
|
2.3
|
|
|
|
Growth
|
|
0.8
|
|
15.0
|
|
10.6
|
|
|
|
North Baja's capital spending
|
|
1.1
|
|
27.8
|
|
12.9
|
|
|
|
-
(a)
-
Great
Lakes' 2007 capital spending information includes only capital expenditures from February 23 to December 31, 2007.
2009 ANNUAL REPORT
71
Our pipeline systems fund their investing activities primarily with operating cash, issuances of new debt or additional borrowings
under existing facilities, and equity contributions from general partners.
Great
Lakes' growth capital expenditures of $2.8 million in 2009 related to a backhaul expansion project involving upgrades to facilities to increase system
capabilities to provide firm backhaul transportation services. The remaining $5.5 million of Great Lakes' capital expenditures in 2009, as well as its 2008 and 2007 capital expenditures, is
comprised of maintenance capital projects including compressor engine overhauls and pipeline remediation. In 2010, Great Lakes expects to invest approximately $11.2 million for maintenance
capital expenditures. Approximately $7.2 million in growth capital expenditures are planned for 2010 related to the backhaul expansion project.
Northern
Border's maintenance capital expenditures decreased $1.7 million in 2009 compared to 2008 due to a decrease in expenditures related to information technology
assets. Growth capital expenditures in 2009 and 2008 were primarily related to spending for the Des Plaines Project. In 2010, Northern Border expects to spend approximately $18.6 million for
capital expenditures. Maintenance capital expenditures are estimated at $6.2 million and include renewals and replacements of existing facilities. Northern Border plans to spend approximately
$12.4 million for growth capital expenditures in 2010.
In
2009, North Baja incurred $1.1 million of capital expenditures primarily related to minor growth projects. In 2010, North Baja expects to spend approximately
$0.5 million for capital expenditures, primarily related to pipe integrity program costs and system pipeline improvements. No significant growth capital expenditures are planned
for 2010.
In
2009, Tuscarora incurred $0.8 million of capital expenditures primarily related to the replacement of electric system components at various compressor stations. In
2008, Tuscarora made capital expenditures of $6.8 million that related primarily to the Likely compressor station expansion compared to $13.2 million in 2007. In 2010, Tuscarora expects
to invest approximately $0.4 million for maintenance capital expenditures. No significant growth capital expenditures are planned for 2010.
CONTINGENCIES
Legal
Various legal actions or governmental proceedings that have arisen in the ordinary course of business are pending. Our pipeline systems believe that the resolution of these
issues will not have a material adverse impact on their results of operations or financial position. Please read Item 3. "Legal Proceedings" for additional information.
Environmental
We believe that our pipeline systems are in substantial compliance with applicable environmental laws and regulations. Please read Item 1. "Business" for additional
information.
RELATED PARTY TRANSACTIONS
Please read Item 13. "Certain Relationships and Related Transactions, and Director Independence" for information regarding related party transactions.
72
TC PIPELINES,
LP
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
OVERVIEW
We are exposed to market risk primarily from interest rate fluctuations. Additionally, the Partnership and our pipeline systems are also exposed to other risks such as credit
risk, liquidity risk, foreign exchange fluctuations and changes to natural gas prices related to the calculation of a Minnesota fuel tax, which we have determined to be less material to us and our
pipeline systems. Our exposure to market risk discussed below includes forward-looking statements and is not necessarily indicative of actual results, which may not represent the maximum possible
gains and losses that may occur, since actual gains and losses will differ from those estimated, based on actual market conditions.
Market
risk is the risk of loss arising from adverse changes in market rates. Our primary risk management objective is to protect earnings and cash flow, and ultimately
unitholder value. We do not use financial instruments for trading purposes.
In
accordance with
ASC 815 Derivatives and Hedging,
we record financial instruments
on the balance sheet as assets and liabilities based on fair value. We estimate the fair value of financial instruments using available market information and appropriate valuation techniques. Changes
in the fair value of financial instruments are recognized in earnings unless the instrument qualifies as a hedge under ASC 815 and meets specific hedge accounting criteria. Qualifying financial
instruments' gains and losses may offset the hedged items' related results in earnings for a fair value hedge or be deferred in accumulated other comprehensive income for a cash flow hedge.
MARKET RISK AND INTEREST RATE RISK
From time to time, and in order to finance our business and that of our pipeline systems, the Partnership and our pipeline systems issue debt to invest in growth opportunities
and provide for ongoing operations. The issuance of debt exposes the Partnership and our pipeline systems to market risk from changes in interest rates which affect earnings and the value of the
financial instruments we hold.
The
Partnership and our pipeline systems use derivatives as part of our overall risk management policy to manage exposures to market risk resulting from these activities
within established policies and procedures. Derivative contracts used to manage market risk generally consist of the following:
-
-
Swaps contractual
agreements between two parties to exchange streams of payments over time according to specified terms. The
Partnership and our pipeline systems enter into interest rate swaps to mitigate the impact of changes in interest rates.
-
-
Options contractual
agreements to convey the right, but not the obligation, for the purchaser to buy or sell a specific amount of a
financial instrument at a fixed price, either at a fixed date or at any time within a specified period. The Partnership and our pipeline systems enter into option agreements to mitigate the impact of
changes in interest rates.
Interest
rate risk is created by fluctuations in the fair values or cash flows of financial instruments due to changes in the market interest rates. Our interest rate
exposure results from our Senior Credit Facility, which is subject to variability in LIBOR interest rates. We regularly assess the impact of interest rate fluctuations on future cash flows and
evaluate hedging opportunities to mitigate our interest rate risk.
Our
interest rate swaps and options are structured such that the cash flows match those of the Senior Credit Facility. The notional amount hedged was $375.0 million
at December 31, 2009 (2008 $475.0 million). $300.0 million of variable-rate debt is hedged by an interest rate swap during the
period from March 12, 2007 through December 12, 2011, where the weighted average fixed interest rate paid is 4.89 per cent. $75.0 million of
variable-rate debt is hedged by an interest rate swap during the period from February 29, 2008 through February 28, 2011, where the fixed interest rate paid is
3.86 per cent. $100.0 million of variable-rate debt was hedged by an interest rate option through
2009 ANNUAL REPORT
73
May 22,
2009 at an interest rate range between a weighted average floor of 4.09 per cent and a cap of 5.35 per cent. In addition to these fixed rates, the
Partnership pays an applicable margin in accordance with the Senior Credit Facility agreement.
At
December 31, 2009, the fair value of the interest rate swaps accounted for as hedges was negative $23.8 million
(2008 negative $31.7 million), of which $12.9 million is classified as a current liability
(2008 $11.8 million). The fair value of the interest rate swaps was calculated using the year end interest rate; therefore, it is expected that this fair
value will fluctuate over the year as interest rates change. In 2009, the Partnership recorded interest expense of $15.1 million on the interest rate swaps and options
(2008 $6.9 million).
At
December 31, 2009, we had $484.0 million (2008 $475.0 million) outstanding on our Senior Credit Facility.
Utilizing the conditions of the interest rate swaps, if LIBOR interest rates hypothetically increased by one per cent (100 basis points) compared to the rates in effect at
December 31, 2009, our annual interest expense would have increased and our net income would have decreased by $1.1 million; and if LIBOR interest rates hypothetically decreased to zero
per cent compared to the rates in effect at December 31, 2009, our annual interest expense would have decreased and our net income would have increased by $0.3 million. These
amounts have been determined by considering the impact of the hypothetical interest rates on unhedged debt outstanding as of December 31, 2009.
Northern
Border utilizes both fixed-rate and variable-rate debt and is exposed to market risk due to the floating interest rates on its revolving
credit facility. Northern Border regularly assesses the impact of interest rate fluctuations on future cash flows and evaluates hedging opportunities to mitigate its interest rate risk. As of
December 31, 2009, 62 per cent of Northern Border's outstanding debt was at fixed rates (2008 71 per cent). Northern Border
utilized its Collar Agreement to limit the variability of the interest rate on $140.0 million of variable-rate borrowings during the period from October 30, 2007 through
October 30, 2009 to a range between a floor of 4.35 per cent and a cap of 5.36 per cent.
If
interest rates hypothetically increased by one per cent (100 basis points) compared with rates in effect at December 31, 2009, Northern Border's
annual interest expense would increase and its net income would decrease by approximately $2.2 million; and if interest rates hypothetically decreased to zero per cent compared with
rates in effect at December 31, 2009, Northern Border's annual interest expense would decrease and its net income would increase by approximately $0.6 million.
Great
Lakes and Tuscarora utilize fixed-rate debt; therefore, they are not exposed to market risk due to floating interest rates. Interest rate risk does not
apply to North Baja, as it currently does not have any debt.
OTHER RISKS
The Partnership is influenced by the same factors that influence our pipeline systems. None of our pipeline systems own any of the natural gas they transport; therefore, they
do not assume any of the related natural gas commodity price risk with respect to transported natural gas volumes.
Counterparty
credit risk represents the financial loss that the Partnership and our pipeline systems would experience if a counterparty to a financial instrument failed to
meet its obligations in accordance with the terms and conditions of its contracts with the Partnership or its pipeline systems. Our maximum counterparty credit exposure with respect to financial
instruments at the balance sheet date consist primarily of the carrying amount, which approximates fair value, of non-derivative financial assets, such as accounts receivable, as well as
the fair value of derivative financial assets. At December 31, 2009, the Partnership's maximum counterparty credit exposure consisted of accounts receivable of $5.4 million
(2008 $2.9 million).
The
Partnership and our pipeline systems have significant credit exposure to financial institutions as they provide committed credit lines and critical liquidity in the
interest rate derivative market, as well as letters of credit to mitigate exposures to non-creditworthy parties. During the deterioration of global financial markets in 2008 and 2009, we
74
TC PIPELINES,
LP
continued
to closely monitor the creditworthiness of our counterparties, including financial institutions. Overall, we do not believe the Partnership and our pipeline systems have any significant
concentrations of counterparty credit risk.
Liquidity
risk is the risk that the Partnership and our pipeline systems will not be able to meet our financial obligations as they fall due. Our approach to managing
liquidity risk is to ensure that we always have sufficient cash and credit facilities to meet our obligations when due, under both normal and stressed conditions, without incurring unacceptable losses
or damage to our reputation. At December 31, 2009, the Partnership has a committed revolving bank line of $250.0 million maturing in December 2011. As of December 31, 2009,
the outstanding balance on this facility was $9.0 million. In addition, at December 31, 2009, Northern Border has a committed revolving bank line of $250.0 million maturing in
April 2012. As of December 31, 2009, $215.0 million was drawn on this facility.
The
state of Minnesota currently requires Great Lakes to pay use tax on the value of the shipper-provided compressor fuel burned in its Minnesota compressor engines. Great
Lakes is subject to commodity price volatility and some volume volatility in determining the amount of use tax owed. If natural gas prices changed by $1 per million British thermal units, Great Lakes'
annual use tax expense would change by approximately $0.6 million.
The
Partnership does not have any material foreign exchange risks.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are included in Part IV, Item 15 of this report on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation of the Partnership's disclosure controls and procedures as of the end of the year covered by this annual report, the principal executive officer and
principal financial officer of the general partner of the Partnership have concluded that the Partnership's disclosure controls and procedures were effective in ensuring that the information required
to be disclosed by the Partnership in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's (SEC's) rules and forms and that information required to be disclosed by the Partnership in the reports that the Partnership files or submits under the
Exchange Act is accumulated and communicated to the management of the general partner of the Partnership, including the principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2009, there has been no change in the Partnership's internal control over financial reporting that has materially affected or is
reasonably likely to materially affect our internal control over financial reporting.
2009 ANNUAL REPORT
75
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)
promulgated under the Securities Exchange Act of 1934. Internal control over financial reporting, no matter how well designed, has inherent limitations and can only provide reasonable assurance with
respect to the preparation and fair presentation of published financial statements. Under the supervision and with the participation of our management, including our chief executive officer and
principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based
on our assessment according to the above criteria, management has concluded that our internal control over financial reporting was effective as of December 31,
2009 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. There were no material weaknesses.
Our
independent registered public accounting firm, KPMG LLP, independently assessed the effectiveness of the Partnership's internal control over financial reporting.
KPMG has issued an attestation report concurring with management's assessment, which is included on page F-2 of the financial statements included in this
Form 10-K.
Item 9B. Other Information
None.
76
TC PIPELINES,
LP
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The Partnership is a limited partnership and as such has no officers, directors or employees. Set forth below is certain information concerning the directors and officers of
the general partner who manage the operations of the Partnership. Each director holds office for a one-year term or until his or her successor is earlier appointed. All officers of the
general partner serve at the discretion of the Board of Directors of the general partner which is a wholly-owned subsidiary of TransCanada.
Name
|
|
Age
|
|
Position with General Partner
|
|
|
Russell K. Girling
|
|
47
|
|
Chairman, Chief Executive Officer and Director
|
|
Mark A.P. Zimmerman
|
|
45
|
|
President
|
|
Jack F. Jenkins-Stark
|
|
59
|
|
Independent Director
|
|
David L. Marshall
|
|
70
|
|
Independent Director
|
|
Walentin (Val) Mirosh
|
|
64
|
|
Independent Director
|
|
Gregory A. Lohnes
|
|
53
|
|
Director
|
|
Kristine L. Delkus
|
|
52
|
|
Director
|
|
Steven D. Becker
|
|
59
|
|
Director
|
|
Terry C. Ofremchuk
|
|
59
|
|
Vice-President, Taxation
|
|
Sean M. Brett
|
|
44
|
|
Vice-President, Commercial Operations
|
|
Rhonda L. Amundson
|
|
48
|
|
Treasurer
|
|
Donald J. DeGrandis
|
|
61
|
|
Secretary
|
|
Robert C. Jacobucci
|
|
41
|
|
Controller, Principal Financial Officer
|
|
Mr. Girling was appointed a director of the general partner in April 1999 and Chief Executive Officer of the general
partner in June 2006. He will remain in these positions until March 1, 2010. Mr. Girling's principal occupation is Chief Operating Officer of TransCanada, a position he has held
since July 2009. In addition, Mr. Girling continues his role as President, Pipelines Division of TransCanada, a position he has held since June 2006. From March 2003 to
June 2006, he was Executive Vice-President, Corporate Development and Chief Financial Officer of TransCanada. Mr. Girling is also a director of Agrium Inc.
Mr. Zimmerman
was appointed President of the general partner in January 2007. Mr. Zimmerman's principal occupation is Vice-President,
Financial Planning of TransCanada, a position he has held since July 2009. From June 2006 to July 2009, Mr. Zimmerman was Vice-President, Commercial
Transactions of TransCanada. From September 2003 to June 2006, he was Director, Project Finance for TransCanada, and prior to September 2003, he was Director, Corporate
Evaluations and Planning for TransCanada.
Mr. Jenkins-Stark
was appointed a director of the general partner in July 1999. Mr. Jenkins-Stark's principal occupation is Chief Financial Officer of
BrightSource Energy Inc. (designs and builds large scale solar plants that deliver solar energy in the form of steam and/or electricity), a position he has held since April 2007.
Mr. Jenkins-Stark was Chief Financial Officer of Silicon Valley Bancshares (offering financial products and services, including commercial, investment, merchant and private banking and private
equity services) from April 2004 to May 2007.
Mr. Marshall
was appointed a director of the general partner in July 1999. Mr. Marshall is a corporate director.
Mr. Mirosh
was appointed a director of the general partner in September 2004. Mr. Mirosh's principal occupation is President of Mircan
Resources Ltd., a private company. From April 2008 to December 2009, he was Vice-President of NOVA Chemicals Corporation and Special Advisor to the President and Chief
Operating Officer. Prior to April 2008, Mr. Mirosh was Vice-President and President of Olefins and Feedstocks, a division of NOVA Chemicals Corporation (commodity chemical
company), positions he has held since July 2003. Mr. Mirosh is also a director of Superior Plus Income Fund.
2009 ANNUAL REPORT
77
Mr. Lohnes
was appointed a director of the general partner in January 2007. Mr. Lohnes' principal occupation is Executive Vice-President and
Chief Financial Officer of TransCanada, a position he
has held since June 2006. Prior to June 2006, he was President and Chief Executive Officer of Great Lakes Gas Transmission Company.
Ms. Delkus
was appointed a director of the general partner in November 2003. Ms. Delkus' principal occupation is Deputy General Counsel, Pipelines and
Regulatory Affairs of TransCanada, a position she has held since September 2006. From June 2006 to September 2006, she was Vice-President, Pipeline Law and Regulatory
Affairs of TransCanada. From December 2005 to June 2006, she was Vice-President, Law, Gas Transmission of TransCanada. Prior to December 2005, she was
Vice-President, Law, Power and Regulatory.
Mr. Becker
was appointed a director of the general partner in January 2007. Mr. Becker's principal occupation is Vice-President, Pipeline
Development of TransCanada, a position he has held since June 2006. From September 2003 to January 2007, Mr. Becker was Vice-President, Business Development of
the general partner. From April 2003 to June 2006, he was Vice-President, Gas Development of TransCanada.
Mr. Ofremchuk
was appointed Vice-President, Taxation of the general partner in July 2007. Mr. Ofremchuk's principal occupation is Manager,
Corporate Taxation of TransCanada.
Ms. Amundson
was appointed Treasurer of the general partner in December 2008. Ms. Amundson's principal occupation is Manager, Capital Markets
of TransCanada.
Mr. Brett
was appointed Vice-President, Commercial Operations of the general partner in December 2009. Mr. Brett also currently holds the
position of Director, LP Operations for TransCanada. From December 2008 to December 2009, Mr. Brett was Director, Joint Venture Management, Keystone Pipeline for
TransCanada. Mr. Brett was Vice-President and Treasurer of the general partner from January 2007 to December 2008. Mr. Brett also held the position of Assistant
Treasurer and Director of Capital Markets for TransCanada. Prior to January 2007, Mr. Brett held a number of positions of increasing responsibility with TransCanada's Finance and
Treasury Group.
Mr. DeGrandis
was appointed Secretary of the general partner in April 2005. Mr. DeGrandis' principal occupation is Corporate Secretary of TransCanada, a
position he has held since June 2006. From June 2004 to June 2006, he was Associate General Counsel, Corporate Secretarial of TransCanada.
Mr. Jacobucci
was appointed principal financial officer of the general partner and Controller of the general partner in November 2009. His principal occupation
is Director of Pipeline Accounting for TransCanada. From November 2008 to November 2009, Mr. Jacobucci was Director, Energy Accounting of TransCanada. From February 2006 to
November 2008, Mr. Jacobucci was Manager, Power Accounting and Manager, U.S. Pipeline Accounting. Prior to February 2006, Mr. Jacobucci held various senior
accounting and leadership positions in TransCanada's financial reporting group.
Director and Officer Appointments
Effective March 1, 2010, Mr. Girling, Chairman and Chief Executive Officer of the general partner will resign his positions to focus on his role as Chief
Operating Officer of TransCanada. Mr. Lohnes will be appointed Chairman of the general partners' board and Mr. James Baggs will be appointed as a director. Mr. Zimmerman will
continue in his role as President, which he has held since January 2007, and as the principal executive officer of the Partnership, he will be responsible for all management activities
previously handled by the Chief Executive Officer.
Mr. Baggs'
principal occupation is Vice-President, Field Operations and Engineering for TransCanada. He has been with TransCanada for 21 years.
On
November 9, 2009, Mr. Jacobucci replaced Amy W. Leong as Controller and Principal Financial Officer.
78
TC PIPELINES,
LP
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that David Marshall and Jack Jenkins-Stark are "audit committee financial experts", are "independent" and are "financially sophisticated"
as defined under applicable SEC and NASDAQ Stock Market Corporate Governance rules. The Board's affirmative determination for both David Marshall and Jack Jenkins-Stark was based on their respective
education and extensive experience as chief financial officers for corporations that presented a breadth and level of complexity of accounting issues that are generally comparable to those of the
Partnership.
IDENTIFICATION OF THE AUDIT COMMITTEE
The general partner of the Partnership has a separately designated audit committee consisting of three independent board members. The members of the committee are David
Marshall, as Chair, Jack Jenkins-Stark and Walentin (Val) Mirosh. All members of the Audit Committee meet the criteria for independence as set forth under the rules of the SEC and those of the NASDAQ
Stock Market. None of the Audit Committee members have participated in the preparation of the financial statements of the Partnership or any of its subsidiaries at any time during the past three
years. In
addition, all members of the Audit Committee are able to read and understand fundamental financial statements, including a company's balance sheet, income statement, and cash flow statement.
CODE OF ETHICS
The Partnership believes that director, management and employee honesty and integrity are important factors in ensuring good corporate governance. The employees of the general
partner, as employees of TransCanada, are subject to TransCanada's Code of Business Ethics. In addition, the general partner has adopted a code of business ethics for its Chief Executive Officer,
President and Principal Financial Officer and one which applies to its independent directors, being the Code of Business Ethics for Directors. All codes are published on its website at
www.tcpipelineslp.com. If any substantive amendments are made to the code for senior officers or if any waivers are granted, the amendment or waiver will be published on the Partnership's website or
filed in a report on Form 8-K.
CORPORATE GOVERNANCE
The Audit Committee has adopted a charter which specifically provides that it is responsible for the appointment, compensation, retention and oversight of the work of the
independent public accountants engaged in preparing or issuing the Partnership's audit report, that the committee has the authority to engage independent counsel and other advisors as it determines
necessary to carry out its duties and for the committee to be responsible for establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting
controls or auditing matters, including procedures for the confidential, anonymous submission by employees of the general partner concerns regarding questionable accounting or auditing matters. The
committee has adopted TransCanada's Ethics Help-Line in fulfillment of its responsibility to establish a confidential and anonymous whistle blowing process. The toll free Ethics
Help-Line number and the audit committee's charter are published on the Partnership's website at www.tcpipelineslp.com.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires the Partnership's directors and executive officers, and persons who beneficially own more than ten
per cent of the common units, to file reports of ownership and changes in ownership with the SEC and to furnish us with copies of all such reports. Based solely upon a review of the copies of
the reports received by us, we believe that all such filing requirements were satisfied during 2009.
2009 ANNUAL REPORT
79
Item 11. Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
We are a master limited partnership, and we are managed by the executive officers of our general partner. We do not directly employ any of the individuals responsible for
managing or operating our business. The executive officers of our general partner are compensated directly by TransCanada.
The
compensation policies and philosophy of TransCanada govern the types and amount of compensation granted each of the named executive officers. Since these policies and
philosophy are those of TransCanada, we refer you to a discussion of those items as set forth in the Executive Compensation section of the TransCanada "Management Proxy Circular" on the TransCanada
website at www.transcanada.com. The TransCanada "Management Proxy Circular" is produced by TransCanada pursuant to Canadian securities regulations and is not incorporated into this document by
reference or deemed furnished or filed by us under the Securities Exchange Act of 1934, as amended; rather the reference is to provide our investors with an understanding of the compensation policies
and philosophy of the ultimate parent of our general partner.
The
board of directors of our general partner does not have a separate compensation committee, nor does it make any determination with respect to the amount of compensation
to be paid to our executive officers. The board of our general partner does have responsibility for evaluating and determining the reasonableness of the total amount we are charged for managerial,
administrative and operational support provided by TransCanada, and its affiliates, including our general partner. The board specifically approves the allocation of the salary of the CEO to the
Partnership on an annual basis. Please read Item 13. "Certain Relationships and Related Transactions, and Director Independence" for more information regarding this arrangement.
In
addition to base salary, we also reimburse our general partner for certain benefit and incentive compensation expenses related to the officers of our general partner and
employees of an affiliate of our general partner who perform services on our behalf. The base salaries that are allocable to us vary for each officer or employee of an affiliate of our general partner
performing services on our behalf and are based on the amount of time an employee devotes to matters related to our business as compared to the amount of time such employee devotes to matters related
to the business of TransCanada and its other affiliates. We are allocated and reimburse the general partner for each officer's salary expense. Other benefit and incentive compensation expenses related
to our officers are reimbursed to the general partner based upon an agreed upon calculation.
The
following table summarizes the salary allocated to and paid by us in 2009, 2008 and 2007 for our principal executive officer, president and principal financial officer.
None of the other executive officers of our general partner allocated to us more than $100,000 related to their salary.
80
TC PIPELINES,
LP
Summary Compensation Table
|
|
|
|
Base Salary Allocated to the Partnership
|
Name and Principal Position
|
|
Year
|
|
Canadian
Dollars
|
|
US Dollar
Equivalent
|
|
Total
(a)
|
|
|
Russell K. Girling
|
|
2009
|
|
75,001
|
|
71,663
|
|
71,663
|
|
Chief Executive Officer
|
|
2008
|
|
68,251
|
|
55,733
|
|
55,733
|
|
|
|
2007
|
|
60,250
|
|
60,973
|
|
60,973
|
|
|
Mark A.P. Zimmerman
|
|
2009
|
|
110,004
|
|
105,109
|
|
105,109
|
|
President
|
|
2008
|
|
108,753
|
|
88,808
|
|
88,808
|
|
|
|
2007
|
|
102,500
|
|
103,729
|
|
103,729
|
|
|
Amy W. Leong
|
|
2009
|
|
24,513
|
|
23,422
|
|
23,422
|
|
Former Controller and Principal Financial Officer
|
|
2008
|
|
27,390
|
|
22,366
|
|
22,366
|
|
|
|
2007
|
|
16,475
|
|
16,673
|
|
16,673
|
|
|
Robert C. Jacobucci
|
|
2009
|
|
3,610
|
|
3,450
|
|
3,450
|
|
Controller and Principal Financial Officer
|
|
2008
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
-
(a)
-
The
compensation of executive officers of the general partner is paid by TransCanada in Canadian dollars. The United States dollar equivalents have
been calculated using the applicable December 31, 2009 noon buying rate of 0.9555 as reported by the Bank of Canada (2008 0.8166;
2007 1.0120).
We reimburse our general partner for benefit and incentive compensation expenses based on a set formula, which expenses are
attributable to additional compensation paid to each of them and other compensation and employment-related expenses, including TransCanada's restricted stock unit and stock option awards, retirement
plans, health and welfare plans, employer-related payroll taxes, matching contributions made under a TransCanada's employee savings plan, and premiums for health and life insurance. This reimbursement
is determined monthly and calculated based on total monthly base salary allocated to us multiplied by a factor of 0.32 for benefits in 2009 (2008 factor
of 0.35; 2007 factor of 0.38) and a factor of 0.48 for incentive compensation in 2009 (2008 factor of 0.40;
2007 factor of 0.30). The total amount reimbursed for benefits and incentive compensation was $667,059 in 2009 for all employees providing services to the
Partnership, including the named officers in the above table (2008 $610,801; 2007 $548,665).
Compensation Committee Report
Neither we, nor our general partner, has a compensation committee. The board of directors of our general partner has reviewed and discussed the Compensation Discussion and
Analysis set forth above and based on this review and discussion has approved it for inclusion in this Form 10-K.
The
Board of Directors of TC PipeLines GP, Inc:
Russell K. Girling
Jack F. Jenkins-Stark
David L. Marshall
Walentin Mirosh
Gregory A. Lohnes
Kristine L. Delkus
Steven D. Becker
2009 ANNUAL REPORT
81
Independent Director Compensation
Independent Director Compensation
(a)
For the year ended December 31, 2009
(in dollars)
|
|
Earned or
Paid in Cash
(b)
|
|
Unit
Awards
(c)
|
|
All Other
Compensation
(d)
|
|
Total
|
|
|
David L. Marshall
(e)
|
|
67,000
|
|
30,000
|
|
5,814
|
|
102,814
|
|
Jack F. Jenkins-Stark
(f)
|
|
69,000
|
|
30,000
|
|
10,608
|
|
109,608
|
|
Walentin (Val) Mirosh
|
|
63,000
|
|
30,000
|
|
5,814
|
|
98,814
|
|
-
(a)
-
Employee
directors do not receive any additional compensation for serving on the board of directors of our general partner; therefore, no amounts are shown
for Russell K. Girling, Gregory A. Lohnes, Kristine L. Delkus and Steven D. Becker. Amounts paid as reimbursable business expenses to each director for attending board functions are not reflected in
this table. Our general partner does not consider the directors' reimbursable business expenses for attending board functions and other business expenses required to perform board duties to have a
personal benefit and thus be considered a perquisite.
-
(b)
-
Pursuant
to the Deferred Share Unit Plan for Non-Employee Directors, Jack F. Jenkins-Stark elected to receive half of his fees ($34,500) in
Deferred Share Units. Due to this election, 999 Deferred Share Units were credited to Mr. Jenkins-Stark's account in 2009, all of which were outstanding at
December 31, 2009.
-
(c)
-
Amounts
presented reflect the compensation expense recognized related to the Deferred Share Units granted during 2009 under the Deferred Share Unit Plan
for Non-Employee Directors. On January 20, 2009, each independent director was granted 1,232 Deferred Share Units, all of which were outstanding at December 31, 2009.
At December 31, 2009, David L. Marshall, Jack F. Jenkins-Stark and Walentin (Val) Mirosh held 1,993, 4,265 and 1,993 Deferred Share Units, respectively. The fair value of Deferred Share
Units held by Mr. Marshall, Mr. Jenkins-Stark and Mr. Mirosh at December 31, 2009 was $67,762, $145,010 and $67,762, respectively.
-
(d)
-
Amounts
presented reflect Deferred Share Units credited to each independent director's account equal to the distributions payable on the Deferred Share
Units previously granted or credited. In this regard, David L. Marshall and Walentin (Val) Mirosh were credited 171 Deferred Share Units in 2009, while Jack F. Jenkins-Stark was credited
312 Deferred Share Units. All Deferred Share Units credited during 2009 were outstanding at December 31, 2009.
-
(e)
-
Chairman
of the Audit Committee
-
(f)
-
Lead
Director and Chairman of the Conflicts Committee
Cash Compensation
Each director who is not an employee of TransCanada, the general partner or its affiliates (independent director) is entitled to a directors' retainer fee of $60,000 per annum,
of which $30,000 is automatically granted in Deferred Share Units (see Deferred Share Units section below). The independent director appointed as Lead Director and chair of the Conflicts
Committee is entitled to an additional fee of $6,000 per annum, while the independent director appointed as chair of the Audit Committee is entitled to an additional fee of $4,000 per annum. Each
independent director is also paid a fee of $1,500 for attendance at each meeting of the Board of Directors and a fee of $1,500 for attendance at each meeting of a committee of the Board. The
independent directors are reimbursed for out-of-pocket expenses incurred in the course of attending such meetings. All fees are paid by the Partnership on a quarterly basis.
The independent directors are permitted to elect to receive any portion of their fees in the form of Deferred Share Units pursuant to The TC PipeLines GP, Inc. Deferred Share Unit
Plan for Non-Employee Directors (2007).
Deferred Share Units
The TC PipeLines GP, Inc. Deferred Share Unit Plan for Non-Employee Directors (2007) was established in 2007 with the first grant occurring in
January 2008. In 2009, as part of the retainer fee, each independent director received an annual grant of Deferred Share Units with a value of $30,000.
At
the time of grant, the value of a Deferred Share Unit is equal to the market value of a common unit at the time the independent director is credited with the units. The
value of a Deferred Share Unit when redeemed is equivalent to the market value of a common unit at the time the redemption takes place. Deferred Share Units cannot be redeemed until the director
ceases to be a member of the Board. Directors may redeem Deferred Share Units for cash or common units at their option.
82
TC PIPELINES,
LP
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth the beneficial ownership of the voting securities of the Partnership as of February 24, 2010 by the general partner's directors, officers
and certain beneficial owners. Executive officers of the general partner own shares of TransCanada, which in the aggregate amount to less than one per cent of TransCanada's issued and
outstanding shares. Other than as set forth below, no person is known by the general partner to own beneficially more than five per cent of the voting securities of the
Partnership.
Amount and Nature of Beneficial Ownership
|
Name and Business Address
|
|
Number of
Common Units
(a)
|
|
Number of DSUs
(b)
|
|
Per cent of Class
(c)
|
|
|
TransCan Northern Ltd.
(d)
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
11,287,725
|
|
|
|
24.4
|
|
|
TC Pipelines GP, Inc.
(e)
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
5,797,106
|
|
|
|
12.5
|
|
|
David L. Marshall
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
2,841
|
|
*
|
|
|
Walentin (Val) Mirosh
10
th
Floor, 1000 7
th
Avenue SW
Calgary, Alberta T2P 5L5
|
|
|
|
2,841
|
|
*
|
|
|
Jack F. Jenkins-Stark
(f)
1999 Harrison Street, Suite 500
Oakland, CA 94612
|
|
4,933
|
|
5,158
|
|
*
|
|
|
Gregory A. Lohnes
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
|
|
|
|
|
Steven D. Becker
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
|
|
|
|
|
Russell K. Girling
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
6,000
|
|
|
|
*
|
|
|
Kristine L. Delkus
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
|
|
|
|
|
James M. Baggs
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
|
|
|
|
|
Mark A.P. Zimmerman
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
|
|
|
|
|
2009 ANNUAL REPORT
83
Amy W. Leong
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
|
|
|
|
|
Robert C. Jacobucci
450 1
st
Street SW
Calgary, Alberta T2P 5H1
|
|
|
|
|
|
|
|
|
Directors and Executive officers as a Group
(g)
(h)
(15 people)
|
|
|
|
|
|
*
|
|
|
-
(a)
-
A
total of 46,227,766 common units are issued and outstanding.
-
(b)
-
A
deferred share unit is a bookkeeping entry, equivalent to the value of a Partnership common unit, and does not entitle the holder to voting or other
shareholder rights, other than the accrual of additional deferred share units for the value of dividends. A director cannot redeem deferred share units until the director ceases to be a member of the
Board. Directors can then redeem their units for cash or shares.
-
(c)
-
Any
deferred share units shall be deemed to be outstanding for the purpose of computing the percentage of outstanding common units owned by such person,
but shall not be deemed to be outstanding for the purpose of computing the percentage of common units by any other person.
-
(d)
-
TransCan
Northern Ltd. is a wholly-owned indirect subsidiary of TransCanada.
-
(e)
-
TC PipeLines GP, Inc.
is a wholly-owned indirect subsidiary of TransCanada and owns an aggregate two per cent general partner
interest of the Partnership.
-
(f)
-
4,933 common
units are held by the Jenkins-Stark Family Trust dated June 16, 1995.
-
(g)
-
With
the exception of the one named director above and Russell K. Girling, none of the other directors and executive officers hold any common units of the
Partnership.
-
(h)
-
Walentin
(Val) Mirosh holds 720 shares of TransCanada, Russell K. Girling holds 571,564 options and 34,220 shares of TransCanada;
Kristine L. Delkus holds 110,062 options and 4,983 shares of TransCanada; Steven D. Becker holds 74,744 options and 9,953 shares of TransCanada; Terry C. Ofremchuk holds
3,750 options and 6,225 shares of TransCanada; Gregory A. Lohnes holds 145,895 options and 18,662 shares of TransCanada; Robert C. Jacobucci holds 556 shares of
TransCanada; Donald J. DeGrandis holds 14,167 options and 128 shares of TransCanada; Mark A.P. Zimmerman holds 43,156 options and 379 shares of TransCanada; Rhonda L.
Amundson holds 5,100 options of TransCanada and 3,223 shares of TransCanada; Sean M. Brett holds 7,000 options of TransCanada, 14,580 shares of TransCanada and
500 Series U preferred shares of TransCanada PipeLines Limited, a wholly-owned subsidiary of TransCanada, and James M. Baggs holds 68,562 options and 4,055 shares of
TransCanada. The directors and executive officers as a group hold 1,044,000 options of TransCanada, 97,684 shares of TransCanada and 500 Series U preferred shares of
TransCanada PipeLines Limited. All options listed above are exercisable within 60 days from February 26, 2010.
-
*
-
Less
than one per cent.
Item 13. Certain Relationships and Related Transactions, and Director Independence
At February 26, 2010, TransCanada owns 11,287,725 common units and the Partnership's general partner owns 5,797,106 common units, representing an aggregate
36.2 per cent limited partner interest in the Partnership. In addition, the general partner owns an aggregate two per cent general partner interest in the Partnership through
which it manages and operates the Partnership. As a result, TransCanada's aggregate ownership interest in the Partnership is 38.2 per cent by virtue of its indirect ownership of the
general partner and 36.2 per cent aggregate limited partner interest.
84
TC PIPELINES,
LP
Distributions and Payments to Our General Partner and Its Affiliates
The following table summarizes the distributions and payments made or to be made by us to our general partner and its affiliates, which includes TransCanada, in connection with
the ongoing operation and liquidation of the Partnership. These distributions and payments were determined by and among affiliated entities and, consequently, are not the result of
arms-length negotiations.
Operational Stage
|
|
Distributions of available cash to our general partner and its affiliates
|
|
We will generally make cash distributions 98% to common unitholders, including our general partner and its affiliates as holders of an aggregate of 17,084,831 common units, and the remaining 2% to our general
partner.
|
|
Payments to our general partner and its affiliates
|
|
In addition, if distributions exceed the minimum quarterly distribution and other higher target levels, our general partner will be entitled to increasing percentages of the distributions, up to 23.2347% of the
distributions above the highest target level. We refer to the rights to the increasing distributions as "incentive distribution rights." For further information about distributions, please read "Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities."
|
|
Withdrawal or removal of our general partner
|
|
If our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for
an amount equal to the fair market value of those interests.
|
|
Liquidation Stage
|
|
Liquidation
|
|
Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their particular capital account balances.
|
|
The general partner maintained its two per cent general partner interest in the Partnership by contributing
$3.8 million to the Partnership in connection with the public offering completed by the Partnership on November 18, 2009.
Incentive Distribution Rights Restructuring
Exchange Agreement
On July 1, 2009, the Partnership entered into an Exchange Agreement (Exchange Agreement) with the general partner pursuant to which the Partnership issued to the general
partner revised incentive distribution rights (Revised IDRs) and 3,762,000 newly issued, unregistered common units representing limited partner interests in the Partnership in exchange for the
cancellation of the incentive distribution rights available to the general partner (Old IDRs) under the Amended and Restated Agreement of Limited Partnership of the Partnership.
Under
the terms of the Revised IDRs, the distributions to the general partner were reset to two per cent, down from the general partner distribution levels of the Old
IDRs at 50 per cent (for combined general partner interest and incentive distribution interest). The incentive distribution levels of the Revised IDRs will result in increased
combined distributions to the general partner (for general partner interest and incentive distribution interest) of 15 per cent and a maximum of 25 per cent when
quarterly distributions increase to $0.81 and $0.88 per common unit or $3.24 and $3.52 per common unit on an annualized basis, respectively. The quarterly distribution level of the Old IDRs was $0.705
per common unit or $2.82 on an annualized basis.
Second Amended and Restated Agreement of Limited Partnership
As part of the Exchange Agreement, the Partnership's Amended and Restated Agreement of Limited Partnership was amended and restated effective as of July 1, 2009 to:
(i) eliminate the Old IDRs and replace them with the Revised IDRs as described above, (ii) eliminate outdated provisions, (iii) incorporate all prior amendments and changes in one
document and (iv) correct typographical errors. The Second Amended and Restated Agreement of Limited Partnership dated July 1, 2009 (Partnership Agreement) replaces the Amended and
Restated Agreement of Limited Partnership in its entirety.
2009 ANNUAL REPORT
85
Acquisition of North Baja
Agreement for Purchase and Sale of Membership Interest
On July 1, 2009, we completed the acquisition of the 100% interest in North Baja Pipeline, LLC. The acquisition was made pursuant to the Agreement for Purchase
and Sale of Membership Interest, dated May 19, 2009 (Acquisition Agreement), between TC PipeLines Intermediate Limited Partnership (TCILP), a subsidiary of the Partnership, and Gas Transmission
Northwest Corporation (GTN), for a total purchase price of $271.4 million.
GTN
is an indirect, wholly-owned subsidiary of TransCanada, which is the ultimate parent company of the General Partner of the Partnership. The purchase price of the
acquisition was determined through negotiations between the GTN and the general partner on behalf of TCILP.
If
GTN completes an expansion of the pipeline from the Mexico/Arizona border to Yuma City, Arizona (Yuma Lateral) by June 30, 2010, TCILP will pay GTN up to an
additional $10 million for the expansion, which amount shall be determined using a formula that is based on transportation service agreements to be entered into in connection with
the expansion. The Yuma Lateral project is currently under construction and is expected to be completed in March 2010. The purchase price has yet to be determined.
The
acquisition was financed through a combination of debt and equity, including receipt from the general partner of approximately $1.6 million to maintain its
two per cent general partner interest and the sale of limited partnership units to an affiliate as described below.
Common Unit Purchase Agreement
On July 1, 2009, we entered into a Common Unit Purchase with TransCan Northern Ltd. (TransCan Northern) to sell 2,609,680 newly issued, unregistered common
units representing limited partner interests in the Partnership to TransCan Northern at a price per common unit of $30.042 for an aggregate amount of approximately $78.4 million (Offering). The
Offering closed on July 1, 2009. TransCan Northern is an indirect, wholly-owned subsidiary of TransCanada.
Reimbursement of Operating and General and Administrative Expense
The Partnership does not have any employees. The management and operating functions are provided by the general partner. The general partner does not receive a management fee
in connection with its management of the Partnership. The Partnership reimburses the general partner for all costs of services provided, including the costs of employee, officer and director
compensation and benefits, and all other expenses necessary or appropriate to the conduct of the business of, and allocable to, the Partnership. Such costs include (i) overhead costs (such as
office space and equipment) and (ii) out-of-pocket expenses related to the provision of such services. The Partnership Agreement provides that the general partner will
determine the costs that are allocable to the Partnership in any reasonable manner determined by the general partner in its sole discretion. Total costs charged to the Partnership by the general
partner were $2.1 million for the year ended December 31, 2009 (2008 $2.1 million;
2007 $1.9 million).
Operating Agreements with Our Pipeline Companies
Our pipeline systems are operated by TransCanada and its affiliates pursuant to operating agreements. Under these agreements, our pipeline systems are required to reimburse
TransCanada for their costs including payroll, employee benefit costs, and other costs incurred on behalf of our pipeline systems. Most costs for materials, services and other charges that are
third-party charges are invoiced directly to each of our pipeline systems.
During
the second quarter of 2009, TransCanada internally announced a reorganization of its U.S. operations, which will include the relocation of some employees and
equipment, and some severance costs, with certain operational cost savings to be expected in the future. According to our operating agreements, some of these costs could be borne by
86
TC PIPELINES,
LP
our
pipeline systems. It is expected that the reorganization will be complete in 2010. Northern Border has entered into an amendment to their operating agreement to fix certain costs related to the
reorganization.
Cash Management Programs
Great Lakes has a cash management agreement with TransCanada whereby Great Lakes' funds are pooled with other TransCanada affiliates. The agreement also gives Great Lakes the
ability to obtain short-term borrowings to provide liquidity for Great Lakes' operating needs.
Transportation Agreements
Great Lakes earns transportation revenues from TransCanada and its affiliates under fixed priced contracts with remaining terms ranging from one to eight years. Great Lakes
earned $142.4 million of transportation revenues under these contracts in 2009 (2008 $144.1 million). This amount represents
49 per cent of total revenues earned by Great Lakes in 2009 (2008 50 per cent). $66.1 million of affiliated revenue is
included in the Partnership's equity income from Great Lakes in 2009 (2008 $67.0 million). At December 31, 2009, $12.9 million was included
in Great Lakes' receivables in regards to the transportation contracts with TransCanada and its affiliates (2008 $12.7 million).
Great
Lakes has 831 MDth/d of longhaul capacity under contract expiring on October 31, 2010 with its largest shipper, TransCanada. On November 3, 2009,
Great Lakes and TransCanada renewed contracts through October 31, 2011 for 470 MDth/d of capacity and agreed that Great Lakes would provide other transportation services. The contract
for the remaining 361 MDth/d of longhaul capacity will expire October 31, 2010.
Great Lakes Rate Proceeding (RP10-149-000).
In November 2009, the FERC issued an
order instituting an investigation, pursuant to Section 5 of the Natural Gas Act, to determine whether the rates currently charged by Great Lakes are just and reasonable. TransCanada owns a
53.55 per cent partner interest in Great Lakes. TransCanada, Great Lakes' largest shipper, and ANR, an affiliate of Great Lakes and a shipper on Great Lakes, have filed interventions in
the GL Rate Proceeding.
Other Agreements
Great Lakes, Northern Border and Tuscarora currently have interconnection, operational balancing agreement and other inter-affiliate agreements with affiliates of TransCanada.
In addition, each of our pipeline systems currently have and will have in the future other routine agreements with TransCanada or one of its subsidiaries that arise in the ordinary course of business,
including agreements for services and other transportation and exchange agreement and interconnection and balancing agreements with other TransCanada pipelines.
2009 ANNUAL REPORT
87
Costs
charged to our pipeline systems for the years ended December 31, 2009 and 2008 by TransCanada and its affiliates and amounts payable to TransCanada and its
affiliates at December 31, 2009 and 2008 are summarized in the following tables:
Year ended December 31
(millions of dollars)
|
|
2009
|
|
2008
|
|
|
|
Costs charged by TransCanada and its affiliates:
|
|
|
|
|
|
|
|
Great Lakes
|
|
33.8
|
|
34.3
|
|
|
|
Northern Border
(a)
|
|
25.5
|
|
30.5
|
|
|
|
North Baja
(b)
|
|
2.9
|
|
4.7
|
|
|
|
Tuscarora
|
|
3.0
|
|
3.7
|
|
|
|
Impact on the Partnership's net income:
|
|
|
|
|
|
|
|
Great Lakes
|
|
14.3
|
|
14.2
|
|
|
|
Northern Border
|
|
12.3
|
|
12.9
|
|
|
|
North Baja
(b)
|
|
2.4
|
|
2.7
|
|
|
|
Tuscarora
|
|
2.8
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
December 31
(millions of dollars)
|
|
2009
|
|
2008
|
|
|
|
Amount payable to/(receivable from) TransCanada and its affiliates:
|
|
|
|
|
|
|
|
Great Lakes
|
|
6.6
|
|
4.5
|
|
|
|
Northern Border
|
|
2.6
|
|
2.8
|
|
|
|
North Baja
(b)
|
|
(1.6
|
)
|
(2.5
|
)
|
|
|
Tuscarora
|
|
0.6
|
|
0.8
|
|
|
|
-
(a)
-
In
2008, Northern Border's costs charged by TransCanada and its affiliates include $2.0 million of charges related to Bison Pipeline LLC
through the effective date of the sale.
-
(b)
-
Recast
as discussed in Note 2 and Note 6 to the Partnership's financial statements included elsewhere in this report.
Relationship with our General Partner and TransCanada and Conflicts of Interest Resolution
-
-
Our
partnership agreement contains specific provisions that address potential conflicts of interest between our general partner and its affiliates, including TransCanada, on
one hand, and us and our subsidiaries, on the other hand. Whenever such a conflict of interest arises, our general partner will resolve the conflict. Our general partner may, but is not required to,
seek the approval of such resolution from the conflicts committee of the board of directors of our general partner ("Special Approval"), which is comprised of independent directors. Any conflict of
interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable if such conflict of interest or resolution is approved by Special Approval;
-
-
on
terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties; or
-
-
fair
to us, taking into account the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or
advantageous to us.
The
general partner may also adopt a resolution or course of action that has not received Special Approval.
In
acting for the Partnership, the general partner is accountable to us and the unitholders as a fiduciary. Neither the Delaware Revised Uniform Limited Partnership Act
(Delaware Act) nor case law defines with particularity the fiduciary duties owed by general partners to limited partners of a limited partnership. The Delaware Act does provide that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the fiduciary duties owed by a general partner to limited partners and the partnership.
88
TC PIPELINES,
LP
In
order to induce the general partner to manage the business of the Partnership, the partnership agreement contains various provisions restricting the fiduciary duties that
might otherwise be owed by the general partner. The following is a summary of the material restrictions of the fiduciary duties owed by the general partner to the limited partners:
-
-
The
partnership agreement permits the general partner to make a number of decisions in its "sole discretion." This entitles the general partner to consider only the
interests and factors that it desires and it shall have no duty or obligation to give any consideration to any interest of, or factors affecting, the Partnership, its affiliates or any limited
partner. Other provisions of the partnership agreement provide that the general partner's actions must be made in its reasonable discretion.
-
-
The
partnership agreement generally provides that affiliated transactions and resolutions of conflicts of interest not involving a required vote of unitholders must be "fair
and reasonable" to the Partnership. In determining whether a transaction or resolution is "fair and reasonable" the general partner may consider interests of all parties involved, including its own.
Unless the general partner has acted in bad faith, the action taken by the general partner shall not constitute a breach of its fiduciary duty.
-
-
The
partnership agreement specifically provides that it shall not be a breach of the general partner's fiduciary duty if its affiliates engage in business interests and
activities in competition with, or in preference or to the exclusion of, the Partnership. Further, the general partner and its affiliates have no obligation to present business opportunities to the
Partnership.
-
-
The
partnership agreement provides that the general partner and its officers and directors will not be liable for monetary damages to the Partnership, the limited partners
or assignees for errors of judgment or for any acts or omissions if the general partner and those other persons acted in good faith.
The
Partnership is required to indemnify the general partner and its officers, directors, employees, affiliates, partners, members, agents and trustees (collectively
referred to hereafter as the General Partner and others), to the fullest extent permitted by law, against liabilities, costs and expenses incurred by the General Partner and others. This
indemnification is required if the General Partner and others acted in good faith and in a manner they reasonably believed to be in, or (in the case of a person other than the general partner)
not opposed to, the best interests of the Partnership. Indemnification is required for criminal proceedings if the General Partner and others had no reasonable cause to believe their conduct was
unlawful. Please read Item 10. "Directors, Executive Officers and Corporate Governance" for additional information.
Director Independence
Please read Item 10. "Directors, Executive Officers and Corporate Governance" for information about the independence of our general partner's board of directors and its
committees, which information is incorporated herein by reference in its entirety.
Item 14. Principal Accounting Fees and Services
The following table sets forth, for the periods indicated, the fees billed by the principal accountants:
Year Ended December 31
(dollars)
|
|
2009
|
|
2008
|
|
|
Audit Fees
(a)
|
|
426,326
|
|
337,393
|
|
Audit Related Fees
(b)
|
|
86,792
|
|
12,947
|
|
Tax Fees
(c)
|
|
|
|
|
|
All Other Fees
(c)
|
|
|
|
|
|
|
Total
|
|
513,118
|
|
350,340
|
|
-
(a)
-
Audit
Fees include services performed related to Sarbanes-Oxley Act reporting requirements, and includes services for the statutory audit
of Tuscarora.
-
(b)
-
Audit
related fees in 2009 related primarily to prospectus work in connection with the Partnership's November equity issuance.
-
(c)
-
The
Partnership has not engaged its external auditors for any tax or other services in 2009 or 2008.
2009 ANNUAL REPORT
89
AUDIT FEES
Audit fees include fees for the audit of annual GAAP financial statements, reviews of the related quarterly financial statements and related consents and comforts letters for
documents filed with the SEC. Before our independent principal accountant is engaged each year for annual audit and other audit and any non-audit services, these services and fees are
reviewed and approved by our Audit Committee.
90
TC PIPELINES,
LP
PART IV
Item 15. Exhibits, Financial Statement Schedules
-
a)
-
(1)
and (2) Financial Statements and Financial Statement Schedules
The
financial statements filed as part of this report are listed in the "Index to Financial Statements" on page F-1.
-
(3)
-
Exhibits
No.
|
|
Description
|
|
|
*2.1
|
|
Agreement for Purchase and Sale of Membership Interest dated May 19, 2009 by and between Gas Transmission Northwest Corporation and TC PipeLines Intermediate Limited Partnership (Exhibit 2.1
to TC PipeLines, LP's Form 8-K filed on May 20, 2009 (File No. 000-26091)).
|
|
*3.1
|
|
Second Amended and Restated Agreement of Limited Partnership of TC PipeLines, LP dated July 1, 2009 (Exhibit 3.1 to TC PipeLines, LP's Form 8-K filed on July 1, 2009 (File No. 000-26091)).
|
|
*3.2
|
|
Certificate of Limited Partnership of TC PipeLines, LP (Exhibit 3.2 to TC PipeLines, LP's Form S-1 Registration Statement, File No. 333-69947 filed on December 30, 1998).
|
|
*10.1
|
|
Contribution, Conveyance and Assumption Agreement among TC PipeLines, LP and certain other parties dated May 28, 1999 (Exhibit 10.2 to TC PipeLines, LP's Form 10-K filed on March 28, 2000 (File
No. 333-69947)).
|
|
*10.2
|
|
First Amended and Restated General Partnership Agreement of Northern Border Pipeline Company dated April 6, 2006, by and between Northern Border Intermediate Limited Partnership and TC Pipelines Intermediate Limited Partnership
(Exhibit 3.1 to Northern Border Pipeline Company's Form 8-K filed on April 12, 2006 (File No. 333-87753)).
|
|
*10.3
|
|
Revolving Credit Agreement, dated as of April 27, 2007, among Northern Border Pipeline Company, the lenders from time to time party thereto, SunTrust Bank, as Administrative Agent, Wachovia Bank National Association, as Syndication Agent, BMO
Capital Markets, Citibank, N.A. and Mizuho Corporate Bank, LTD., as Co-Documentation Agents, JP Morgan Chase Bank, N.A. and Export Development Canada, as Managing Agents and Wachovia Capital Markets, LLC and SunTrust Capital Markets,
Inc., as Co-Lead Arrangers and Book Managers. (Exhibit 10.1 to Northern Border Pipeline Company's Form 10-Q filed on April 30, 2007 (File No. 333-88577)).
|
|
*10.3.1
|
|
First Amendment to Amended and Restated Revolving Credit Agreement dated as of July 31, 2008 between Northern Border Pipeline Company and the lenders named therein. (Exhibit 10.2 to TC PipeLines, LP's Form 10-Q filed on
November 3, 2008 (File No. 000-26091)).
|
|
*10.4
|
|
Amended and Restated Revolving Credit and Term Loan Agreement among TC PipeLines, LP, the lenders from time to time party thereto, SunTrust Bank as Administrative Agent, UBS Securities LLC and Royal Bank of Canada, as
Co-Documentation Agents, BMO Capital Markets Financing Inc. and the Royal Bank of Scotland PLC, as Co-Syndication Agents, Deutsche Bank AG New York Branch and the Bank of Tokyo-Mitsubishi UFJ, Ltd., as Managing Agents, and
SunTrust Capital Markets, Inc. as Arranger and Book Manager, dated February 13, 2007 (Exhibit 10.1 to TC PipeLines, LP's Form 8-K filed on February 15, 2007 (File No. 000-26091)).
|
|
*10.5
|
|
Subordinated Loan Agreement between TC PipeLines, LP and TransCanada PipeLines Limited, dated February 13, 2007 (Exhibit 10.2 to TC PipeLines, LP's Form 8-K filed on February 15, 2007 (File
No. 000-26091)).
|
|
2009 ANNUAL REPORT
91
*10.6
|
|
Subordination and Intercreditor Agreement among TransCanada PipeLines Limited, TC PipeLines, LP, and SunTrust Bank, as Administrative Agent, dated February 13, 2007 (Exhibit 10.3 to TC PipeLines, LP's
Form 8-K filed on February 15, 2007 (File No. 000-26091)).
|
|
*10.7
|
|
Form of Conveyance, Contribution and Assumption Agreement among Northern Plains Natural Gas Company, Northwest Border Pipeline Company, Pan Border Gas Company, Northern Border Partners, L.P., and Northern Border Intermediate Limited Partnership.
(Exhibit 10.16 to Northern Border Pipeline Company's Form S-1 Registration Statement filed on July 16, 1993 (Registration No. 33-66158)).
|
|
*10.8
|
|
Form of Contribution, Conveyance and Assumption Agreement among TC PipeLines, L.P., and Northern Border Intermediate Limited Partnership. (Exhibit 10.2 to TC PipeLines, LP's Form S-1/A filed on May 3, 1999
(File No. 333-69947)).
|
|
*10.9
|
|
Operating Agreement by and between Northern Border Pipeline Company and TransCan Northwest Border Ltd. (Exhibit 10.2 to Northern Border Pipeline Company's Form 8-K filed on April 12, 2006 (File No. 333-88577)).
|
|
*10.9.1
|
|
Amendment No.1 to Northern Border Pipeline Company Operating Agreement by and between Northern Border Pipeline Company and TransCanada Northern Border Inc. dated as of April 22, 2008. (Exhibit 10.9.1 to TC PipeLines,
LP's Form 10-K filed on February 27, 2009 (File No. 000-26091)).
|
|
10.9.2
|
|
Second Amendment of Operating Agreement by and between Northern Border Pipeline Company and TransCanada Northern Border Inc. dated as of February 10, 2010.
|
|
*10.10
|
|
Operating Agreement by and between Tuscarora Gas Transmission Company and TransCan Northwest Border Ltd. dated as of December 19, 2006 (Exhibit 10.11 to TC PipeLines, LP's Form 10-K filed on March 2, 2007 (File
No. 000-26091)).
|
|
*10.10.1
|
|
First Amendment to Operating Agreement by and between Tuscarora Gas Transmission Company and TransCanada Northern Border Inc. (formerly TransCan Northwest Border Ltd.) dated as of June 21, 2007. (Exhibit 10.10.1
to TC PipeLines, LP's Form 10-K filed on February 27, 2009 (File No. 000-26091)).
|
|
*10.10.2
|
|
Second Amendment to Operating Agreement by and between Tuscarora Gas Transmission Company and TransCanada Northern Border Inc. (formerly TransCan Northwest Border Ltd.) dated as of December 31, 2007. (Exhibit 10.10.2
to TC PipeLines, LP's Form 10-K filed on February 27, 2009 (File No. 000-26091)).
|
|
*10.10.3
|
|
Third Amendment to Operating Agreement by and between Tuscarora Gas Transmission Company and TransCanada Northern Border Inc. dated as of December 31, 2008. (Exhibit 10.10.3 to TC PipeLines, LP's Form 10-K filed on
February 27, 2009 (File No. 000-26091)).
|
|
10.10.4
|
|
Fourth Amendment to Operating Agreement by and between Tuscarora Gas Transmission Company and TransCanada Northern Border Inc. dated as of December 31, 2009.
|
|
*10.11
|
|
Amended and Restated Agreement of Limited Partnership of Great Lakes Gas Transmission Limited Partnership between TransCanada GL, Inc., TC GL Intermediate Limited Partnership and Great Lakes Gas Transmission Company, dated February 22,
2007. (Exhibit 10.9 to TC PipeLines, LP's Form 10-Q filed on April 30, 2007 (File No. 000-26091)).
|
|
*10.12
|
|
Operating Agreement between Great Lakes Gas Transmission Limited Partnership and Great Lakes Gas Transmission Company, dated April 5, 1990. (Exhibit 10.10 to TC PipeLines, LP's Form 10-Q filed on April 30, 2007
(File No. 000-26091)).
|
|
*#10.13
|
|
The TC PipeLines GP, Inc. Share Unit Plan for Non-Employee Directors (2007), dated October 18, 2007, as amended on December 10, 2008. (Exhibit 10.25 to TC PipeLines, LP's Form 10-K filed on
February 27, 2009 (File No. 000-26091)).
|
|
92
TC PIPELINES,
LP
*10.14
|
|
Membership Interest Purchase Agreement as of August 28, 2008, by and between Northern Border Pipeline Company and TransCanada Pipeline USA Ltd. (Exhibit 10.1 to TC PipeLines, LP's Form 10-Q filed on November 3,
2008 (File No. 000-26091)).
|
|
*10.15
|
|
Interconnect Agreement between ANR Pipeline Company and Northern Border Pipeline Company, dated June 9, 2008. (Exhibit 10.3 to TC PipeLines, LP's Form 10-Q filed on August 5, 2008 (File No. 000-26091)).
|
|
*10.16
|
|
Common Unit Purchase Agreement dated July 1, 2009 by and between TC PipeLines, LP and TransCan Northern Ltd. (Exhibit 10.1 to TC PipeLines, LP's Form 8-K filed on July 1, 2009 (File No. 000-26091)).
|
|
*10.17
|
|
Management Services Agreement dated January 1, 2002 by and between Gas Transmission Service Company, LLC (formally PG&E Gas Transmission Service Company, LLC) and North Baja Pipeline, LLC. (Exhibit 10.2
to TC PipeLines, LP's Form 10-Q filed on August 4, 2009 (File No. 000-26091)).
|
|
*10.18
|
|
Exchange Agreement, dated July 1, 2009, by and between TC PipeLines, LP and TC PipeLines GP, Inc. (Exhibit 10.2 to TC PipeLines, LP's Form 8-K filed on July 1, 2009 (File No. 000-26091)).
|
|
21.1
|
|
Subsidiaries of the Registrant.
|
|
23.1
|
|
Consent of KPMG LLP with respect to the financial statements of TC PipeLines, LP
|
|
23.2
|
|
Consent of KPMG LLP with respect to the financial statements of Great Lakes Gas Transmission Limited Partnership
|
|
23.3
|
|
Consent of KPMG LLP with respect to the financial statements of Northern Border Pipeline Company
|
|
23.4
|
|
Consent of KPMG LLP with respect to the balance sheets of TC PipeLines GP, Inc.
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
99.1
|
|
Consolidated Balance Sheets of TC PipeLines GP, Inc. as of December 31, 2009 and 2008.
|
|
*99.2
|
|
Transportation Service Agreement FT4761 between Great Lakes Gas Transmission Limited Partnership and TransCanada PipeLines Limited, dated November 4, 2004. (Exhibit 10.2 to TC PipeLines, LP's Form 10-Q filed on
April 30, 2007 (File No. 000-26091)).
|
|
*99.3
|
|
Transportation Service Agreement FT5840 between Great Lakes Gas Transmission Limited Partnership and TransCanada PipeLines Limited, dated December 1, 2005. (Exhibit 10.6 to TC PipeLines, LP's Form 10-Q filed on
April 30, 2007 (File No. 000-26091)).
|
|
*99.4
|
|
Transportation Service Agreement FT 8742 between Great Lakes Gas Transmission Limited Partnership and TransCanada PipeLines Limited, dated December 6, 2007. (Exhibit 10.21 to TC PipeLines, LP's Form 10-K filed on
February 28, 2008 (File No. 000-26091)).
|
|
*99.5
|
|
Transportation Service Agreement FT9141 between Great Lakes Gas Transmission Limited Partnership and ANR Pipeline Company, dated March 12, 2008. (Exhibit 10.1 to TC PipeLines, LP's Form 10-Q filed on August 5,
2008 (File No. 000-26091)).
|
|
*99.6
|
|
Transportation Service Agreement FT9158 between Great Lakes Gas Transmission Limited Partnership and ANR Pipeline Company, dated March 14, 2008. (Exhibit 10.2 to TC PipeLines, LP's Form 10-Q filed on August 5,
2008 (File No. 000-26091)).
|
|
2009 ANNUAL REPORT
93
*99.7
|
|
Transportation Service Agreement FT11701 between Great Lakes Gas Transmission Limited Partnership and TransCanada PipeLines Limited, dated November 26, 2008. (Exhibit 10.21 to TC PipeLines, LP's Form 10-K filed on
February 27, 2009 (File No. 000-26091)).
|
|
*99.8
|
|
Transportation Service Agreement FT4760 between Great Lakes Gas Transmission Limited Partnership and TransCanada PipeLines Limited, dated November 26, 2008. (Exhibit 10.22 to TC PipeLines, LP's Form 10-K filed on
February 27, 2009 (File No. 000-26091)).
|
|
*99.9
|
|
Market Center Service Agreement MC11987 between Great Lakes Gas Transmission Limited Partnership and TransCanada Gas Storage USA Inc., dated February 27, 2009. (Exhibit 10.1 to TC PipeLines, LP's Form 10-Q filed on
April 30, 2009 (File No. 000-26091)).
|
|
*99.10
|
|
Transportation Service Agreement IT11986 between Great Lakes Gas Transmission Limited Partnership and TransCanada Gas Storage USA Inc., dated February 27, 2009. (Exhibit 10.2 to TC PipeLines, LP's Form 10-Q filed on
April 30, 2009 (File No. 000-26091)).
|
|
99.11
|
|
Transportation Service Agreement FT4760 between Great Lakes Transmission Limited Partnership and TransCanada PipeLines Limited, dated November 1, 2009.
|
|
99.12
|
|
Transportation Service Agreement FT4761 between Great Lakes Transmission Limited Partnership and TransCanada PipeLines Limited, dated November 1, 2009.
|
|
99.13
|
|
Transportation Service Agreement FT14131 between Great Lakes Transmission Limited Partnership and TransCanada PipeLines Limited, dated November 1, 2009.
|
|
99.14
|
|
Transportation Service Agreement FT14132 between Great Lakes Transmission Limited Partnership and TransCanada PipeLines Limited, dated November 1, 2009.
|
|
-
*
-
Indicates
exhibits incorporated by reference.
-
+
-
Pursuant
to item 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the
SEC upon request.
-
#
-
Management
contract or compensatory plan or arrangement.
94
TC PIPELINES,
LP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 26th day of February 2010.
|
|
TC PIPELINES, LP
(A Delaware Limited Partnership)
by its general partner, TC PipeLines GP, Inc.
|
|
|
By:
|
/s/
RUSSELL K. GIRLING
Russell K. Girling
Chairman, Chief Executive Officer and Director
TC PipeLines GP, Inc. (Principal Executive Officer)
|
|
|
By:
|
/s/
ROBERT C. JACOBUCCI
Robert C. Jacobucci
Controller
TC PipeLines GP, Inc. (Principal Financial Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in
the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
RUSSELL K. GIRLING
Russell K. Girling
|
|
Chairman, Chief Executive Officer
and Director (Principal Executive Officer)
|
|
February 26, 2010
|
/s/
ROBERT C. JACOBUCCI
Robert C. Jacobucci
|
|
Controller and Principal Financial Officer
|
|
February 26, 2010
|
/s/
GREGORY A. LOHNES
Gregory A. Lohnes
|
|
Director
|
|
February 26, 2010
|
/s/
KRISTINE L. DELKUS
Kristine L. Delkus
|
|
Director
|
|
February 26, 2010
|
/s/
STEVEN D. BECKER
Steven D. Becker
|
|
Director
|
|
February 26, 2010
|
/s/
WALENTIN (VAL) MIROSH
Walentin (Val) Mirosh
|
|
Director
|
|
February 26, 2010
|
/s/
JACK F. JENKINS-STARK
Jack F. Jenkins-Stark
|
|
Director
|
|
February 26, 2010
|
/s/
DAVID L. MARSHALL
David L. Marshall
|
|
Director
|
|
February 26, 2010
|
2009 ANNUAL REPORT
95
TC PIPELINES, LP
INDEX TO FINANCIAL STATEMENTS
|
|
Page No.
|
FINANCIAL STATEMENTS OF TC PIPELINES, LP
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2
|
Balance Sheet December 31, 2009 and 2008
|
|
F-3
|
Statement of Income Years Ended December 31, 2009, 2008 and 2007
|
|
F-4
|
Statement of Comprehensive Income Years Ended December 31, 2009, 2008 and 2007
|
|
F-4
|
Statement of Cash Flows Years Ended December 31, 2009, 2008 and 2007
|
|
F-5
|
Statement of Changes in Partners' Equity Years Ended December 31, 2009, 2008 and 2007
|
|
F-6
|
Notes to Financial Statements
|
|
F-7
|
FINANCIAL STATEMENTS OF GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-18
|
Statement of Income and Partners' Capital Years Ended December 31, 2009, 2008 and 2007
|
|
F-19
|
Balance Sheet December 31, 2009 and 2008
|
|
F-20
|
Statement of Cash Flows Years Ended December 31, 2009, 2008 and 2007
|
|
F-21
|
Notes to Financial Statements
|
|
F-22
|
FINANCIAL STATEMENTS OF NORTHERN BORDER PIPELINE COMPANY
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-27
|
Balance Sheet December 31, 2009 and 2008
|
|
F-28
|
Statement of Income Years Ended December 31, 2009, 2008 and 2007
|
|
F-29
|
Statement of Comprehensive Income Years Ended December 31, 2009, 2008 and 2007
|
|
F-29
|
Statement of Cash Flows Years Ended December 31, 2009, 2008 and 2007
|
|
F-30
|
Statement of Changes in Partners' Equity Years Ended December 31, 2009, 2008 and 2007
|
|
F-31
|
Notes to Financial Statements
|
|
F-32
|
2009 ANNUAL REPORT
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of TC PipeLines GP, Inc., General Partner of TC PipeLines, LP:
We
have audited the accompanying consolidated balance sheets of TC PipeLines, LP (a Delaware limited partnership) and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, cash flows and changes in partners' equity for each of the years in the
three-year period ended December 31, 2009. We also have audited TC PipeLines, LP internal control over financial reporting as of December 31, 2009, based on
criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management of the General Partner of TC PipeLines, LP is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report
on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Partnership's internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
An
entity's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. An entity's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TC PipeLines, LP
and subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, TC PipeLines, LP maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/
KPMG LLP
Calgary,
Canada
February 24, 2010
F-2
TC PIPELINES,
LP
TC PIPELINES, LP
CONSOLIDATED BALANCE SHEET
December 31 (millions of dollars)
|
|
2009
|
|
2008
(a)
|
|
|
|
Assets
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
3.1
|
|
8.4
|
|
|
|
Accounts receivable and other (Note 17)
|
|
8.6
|
|
11.4
|
|
|
|
|
|
11.7
|
|
19.8
|
|
|
|
Investment in Great Lakes (Note 3)
|
|
691.2
|
|
704.5
|
|
|
Investment in Northern Border (Note 4)
|
|
523.0
|
|
514.8
|
|
|
Plant, property and equipment (Note 5)
|
|
318.0
|
|
330.3
|
|
|
Goodwill
|
|
130.2
|
|
130.2
|
|
|
Other assets
|
|
1.0
|
|
1.5
|
|
|
|
|
|
1,675.1
|
|
1,701.1
|
|
|
|
Liabilities and Partners' Equity
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
4.5
|
|
5.3
|
|
|
|
Accrued interest
|
|
1.3
|
|
3.7
|
|
|
|
Current portion of long-term debt (Note 7)
|
|
53.4
|
|
4.4
|
|
|
|
Current portion of fair value of derivative contracts (Note 16)
|
|
12.9
|
|
11.8
|
|
|
|
|
|
72.1
|
|
25.2
|
|
|
Long-term debt (Note 7)
|
|
487.9
|
|
532.4
|
|
|
Fair value of derivative contracts and other (Note 16)
|
|
11.6
|
|
20.4
|
|
|
|
|
|
571.6
|
|
578.0
|
|
|
|
Due to North Baja's former parent
|
|
|
|
247.5
|
|
|
|
Partners' Equity (Note 8)
|
|
|
|
|
|
|
|
Common units
|
|
1,105.6
|
|
891.4
|
|
|
|
General partner
|
|
23.6
|
|
19.1
|
|
|
|
Accumulated other comprehensive loss
|
|
(25.7
|
)
|
(34.9
|
)
|
|
|
|
|
1,103.5
|
|
875.6
|
|
|
|
|
|
1,675.1
|
|
1,701.1
|
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
Subsequent events (Note 18)
The
accompanying notes are an integral part of these consolidated financial statements.
2009 ANNUAL REPORT
F-3
TC PIPELINES, LP
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 (millions of dollars except per common unit amounts)
|
|
2009
(a)
|
|
2008
(a)
|
|
2007
(a)
|
|
|
|
Equity income from investment in Great Lakes (Note 3)
|
|
59.1
|
|
57.3
|
|
49.0
|
|
|
Equity income from investment in Northern Border (Note 4)
|
|
40.3
|
|
65.3
|
|
61.2
|
|
|
Transmission revenues
|
|
67.9
|
|
64.5
|
|
49.8
|
|
|
Operating expenses
|
|
(11.0
|
)
|
(11.5
|
)
|
(10.8
|
)
|
|
General and administrative
|
|
(6.2
|
)
|
(4.1
|
)
|
(3.4
|
)
|
|
Depreciation (Note 5)
|
|
(14.7
|
)
|
(13.9
|
)
|
(12.4
|
)
|
|
Financial charges, net and other (Note 9)
|
|
(29.3
|
)
|
(34.6
|
)
|
(38.7
|
)
|
|
|
Net income
|
|
106.1
|
|
123.0
|
|
94.7
|
|
|
|
Net income allocation (Note 10)
|
|
|
|
|
|
|
|
|
Common units
|
|
90.6
|
|
95.1
|
|
80.0
|
|
|
General partner
|
|
7.2
|
|
12.6
|
|
9.0
|
|
|
|
|
|
97.8
|
|
107.7
|
|
89.0
|
|
|
|
Net income per common unit (Note 10)
|
|
$2.34
|
|
$2.73
|
|
$2.48
|
|
|
|
Weighted average common units outstanding
(millions)
|
|
38.7
|
|
34.9
|
|
32.3
|
|
|
|
Common units outstanding, end of the period
(millions)
|
|
46.2
|
|
34.9
|
|
34.9
|
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
TC PIPELINES, LP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Net income
(a)
|
|
106.1
|
|
123.0
|
|
94.7
|
|
|
Other comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
Change associated with current period hedging transactions (Note 16)
|
|
7.9
|
|
(22.0
|
)
|
(11.4
|
)
|
|
|
Change associated with current period hedging transactions of investees
|
|
1.3
|
|
(1.6
|
)
|
(1.7
|
)
|
|
|
|
|
9.2
|
|
(23.6
|
)
|
(13.1
|
)
|
|
|
Total comprehensive income
|
|
115.3
|
|
99.4
|
|
81.6
|
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
TC PIPELINES,
LP
TC PIPELINES, LP
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 (millions of dollars)
|
|
2009
(a)
|
|
2008
(a)
|
|
2007
(a)
|
|
|
|
Cash Generated From Operations
|
|
|
|
|
|
|
|
|
Net income
|
|
106.1
|
|
123.0
|
|
94.7
|
|
|
Depreciation (Note 5)
|
|
14.7
|
|
13.9
|
|
12.4
|
|
|
Amortization of other assets (Note 9)
|
|
0.4
|
|
0.5
|
|
0.4
|
|
|
Non-controlling interests
|
|
|
|
|
|
0.2
|
|
|
Increase in other long-term liabilities
|
|
0.2
|
|
0.1
|
|
|
|
|
Equity allowance for funds used during construction
|
|
(0.5
|
)
|
(1.1
|
)
|
(1.1
|
)
|
|
Decrease/(increase) in operating working capital (Note 12)
|
|
2.5
|
|
(4.2
|
)
|
1.7
|
|
|
|
|
|
123.4
|
|
132.2
|
|
108.3
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Cumulative distributions in excess of equity earnings:
|
|
|
|
|
|
|
|
|
|
Great Lakes
|
|
13.4
|
|
16.6
|
|
12.3
|
|
|
|
Northern Border
|
|
35.4
|
|
25.4
|
|
25.1
|
|
|
Investment in Great Lakes (Note 3)
|
|
(0.1
|
)
|
|
|
(733.0
|
)
|
|
Investment in Northern Border (Notes 4 and 15)
|
|
(42.3
|
)
|
|
|
(7.5
|
)
|
|
Investment in North Baja, net of cash acquired (Note 6)
|
|
(271.4
|
)
|
|
|
|
|
|
Investment in Tuscarora, net of cash acquired
|
|
|
|
|
|
(3.9
|
)
|
|
Capital expenditures
|
|
(1.9
|
)
|
(34.6
|
)
|
(26.1
|
)
|
|
Other assets
|
|
0.1
|
|
|
|
(1.1
|
)
|
|
(Increase)/decrease in investing working capital (Note 12)
|
|
(2.9
|
)
|
(3.7
|
)
|
4.0
|
|
|
|
|
|
(269.7
|
)
|
3.7
|
|
(730.2
|
)
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Distributions paid (Note 11)
|
|
(117.0
|
)
|
(108.6
|
)
|
(86.7
|
)
|
|
Equity issuances, net
|
|
265.6
|
|
|
|
607.0
|
|
|
Long-term debt issued (Note 7)
|
|
208.0
|
|
4.0
|
|
171.5
|
|
|
Long-term debt repaid (Note 7)
|
|
(203.5
|
)
|
(40.6
|
)
|
(66.2
|
)
|
|
Due to North Baja's former parent (Note 6)
|
|
(12.1
|
)
|
10.2
|
|
(0.4
|
)
|
|
|
|
|
141.0
|
|
(135.0
|
)
|
625.2
|
|
|
|
(Decrease)/increase in cash and cash equivalents
|
|
(5.3
|
)
|
0.9
|
|
3.3
|
|
|
Cash and cash equivalents, beginning of year
|
|
8.4
|
|
7.5
|
|
4.2
|
|
|
|
Cash and cash equivalents, end of year
|
|
3.1
|
|
8.4
|
|
7.5
|
|
|
|
Interest payments made
|
|
16.5
|
|
30.3
|
|
41.3
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
The accompanying notes are an integral part of these consolidated financial statements.
2009 ANNUAL REPORT
F-5
TC PIPELINES, LP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
|
Common Units
|
|
General
Partner
|
|
Accumulated
Other
Comprehensive
Loss
(a)
|
|
Partners' Equity
|
|
|
|
|
(millions
of units)
|
|
(millions
of dollars)
|
|
(millions
of dollars)
|
|
(millions
of dollars)
|
|
(millions
of units)
|
|
(millions
of dollars)
|
|
|
Partners' equity at December 31, 2006
|
17.5
|
|
295.6
|
|
6.5
|
|
1.8
|
|
17.5
|
|
303.9
|
|
|
Net income
(b)
|
|
|
86.9
|
|
7.8
|
|
|
|
|
|
94.7
|
|
|
Net income attributed to former North Baja owner
|
|
|
(5.6
|
)
|
(0.1
|
)
|
|
|
|
|
(5.7
|
)
|
|
Equity issuances, net
|
17.4
|
|
594.4
|
|
12.6
|
|
|
|
17.4
|
|
607.0
|
|
|
Distributions paid
|
|
|
(79.0
|
)
|
(7.7
|
)
|
|
|
|
|
(86.7
|
)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(13.1
|
)
|
|
|
(13.1
|
)
|
|
|
Partners' equity at December 31, 2007
|
34.9
|
|
892.3
|
|
19.1
|
|
(11.3
|
)
|
34.9
|
|
900.1
|
|
|
Net income
(b)
|
|
|
110.9
|
|
12.1
|
|
|
|
|
|
123.0
|
|
|
Net income attributed to former North Baja owner
|
|
|
(15.0
|
)
|
(0.3
|
)
|
|
|
|
|
(15.3
|
)
|
|
Distributions paid
|
|
|
(96.8
|
)
|
(11.8
|
)
|
|
|
|
|
(108.6
|
)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(23.6
|
)
|
|
|
(23.6
|
)
|
|
|
Partners' equity at December 31, 2008
|
34.9
|
|
891.4
|
|
19.1
|
|
(34.9
|
)
|
34.9
|
|
875.6
|
|
|
Net income
(b)
|
|
|
98.8
|
|
7.3
|
|
|
|
|
|
106.1
|
|
|
Net income attributed to former North Baja owner
|
|
|
(8.2
|
)
|
(0.1
|
)
|
|
|
|
|
(8.3
|
)
|
|
Equity issuances, net (Notes 6 and 8)
|
11.3
|
|
260.2
|
|
5.4
|
|
|
|
11.3
|
|
265.6
|
|
|
Distributions paid
|
|
|
(109.4
|
)
|
(7.6
|
)
|
|
|
|
|
(117.0
|
)
|
|
Excess purchase price over net acquired assets
(c)
|
|
|
(27.2
|
)
|
(0.5
|
)
|
|
|
|
|
(27.7
|
)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
9.2
|
|
|
|
9.2
|
|
|
|
Partners' equity at December 31, 2009
|
46.2
|
|
1,105.6
|
|
23.6
|
|
(25.7
|
)
|
46.2
|
|
1,103.5
|
|
|
|
-
(a)
-
The
Partnership uses derivatives to assist in managing its exposure to interest rate risk. Based on interest rates at December 31, 2009, the amount
of losses related to cash flow hedges reported in accumulated other comprehensive income that will be reclassified to net income in the next 12 months is $13.0 million, which will be
offset by a reduction to interest expense of a similar amount.
-
(b)
-
Recast
as discussed in Note 2 and Note 6.
-
(c)
-
Accounting
adjustment for common control transaction. See Note 6 for details.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
TC PIPELINES,
LP
TC PIPELINES, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION
TC PipeLines, LP and its subsidiaries are collectively referred to herein as the Partnership. The Partnership was formed by TransCanada PipeLines Limited, a
wholly-owned subsidiary of TransCanada Corporation (collectively referred to herein as TransCanada), to acquire, own and participate in the management of energy infrastructure assets in
North America.
The
Partnership owns the following interests in natural gas pipeline systems:
-
-
a
46.45 per cent general partner interest in Great Lakes Gas Transmission Limited Partnership (Great Lakes), a Delaware limited partnership. Great Lakes owns a
2,115-mile pipeline that transports natural gas serving markets in Minnesota, Wisconsin, Michigan and Eastern Canada;
-
-
a
50 per cent general partner interest in Northern Border Pipeline Company (Northern Border), a Texas general partnership. Northern Border owns a
1,249-mile U.S. interstate pipeline system that transports natural gas from the Montana-Saskatchewan border to markets in the Midwestern U.S.;
-
-
a
100 per cent interest in North Baja Pipeline, LLC (North Baja), a Delaware limited liability company. North Baja owns an 80-mile
U.S. interstate pipeline system that transports natural gas between an interconnection with El Paso Natural Gas Company
near Ehrenberg, Arizona and an interconnection near Ogilby, California on the California/Mexico border with the Gasoducto Bajanorte natural gas pipeline system; and
-
-
a
100 per cent interest in Tuscarora Gas Transmission Company (Tuscarora), a Nevada general partnership. Tuscarora owns a 240-mile
U.S. interstate pipeline system that transports natural gas from Oregon, where it interconnects with facilities of Gas Transmission Northwest Corporation, a wholly-owned subsidiary of
TransCanada, to a terminus in Northern Nevada.
The
Partnership is managed by its general partner, TC PipeLines GP, Inc. (TC PipeLines GP), a wholly-owned subsidiary of TransCanada. The
general partner provides administrative services for the Partnership and is reimbursed for its costs and expenses. In addition to its aggregate two per cent general partner interest in the
Partnership, the general partner owns 5,797,106 common units, representing an effective 14.3 per cent interest in the Partnership at December 31, 2009. TransCanada also
indirectly holds 11,287,725 common units representing an effective 23.9 per cent limited partner interest in the Partnership at December 31, 2009.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying financial statements and related notes present the financial position of the Partnership as of December 31, 2009 and 2008 and the results of its
operations, cash flows and changes in partners' equity for the years ended December 31, 2009, 2008 and 2007. The Partnership uses the equity method of accounting for its investments in Great
Lakes and Northern Border, over which it is able to exercise significant influence. The Partnership consolidates its investments in North Baja and Tuscarora.
On
July 1, 2009, the Partnership acquired a 100 per cent interest in North Baja from TransCanada. The acquisition was accounted for as a transaction
between entities under common control, similar to a pooling of interests, whereby the assets and liabilities of North Baja were recorded at TransCanada's carrying value and the Partnership's
historical financial information was recast to include North Baja for all periods presented on a consolidated basis. Refer to Note 6 for additional disclosure regarding the North Baja
acquisition.
Amounts
are stated in U.S. dollars. Certain comparative figures have been reclassified to conform to the current year's presentation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ from these estimates.
(c) Cash and Cash Equivalents
The Partnership's short-term investments with original maturities of three months or less are considered to be cash equivalents and are recorded at cost, which
approximates market value.
2009 ANNUAL REPORT
F-7
(d) Plant, Property and Equipment
Plant, property and equipment of North Baja and Tuscarora is stated at original cost. Costs of restoring the land above and around the pipeline are capitalized to pipeline
facilities and depreciated over the remaining life of the related pipeline facilities. Depreciation of pipeline facilities and compression equipment is provided on a straight-line
composite basis over the estimated useful life of the pipeline and compression equipment of 25 to 30 years. Metering and other is depreciated on a straight-line basis over the
estimated useful lives of the equipment, which range from 3 to 30 years. Repair and maintenance costs are expensed as incurred. Costs that are considered a betterment are capitalized. An
allowance for funds used during construction, using the rate of return on rate base approved by the Federal Energy Regulatory Commission (FERC), is capitalized and included in the cost of plant,
property and equipment. Amounts included in construction work in progress are not amortized until transferred into service.
The
Partnership assesses its long-lived assets for impairment based on
Accounting Standards Codification (ASC)
360-10-35 Property, Plant, and Equipment Overall Subsequent
Measurement.
A long-lived asset is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may exceed the undiscounted
cash flows expected to be generated by the asset. If the carrying amount exceeds the undiscounted cash flows, impairment is recognized to the extent the carrying amount exceeds its fair value.
(e) Partners' Equity
Costs incurred in connection with the issuance of units are deducted from the proceeds received.
(f) Revenue Recognition
Transmission revenues relate to North Baja and Tuscarora, and are recognized in the period in which the service is provided. When a rate case is pending final FERC approval, a
portion of the revenue collected is subject to possible refund. As of December 31, 2009, 2008 and 2007, the Partnership has not recognized any transmission revenue that is subject
to refund.
(g) Income Taxes
The Partnership is not subject to federal or state income tax. The tax effect of the Partnership's activities accrues to its partners. The Partnership's taxable income or loss,
which may vary substantially from the net income or loss reported in the consolidated statement of income, is includable in the federal income tax returns of each partner. The aggregate difference in
the basis of the Partnership's net assets for financial and income tax purposes cannot be readily determined because all information regarding each partner's tax attributes related to the partnership
is not available.
(h) Acquisitions and Goodwill
The Partnership accounts for business acquisitions from third parties using the purchase method of accounting and accordingly the assets and liabilities of the acquired entities
are recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired is attributed to goodwill. Goodwill is not amortized
for accounting purposes; however, it is tested on an annual basis for impairment, or more frequently if any indicators of impairment are evident.
The
Partnership accounts for business acquisitions between entities under common control using a method similar to a pooling of interests, whereby the assets and liabilities
of the acquired entities are recorded at TransCanada's carrying value and the Partnership's historical financial information is recast to include the acquired entities for all periods presented. If
the fair market value paid for the acquired entities is greater than the recorded net assets of the acquired entities, the excess purchase price paid is recorded as a reduction to Partners' Equity.
(i) Derivative Financial Instruments and Hedging Activities
The Partnership utilizes derivative and other financial instruments to manage its exposure to changes in interest rates. Derivatives and other hedging instruments must be
designated as hedges and be effective to qualify for hedge accounting. For cash flow hedges, unrealized gains or losses relating to derivatives are recognized as other comprehensive income. In the
event that a derivative does not meet the designation or effectiveness criteria, any unrealized gain or loss on the instrument is recognized immediately in earnings.
If
a derivative that previously qualified as a hedge is settled, de-designated or ceases to be effective, the gain or loss at that date is recognized in the same
period and in the same financial statement category as the corresponding hedged transactions. If a hedged anticipated transaction is no longer probable to occur, related gains or losses are
immediately recognized in earnings and amounts previously recognized in other comprehensive income are reclassified to earnings prospectively. Costs associated with the purchase of certain hedging
instruments are deferred and amortized against interest expense.
F-8
TC PIPELINES,
LP
(j) Asset Retirement Obligation
ASC 410 Asset Retirement and Environmental Obligations
provides accounting requirements for the recognition and measurement
of liabilities associated with the retirement of tangible long-lived assets. Under the standard, these liabilities are recognized at fair value as incurred and capitalized as part of the
cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time is classified as an operating expense. Retirement obligations associated with
long-lived assets included within the scope of ASC 410 are those for which a legal obligation exists under enacted laws, statutes, ordinances, or written or oral contracts,
including obligations arising under the doctrine of promissory estoppel.
No
amount is recorded for asset retirement obligations relating to the assets as it is not possible to make a reasonable estimate of the fair value of the liability due to
the inability to determine the scope and timing of the asset retirements.
(k) Government Regulation
North Baja and Tuscarora, the Partnership's wholly-owned pipeline systems, are subject to regulation by the FERC. The Partnership's accounting policies conform to
ASC 980 Regulated
Operations.
Accordingly, certain assets or liabilities that result from the regulated ratemaking
process may be recorded that would not be recorded under GAAP for non-regulated entities. The Partnership regularly evaluates the continued applicability of ASC 980, considering such
factors as regulatory changes, the impact of competition, and the ability to recover regulatory assets. As of December 31, 2009 and 2008, the Partnership has no regulatory assets or
liabilities, other than the allowance for funds used during construction that is capitalized and included in plant, property and equipment.
(l) Debt Issuance Costs
Costs related to the issuance of debt are deferred and amortized using the effective interest rate method over the term of the related debt.
NOTE 3 INVESTMENT IN GREAT LAKES
On February 22, 2007, the Partnership acquired a 46.45 per cent general partner interest in Great Lakes. TransCanada, which previously held a
50 per cent interest in Great Lakes, acquired the other 3.55 per cent interest concurrent with the Partnership's acquisition of its interest. On the same day, a
wholly-owned subsidiary of TransCanada acquired 100 per cent ownership of the operator of Great Lakes. Great Lakes is regulated by the FERC and its accounting policies conform to
ASC 980 Regulated
Operations.
TC
GL Intermediate Limited Partnership, as one of the general partners, may be exposed to the commitments and contingencies of Great Lakes. The Partnership holds a
98.9899 per cent limited partnership interest in TC GL Intermediate Limited Partnership.
On
November 19, 2009, the FERC issued an order in FERC Docket No. RP10-149 (November 2009 Order) instituting an investigation, pursuant to
Section 5 of the Natural Gas Act (GL Rate Proceeding). The FERC alleged, based on a review of certain historical information, that Great Lakes' revenues might substantially exceed Great
Lakes actual cost of service and therefore may be unjust and unreasonable. On February 4, 2010, Great Lakes filed a cost and revenue study (GL Cost and Revenue Study) in response to the
November 2009 Order. The GL Cost and Revenue Study supports Great Lakes' current rates and shows that if Great Lakes filed to reset its rates, these rates should be above Great Lakes' current
rates. The GL Cost and Revenue Study reflects the increased risk of de-contracting on the Great Lakes system which may result in decreases to overall long-term, daily and
short-term firm transportation revenues, and interruptible transportation revenues, as compared to prior periods.
In
the absence of a settlement, a hearing in the GL Rate Proceeding is scheduled for early August 2010 and an initial decision by the Administrative Law Judge is
expected in November 2010. Should the FERC determine as a result of these proceedings, that Great Lakes' rates are not just and reasonable; the FERC could order Great Lakes to reduce its rates
prospectively. Great Lakes' has expressed interest in pursuing settlement discussions with the FERC and interveners with the aim of bringing certainty to Great Lakes rates.
The
Partnership uses the equity method of accounting for its investment in Great Lakes. The Partnership's equity income from its investment in Great Lakes amounted to
$59.1 million for the year ended December 31, 2009 (2008 $57.3 million; $49.0 million for the period February 23, 2007 to
December 31, 2007). Great Lakes had no undistributed earnings for the years ended December 31, 2009 and 2008, and the period February 23, 2007 to December 31, 2007.
2009 ANNUAL REPORT
F-9
The
following tables contain summarized financial information of Great Lakes as at December 31, 2009 and 2008 and for the years ended December 31, 2009 and
2008, and for the period February 23, 2007 to December 31, 2007:
Summarized Consolidated Great Lakes Balance Sheet
December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
0.1
|
|
1.6
|
|
Other current assets
|
|
83.0
|
|
80.2
|
|
Plant, property and equipment, net
|
|
873.3
|
|
923.4
|
|
|
|
|
956.4
|
|
1,005.2
|
|
|
Liabilities and Partners' Equity
|
|
|
|
|
|
Current liabilities
|
|
40.3
|
|
43.0
|
|
Deferred credits
|
|
3.8
|
|
2.3
|
|
Long-term debt, including current maturities
|
|
411.0
|
|
430.0
|
|
Partners' capital
|
|
501.3
|
|
529.9
|
|
|
|
|
956.4
|
|
1,005.2
|
|
|
Summarized Consolidated Great Lakes Income Statement
Year ended December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
For the period
February 23 to
December 31,
2007
|
|
|
|
Transmission revenues
|
|
289.7
|
|
287.1
|
|
236.2
|
|
|
Operating expenses
|
|
(66.5
|
)
|
(67.1
|
)
|
(53.7
|
)
|
|
Depreciation
|
|
(58.5
|
)
|
(58.5
|
)
|
(49.4
|
)
|
|
Financial charges, net and other
|
|
(31.9
|
)
|
(32.6
|
)
|
(27.6
|
)
|
|
Michigan business tax
|
|
(5.4
|
)
|
(5.5
|
)
|
|
|
|
|
Net income
|
|
127.4
|
|
123.4
|
|
105.5
|
|
|
|
NOTE 4 INVESTMENT IN NORTHERN BORDER
The Partnership owns a 50 per cent general partner interest in Northern Border. The other 50 per cent partnership interest in Northern Border is held
by ONEOK Partners, L.P., a publicly traded limited partnership. Northern Border is regulated by the FERC and its accounting policies conform to
ASC
980 Regulated Operations.
Northern Border is operated by TransCanada.
TC PipeLines
Intermediate Limited Partnership, as one of the general partners, may be exposed to the commitments and contingencies of Northern Border. The Partnership
holds a 98.9899 per cent limited partnership interest in TC PipeLines Intermediate Limited Partnership.
The
Partnership uses the equity method of accounting for its investment in Northern Border. The Partnership's equity income from its investment in Northern Border amounted
to $40.3 million for the year ended December 31, 2009 (2008 $65.3 million;
2007 $61.2 million). Equity income from Northern Border includes a twelve-year amortization of a $10.0 million transaction fee paid to
the operator of Northern Border as an inducement to become operator at the time of the additional 20 per cent acquisition in April 2006. Northern Border had no undistributed
earnings for the years ended December 31, 2009, 2008 and 2007.
On
February 2, 2009, Northern Border received a Notice of Violation (NOV) from the United States Environmental Protection Agency alleging that Northern Border
was in violation of certain regulations pursuant to the Clean Air Act regarding a compressor station on its system. Northern Border disputes the NOV. At this time, Northern Border is unable to
reasonably estimate the cost of any associated corrective action or the possibility or amount of any penalty, but does not expect such amounts to be material to its financial condition.
F-10
TC PIPELINES,
LP
The
following tables contain summarized financial information of Northern Border as at December 31, 2009 and 2008 and for the years ended December 31, 2009,
2008 and 2007:
Summarized Northern Border Balance Sheet
December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
16.9
|
|
21.6
|
|
|
Other current assets
|
|
30.2
|
|
39.1
|
|
|
Plant, property and equipment, net
|
|
1,343.1
|
|
1,390.8
|
|
|
Other assets
|
|
24.2
|
|
24.5
|
|
|
|
|
|
1,414.4
|
|
1,476.0
|
|
|
|
Liabilities and Partners' Equity
|
|
|
|
|
|
|
Current liabilities
|
|
38.0
|
|
48.7
|
|
|
Deferred credits and other
|
|
8.3
|
|
11.2
|
|
|
Long-term debt, including current maturities
|
|
564.6
|
|
630.4
|
|
|
Partners' equity
|
|
|
|
|
|
|
|
Partners' capital
|
|
806.6
|
|
791.4
|
|
|
|
Accumulated other comprehensive loss
|
|
(3.1
|
)
|
(5.7
|
)
|
|
|
|
|
1,414.4
|
|
1,476.0
|
|
|
|
Summarized Northern Border Income Statement
Year ended December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Transmission revenues
|
|
249.2
|
|
293.1
|
|
309.4
|
|
|
Operating expenses
|
|
(70.8
|
)
|
(78.0
|
)
|
(83.5
|
)
|
|
Depreciation
|
|
(61.9
|
)
|
(61.1
|
)
|
(60.7
|
)
|
|
Financial charges, net and other (Note 13)
|
|
(34.4
|
)
|
(21.8
|
)
|
(41.1
|
)
|
|
|
Net income
|
|
82.1
|
|
132.2
|
|
124.1
|
|
|
|
NOTE 5 PLANT, PROPERTY AND EQUIPMENT
|
|
2009
|
|
2008
|
December 31 (millions of dollars)
|
|
Cost
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
Cost
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
|
Pipeline
|
|
279.6
|
|
90.7
|
|
188.9
|
|
279.5
|
|
81.3
|
|
198.2
|
|
Compression
|
|
113.4
|
|
20.5
|
|
92.9
|
|
112.8
|
|
16.4
|
|
96.4
|
|
Metering and other
|
|
37.5
|
|
7.1
|
|
30.4
|
|
37.1
|
|
5.9
|
|
31.2
|
|
Under construction
|
|
5.8
|
|
|
|
5.8
|
|
4.5
|
|
|
|
4.5
|
|
|
|
|
436.3
|
|
118.3
|
|
318.0
|
|
433.9
|
|
103.6
|
|
330.3
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
2009 ANNUAL REPORT
F-11
NOTE 6 ACQUISITIONS AND REVISED INCENTIVE DISTRIBUTION RIGHTS
On July 1, 2009, the Partnership acquired a 100 per cent interest in North Baja, a Delaware limited liability company, from TransCanada. The North Baja
pipeline system extends from an interconnection with El Paso Natural Gas Company near Ehrenberg, Arizona to a point near Ogilby, California on the California/Mexico border where it connects with the
Gasoducto Bajanorte natural gas pipeline system owned by Sempra Energy International. North Baja is regulated by the FERC and is operated by TransCanada.
The
purchase price of $271.4 million was financed through a combination of (i) a draw of $170.0 million on the Partnership's $250.0 million
revolving portion of its revolving credit and term loan agreement (Senior Credit Facility), (ii) issuance of 2,609,680 common units at $30.042 per common unit to TransCanada for gross
proceeds of $78.4 million, (iii) issuance of additional general partner interest to the general partner of $1.6 million, which was required to maintain the general partner's two
per cent general partner interest in the Partnership, and (iv) approximately $21.4 million of cash on hand.
The
acquisition of North Baja was accounted for as a transaction between entities under common control, similar to a pooling of interests, whereby the assets and liabilities
of North Baja were recorded at TransCanada's carrying value and the Partnership's historical financial information was recast to include North Baja for all periods presented. The purchase price was
recorded as follows: Working capital of $2.0 million; Plant, property and equipment of $193.5 million; Goodwill of $48.5 million; Other assets of $0.1 million; and Other
long-term liabilities of $0.4 million. As the fair value paid for North Baja was greater than the recorded net assets of North Baja, the excess purchase price paid of
$27.7 million was recorded as a reduction to Partners' Equity. The effect of recasting the Partnership's consolidated financial statements to account for the common control transaction
increased the Partnership's net income by $15.3 million and $5.7 million for the years ended December 31, 2008 and 2007, respectively, from amounts previously reported. In
addition, the Partnership's 2009 net income increased by $8.3 million due to the recasting of its results for the six months ended June 30, 2009.
The
Partnership agreed to acquire an expansion of the North Baja pipeline from the Mexico/Arizona border to Yuma City, Arizona for an additional sum up to
$10.0 million, if TransCanada completed the expansion by June 30, 2010. The expansion is currently under construction and is expected to be completed in March 2010. The purchase
price has yet to be determined. This acquisition will be accounted for when the transaction occurs.
Concurrent
with the acquisition of North Baja, the Partnership entered into an exchange agreement with its general partner whereby the Partnership issued
3,762,000 common units to the general partner and provided for revised incentive distribution rights (Revised IDRs) in exchange for the cancellation of the incentive distribution rights
available to the general partner (Old IDRs) under the Amended and Restated Agreement of Limited Partnership of the Partnership.
Under
the terms of the Revised IDRs, the distributions to the general partner were reset to two per cent, down from the general partner distribution levels of the Old
IDRs at 50 per cent (for combined general partner interest and incentive distribution interest). The incentive distribution levels of the Revised IDRs will result in increased
combined distributions to the general partner (for general partner interest and incentive distribution interest) of 15 per cent and a maximum of 25 per cent when
quarterly distributions increase to $0.81 and $0.88 per common unit or $3.24 and $3.52 per common unit on an annualized basis, respectively.
NOTE 7 CREDIT FACILITIES AND LONG-TERM DEBT
December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
|
Senior Credit Facility due 2011
|
|
484.0
|
|
475.0
|
|
7.13% Series A Senior Notes due 2010
|
|
48.2
|
|
51.3
|
|
7.99% Series B Senior Notes due 2010
|
|
4.4
|
|
5.0
|
|
6.89% Series C Senior Notes due 2012
|
|
4.7
|
|
5.5
|
|
|
|
|
541.3
|
|
536.8
|
|
|
The
Partnership's Senior Credit Facility consists of a $475.0 million senior term loan and a $250.0 million senior revolving credit facility with a banking
syndicate. In accordance with the Senior Credit Facility agreement, once repaid, a senior term loan cannot be re-borrowed. In 2009, none of the senior term loan was repaid
(2008 $13.0 million); therefore, $475.0 million remained outstanding under the senior term loan at December 31, 2009. $9.0 million
was outstanding under the revolving portion of the Senior Credit Facility at December 31, 2009 (2008 $nil), leaving $241.0 million available for
future borrowings.
The
Senior Credit Facility matures on December 12, 2011, subject to two one-year extensions at the option of the Partnership and with the approval of a
majority of the lenders thereunder. Amounts borrowed may be repaid in part, or in full, prior to that time without penalty. Borrowings under the Senior Credit Facility bear interest based, at the
Partnership's election, on the London Interbank Offered Rate (LIBOR) or the prime rate plus, in either case, an applicable margin. There was $484.0 million outstanding under the Senior Credit
Facility at December 31, 2009 (2008 $475.0 million). The interest rate on the Senior Credit Facility averaged 1.42 per cent for the
year ended
F-12
TC PIPELINES,
LP
December 31,
2009 (2008 3.75 per cent). After hedging activity, the interest rate incurred on the Senior Credit Facility averaged
4.10 per cent for the year ended December 31, 2009 (2008 5.15 per cent). Prior to hedging activities, the interest rate was
0.97 per cent at December 31, 2009 (2008 2.67 per cent). At December 31, 2009, the Partnership was in compliance with
its financial covenants, in addition to the other covenants which include restrictions on entering into mergers, consolidations and sales of assets, granting liens, material amendments to the
Partnership Agreement, incurring additional debt and distributions to unitholders.
Series A,
B and C Senior Notes are secured by Tuscarora's transportation contracts, supporting agreements and substantially all of Tuscarora's property. The
note purchase agreements contain certain provisions that include, among other items, limitations on additional indebtedness and distributions to partners. On December 21, 2010, the
Series A and B Senior Notes will mature. As market conditions dictate, the Partnership intends to refinance this debt with either fixed-rate or
variable-rate debt.
The
principal repayments required on the long-term debt are as follows:
(millions of dollars)
|
|
|
|
|
2010
|
|
53.4
|
|
2011
|
|
484.8
|
|
2012
|
|
3.1
|
|
|
|
|
541.3
|
|
|
NOTE 8 PARTNERS' EQUITY
On November 18, 2009, the Partnership completed a public offering of 5,000,000 common units at $38.00 per common unit for gross proceeds of $190.0 million
and net proceeds of $181.8 million after unit issuance costs. TC PipeLines GP maintained its two per cent general partner interest in the Partnership by contributing
$3.8 million to the Partnership in connection with the offering.
Refer
to Note 6 for disclosure regarding the equity issuance in connection with the acquisition of North Baja.
At
December 31, 2009, Partners' equity includes 46,227,766 common units (2008 34,856,086 common units)
representing an aggregate 98 per cent limited partner interest in the Partnership (including 5,797,106 common units held by the general partner and 11,287,725 common units
held indirectly by TransCanada) and an aggregate two per cent general partner interest. In aggregate, the general partner's interests represent an effective 14.3 per cent
ownership in the Partnership at December 31, 2009 (December 31, 2008 7.7 per cent).
NOTE 9 FINANCIAL CHARGES, NET AND OTHER
Year ended December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
2007
|
|
|
Interest expense on long-term debt
|
|
11.9
|
|
23.1
|
|
35.1
|
|
Interest expense on short-term debt
(a)
|
|
2.7
|
|
6.3
|
|
7.7
|
|
Capitalized interest
(a)
|
|
(0.4
|
)
|
(1.4
|
)
|
(1.6 )
|
|
Loss/(gain) on interest rate swaps and options
|
|
15.1
|
|
6.9
|
|
(1.4 )
|
|
Interest income
(a)
|
|
(0.4
|
)
|
(0.8
|
)
|
(2.0 )
|
|
Amortization of other assets
|
|
0.4
|
|
0.5
|
|
0.4
|
|
Other
|
|
|
|
|
|
0.5
|
|
|
|
|
29.3
|
|
34.6
|
|
38.7
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
NOTE 10 NET INCOME PER COMMON UNIT
Net income per common unit is computed by dividing net income, after deduction of the general partner's allocation, by the weighted average number of common units outstanding.
The general partner's allocation is equal to an amount based upon the general partner's two per cent interest, plus an amount equal to incentive distributions. Incentive distributions are
received by the general partner if quarterly cash
2009 ANNUAL REPORT
F-13
distributions
on the common units exceed levels specified in the partnership agreement. Net income per common unit was determined as follows:
(millions of dollars except per unit)
|
|
2009
|
|
2008
|
|
2007
|
|
|
Net income
(a)
|
|
106.1
|
|
123.0
|
|
94.7
|
|
North Baja's contribution prior to acquisition
|
|
(8.3
|
)
|
(15.3
|
)
|
(5.7 )
|
|
|
Net income allocated to partners
(b)
|
|
97.8
|
|
107.7
|
|
89.0
|
|
Net income allocated to general partner:
|
|
|
|
|
|
|
|
|
General partner interest
|
|
(1.9
|
)
|
(2.2
|
)
|
(1.8 )
|
|
|
Incentive distribution income allocation
|
|
(5.3
|
)
|
(10.4
|
)
|
(7.2 )
|
|
|
|
|
(7.2
|
)
|
(12.6
|
)
|
(9.0 )
|
|
|
Net income allocable to common units
|
|
90.6
|
|
95.1
|
|
80.0
|
|
|
Weighted average common units outstanding
(millions)
|
|
38.7
|
|
34.9
|
|
32.3
|
|
Net income per common unit
|
|
$2.34
|
|
$2.73
|
|
$2.48
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
-
(b)
-
Net
income allocated to partners excludes North Baja's earnings prior to the Partnership's acquisition of North Baja on July 1, 2009, as the
earnings of North Baja prior to that date were allocated to TransCanada and were not allocable to either the general partner or common units.
Effective
January 1, 2009, the Partnership adopted the provisions of
ASC 260-10-55 Earnings Per
Share Overall Implementation Guidance and Illustrations Master Limited
Partnerships
. According to the new standard, for purposes of calculating net income per common unit, net income must be reduced by the amount of available cash that will be
distributed with respect to that period. Any undistributed income must be allocated to the various interest holders based on the contractual provisions of the partnership agreement. Under the
partnership agreement, for any quarterly period, the participation of the Incentive Distributions Rights (IDRs) is limited to available cash distributions declared. Accordingly, the undistributed net
income has been allocated to the general partner's two per cent interest and the common unitholders.
The
retrospective application of ASC 260-10-55 impacted the amount of net income allocated to the IDR holder for the years ended
December 31, 2008 and 2007, as the amount previously allocated to the IDR holder was based on the cash distribution paid in that year and is now based on the amount declared for the year. The
retrospective application of this standard resulted in a reduction from $2.75 to $2.73 in net income per common unit for the year ended December 31, 2008
(2007 reduction from $2.51 to $2.48 in net income per common unit).
NOTE 11 CASH DISTRIBUTIONS
The Partnership makes cash distributions to its partners with respect to each calendar quarter within 45 days after the end of each quarter. Distributions are based on
Available Cash, as defined in the Partnership Agreement, which includes all cash and cash equivalents of the Partnership and working capital borrowings less reserves established by the general
partner. The Unitholders currently receive a quarterly distribution of $0.73 per common unit if and to the extent there is sufficient Available Cash.
As
an incentive, the general partner's percentage interest in quarterly distributions is increased after certain specified target levels are met. Prior to July 1,
2009, the combined general partner interest and incentive distribution interest payable to the General Partner were 15 per cent, 25 per cent, and 50 per cent
of all quarterly distributions of Available Cash that exceed target levels of $0.45, $0.5275 and $0.69 per common unit, respectively. On July 1, 2009, the incentive distributions were revised
under the Second Amended and Restated Agreement of Limited Partnership of the Partnership. Currently, the combined general partner interest and incentive distribution interest payable to the General
Partner are 15 per cent and a maximum of 25 per cent of all quarterly distributions of Available Cash that exceed target levels of $0.81 and $0.88, respectively, per
common unit.
For
the year ended December 31, 2009, the Partnership distributed $2.87 per common unit (2008 $2.775 per common unit;
2007 $2.565 per common unit). The distributions paid for the year ended December 31, 2009 included incentive distributions to the general partner in the
amount of $5.3 million (2008 $9.7 million; 2007 $5.9 million). Partnership income is allocated to
the general partner and the limited partners in accordance with their respective partnership percentages, after giving effect to any priority income allocations for incentive distributions that are
allocated 100 per cent to the general partner.
F-14
TC PIPELINES,
LP
NOTE 12 CHANGE IN WORKING CAPITAL
Year Ended December 31 (millions of dollars)
|
|
2009
(a)
|
|
2008
(a)
|
|
2007
(a)
|
|
|
Decrease/(increase) in accounts receivable and other
|
|
2.8
|
|
(0.6
|
)
|
(2.1 )
|
|
(Decrease)/increase in bank indebtedness
|
|
|
|
(1.4
|
)
|
1.4
|
|
(Decrease)/increase in accounts payable and accrued liabilities
|
|
(0.8
|
)
|
(5.0
|
)
|
4.8
|
|
(Decrease)/increase in accrued interest
|
|
(2.4
|
)
|
(0.9
|
)
|
1.6
|
|
|
|
|
(0.4
|
)
|
(7.9
|
)
|
5.7
|
|
(Increase)/decrease in investing working capital
|
|
(2.9
|
)
|
(3.7
|
)
|
4.0
|
|
|
Decrease/(increase) in operating working capital
|
|
2.5
|
|
(4.2
|
)
|
1.7
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
NOTE 13 RELATED PARTY TRANSACTIONS
The Partnership does not have any employees. The management and operating functions are provided by the general partner. The general partner does not receive a management fee in
connection with its management of the Partnership. The Partnership reimburses the general partner for all costs of services provided, including the costs of employee, officer and director compensation
and benefits, and all other expenses necessary or appropriate to the conduct of the business of, and allocable to, the Partnership. Such costs include (i) overhead costs (such as office space
and equipment) and (ii) out-of-pocket expenses related to the provision of such services. The Partnership Agreement provides that the general partner will determine the
costs that are allocable to the Partnership in any reasonable manner determined by the general partner in its sole discretion. Total costs charged to the Partnership by the general partner were
$2.1 million for the year ended December 31, 2009 (2008 $2.1 million; 2007 $1.9 million).
As
operator, TransCanada and its affiliates provide capital and operating services to Great Lakes, Northern Border, North Baja and Tuscarora (together, "our pipeline
systems"). TransCanada and its affiliates incur costs on behalf of our pipeline systems, including, but not limited to, employee salary and benefit costs, property and liability insurance costs.
Costs
charged to our pipeline systems for the years ended December 31, 2009 and 2008 by TransCanada and its affiliates and amounts payable to TransCanada and its
affiliates at December 31, 2009 and 2008 are summarized in the following tables:
Year ended December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
|
Costs charged by TransCanada and its affiliates:
|
|
|
|
|
|
|
Great Lakes
|
|
33.8
|
|
34.3
|
|
|
Northern Border
(a)
|
|
25.5
|
|
30.5
|
|
|
North Baja
(b)
|
|
2.9
|
|
4.7
|
|
|
Tuscarora
|
|
3.0
|
|
3.7
|
|
Impact on the Partnership's net income:
|
|
|
|
|
|
|
Great Lakes
|
|
14.3
|
|
14.2
|
|
|
Northern Border
|
|
12.3
|
|
12.9
|
|
|
North Baja
(b)
|
|
2.4
|
|
2.7
|
|
|
Tuscarora
|
|
2.8
|
|
2.7
|
|
December 31 (millions of dollars)
|
|
2009
|
|
2008
|
|
|
Amount payable to/(receivable from) TransCanada and its affiliates:
|
|
|
|
|
|
|
Great Lakes
|
|
6.6
|
|
4.5
|
|
|
Northern Border
|
|
2.6
|
|
2.8
|
|
|
North Baja
(b)
|
|
(1.6
|
)
|
(2.5 )
|
|
|
Tuscarora
|
|
0.6
|
|
0.8
|
|
-
(a)
-
In
2008, Northern Border's costs charged by TransCanada and its affiliates include $2.0 million of charges related to Bison Pipeline LLC
through the effective date of the sale.
-
(b)
-
Recast
as discussed in Note 2 and Note 6.
2009 ANNUAL REPORT
F-15
Great
Lakes earns transportation revenues from TransCanada and its affiliates under fixed priced contracts with remaining terms ranging from one to eight years. Great
Lakes earned $142.4 million of transportation revenues under these contracts in 2009 (2008 $144.1 million). This amount represents
49 per cent of total revenues earned by Great Lakes in 2009 (2008 50 per cent). $66.1 million of affiliated revenue is
included in the Partnership's equity income from Great Lakes in 2009 (2008 $67.0 million). At December 31, 2009, $12.9 million was included
in Great Lakes' receivables in regards to the transportation contracts with TransCanada and its affiliates (2008 $12.7 million).
Great
Lakes has 831 thousand dekatherms per day (MDth/d) of longhaul capacity under contract expiring on October 31, 2010 with its largest shipper,
TransCanada. On November 3, 2009, Great Lakes and TransCanada renewed contracts through October 31, 2011 for 470 MDth/d of capacity and agreed that Great Lakes would provide other
transportation services. The contract for the remaining 361 MDth/d of longhaul capacity will expire October 31, 2010.
In
August 2008, Northern Border sold its wholly-owned subsidiary, Bison Pipeline LLC, to TransCanada for $20.0 million. In connection with this
transaction, Northern Border recorded a gain on sale of $16.2 million, of which the Partnership's share is $8.1 million. In the Summarized Northern Border Income Statement provided in
Note 4, the gain on sale is included in Financial charges, net and other.
Northern
Border's Des Plaines Project consists of the construction, ownership and operation of interconnect facilities near Joliet, Illinois. In June 2008, in
connection with the Des Plaines Project, Northern Border and ANR Pipeline Company (ANR), a wholly-owned subsidiary of TransCanada, entered into an Interconnect Agreement, which provided that Northern
Border would reimburse ANR for the cost of the interconnect facilities to be owned by ANR. In June 2008, Northern Border paid ANR $0.5 million.
NOTE 14 QUARTERLY FINANCIAL DATA (unaudited)
The following sets forth selected financial data for the four quarters in 2009 and 2008:
Quarter ended (millions of dollars except per unit amounts)
|
|
Mar 31
|
|
Jun 30
|
|
Sep 30
|
|
Dec 31
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Equity income
|
|
35.1
|
|
18.3
|
|
23.7
|
|
22.3
|
|
Transmission revenues
(a)
|
|
16.8
|
|
16.8
|
|
17.5
|
|
16.8
|
|
Net income
(a)
|
|
35.9
|
|
17.9
|
|
27.4
|
|
24.9
|
|
Net income per common unit
|
|
$0.82
|
|
$0.31
|
|
$0.65
|
|
$0.56
|
|
Cash distributions paid
|
|
27.7
|
|
27.8
|
|
30.8
|
|
30.7
|
|
2008
|
|
|
|
|
|
|
|
|
|
Equity income
|
|
38.1
|
|
22.5
|
|
31.9
|
|
30.1
|
|
Transmission revenues
(a)
|
|
14.1
|
|
16.1
|
|
17.4
|
|
16.9
|
|
Net income
(a)
|
|
37.3
|
|
23.6
|
|
33.0
|
|
29.1
|
|
Net income per common unit
|
|
$0.87
|
|
$0.47
|
|
$0.72
|
|
$0.67
|
|
Cash distributions paid
|
|
25.6
|
|
27.4
|
|
27.8
|
|
27.8
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
NOTE 15 CAPITAL REQUIREMENTS
In the first quarter of 2009, the Partnership made an equity contribution of $4.3 million to Northern Border, representing the Partnership's 50 per cent
share of an $8.6 million cash call issued by Northern Border to complete the Des Plaines Project. In the third quarter of 2009, the Partnership made an equity contribution of
$38.0 million, representing the Partnership's 50 per cent share of a $76.0 million cash call issued by Northern Border to partially fund the repayment of
$200.0 million of debt which matured on September 1, 2009.
NOTE 16 DERIVATIVE FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable and other, accounts payable and accrued liabilities, and accrued interest approximate their fair values
because of the short maturity or duration of these instruments, or because the instruments carry a variable rate of interest or a rate that approximates current rates. The fair value of the
Partnership's long-term debt is estimated by discounting the future cash flows of each instrument at estimated current borrowing rates.
F-16
TC PIPELINES,
LP
The
estimated fair values of the Partnership's and its subsidiary's long-term debt as of December 31, 2009 and 2008 are as follows:
|
|
2009
|
|
2008
|
|
December 31 (millions of dollars)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
Senior Credit Facility
|
|
484.0
|
|
484.0
|
|
475.0
|
|
475.0
|
|
Series A Senior Notes
|
|
48.2
|
|
50.8
|
|
51.3
|
|
52.3
|
|
Series B Senior Notes
|
|
4.4
|
|
4.7
|
|
5.0
|
|
5.2
|
|
Series C Senior Notes
|
|
4.7
|
|
5.2
|
|
5.5
|
|
5.4
|
|
|
|
|
541.3
|
|
544.7
|
|
536.8
|
|
537.9
|
|
|
The
Partnership's long-term debt results in exposures to changing interest rates. The Partnership uses derivatives to assist in managing its exposure to interest
rate risk.
The
interest rate swaps and options are structured such that the cash flows match those of the Senior Credit Facility. The notional amount hedged was $375.0 million
at December 31, 2009 (2008 $475.0 million). $300.0 million of variable-rate debt is hedged by an interest rate swap through
December 12, 2011, where the weighted average fixed interest rate paid is 4.89 per cent. $75.0 million of variable-rate debt is hedged by an interest rate swap
during the period from February 29, 2008 through February 28, 2011, where the fixed interest rate paid is 3.86 per cent. $100.0 million of variable-rate
debt was hedged by an interest rate option through May 22, 2009 at an interest rate range between a weighted average floor of 4.09 per cent and a cap of
5.35 per cent. In addition to these fixed rates, the Partnership pays an applicable margin in accordance with the Senior Credit Facility agreement.
Under
ASC 820 Fair Value Measurements and Disclosures,
financial instruments are
recorded at fair value on a recurring basis and are categorized into one of three categories based upon a fair value hierarchy. The Partnership has classified all of its derivative financial
instruments as Level II where the fair value is determined by using valuation techniques that refer to observable market data or estimated market prices. At December 31, 2009, the fair
value of the interest rate swaps accounted for as hedges was negative $23.8 million (2008 negative $31.7 million), of which $12.9 million
is classified as a current liability (2008 $11.8 million). The fair value of the interest rate swaps was calculated using the year end interest rate;
therefore, it is expected that this fair value will fluctuate over the year as interest rates change. In 2009, the Partnership recorded interest expense of $15.1 million on the interest rate
swaps and options (2008 $6.9 million).
NOTE 17 ACCOUNTS RECEIVABLE AND OTHER
December 31 (millions of dollars)
|
|
2009
|
|
2008
(a)
|
|
|
Accounts receivable
|
|
7.4
|
|
9.0
|
|
Inventory
|
|
0.6
|
|
0.6
|
|
Prepayments
|
|
0.5
|
|
0.5
|
|
Other assets
|
|
0.1
|
|
1.3
|
|
|
|
|
8.6
|
|
11.4
|
|
|
-
(a)
-
Recast
as discussed in Note 2 and Note 6.
NOTE 18 SUBSEQUENT EVENTS
On January 19, 2010, the Board of Directors of the general partner declared the Partnership's fourth quarter 2009 cash distribution in the amount of $0.73 per common
unit. The fourth quarter cash distribution which was paid on February 12, 2010 to unitholders of record as of January 31, 2010, totaled $34.4 million and was paid in the following
manner: $33.7 million to common unitholders (including $4.2 million to the general partner as holder of 5,797,106 common units and $8.2 million to TransCanada as holder of
11,287,725 common units) and $0.7 million to the general partner in respect of its two per cent general partner interest. The cash distribution represents an annual cash
distribution of $2.92 per common unit.
Great
Lakes declared and paid its fourth quarter 2009 distribution of $33.7 million on February 1, 2010, of which the Partnership received its
46.45 per cent share or $15.7 million.
Northern
Border declared and paid its fourth quarter 2009 distribution of $32.8 million on February 1, 2010, of which the Partnership received its
50 per cent share or $16.4 million.
The
Partnership has evaluated subsequent events from January 1, 2010 through February 24, 2010, which represents the date the financial statements
were issued.
2009 ANNUAL REPORT
F-17
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP
INDEPENDENT AUDITORS' REPORT
The Partners and Management Committee
Great Lakes Gas Transmission Limited Partnership:
We have audited the accompanying consolidated balance sheets of Great Lakes Gas Transmission Limited Partnership and subsidiary
(the Partnership) as of December 31, 2009 and 2008, and the related consolidated statements of income and partners' capital, and cash flows for the each of the years in the
three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Great Lakes Gas Transmission
Limited Partnership and subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the each of the years in the three-year period ended
December 31, 2009 in conformity with U.S. generally accepted accounting principles.
/s/
KPMG LLP
Houston,
Texas
February 11, 2010
F-18
TC PIPELINES,
LP
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME AND PARTNERS' CAPITAL
Years Ended December 31 (Thousands of Dollars)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Transportation Revenues
|
|
|
|
|
|
|
|
|
|
Affiliated Revenues
|
|
$ 142,364
|
|
144,137
|
|
137,166
|
|
|
|
Nonaffiliated Revenues
|
|
147,329
|
|
142,993
|
|
145,660
|
|
|
|
|
|
289,693
|
|
287,130
|
|
282,826
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Operation and Maintenance
|
|
48,760
|
|
46,276
|
|
42,125
|
|
|
|
Depreciation
|
|
58,503
|
|
58,522
|
|
58,046
|
|
|
|
Property and Other Non Income Taxes
|
|
17,729
|
|
20,788
|
|
22,195
|
|
|
|
|
|
124,992
|
|
125,586
|
|
122,366
|
|
|
|
Operating Income
|
|
164,701
|
|
161,544
|
|
160,460
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Interest on Long Term Debt
|
|
(32,884
|
)
|
(34,222
|
)
|
(35,096
|
)
|
|
|
Interest Income
|
|
495
|
|
1,299
|
|
2,872
|
|
|
|
Other, Net
|
|
517
|
|
318
|
|
65
|
|
|
|
|
|
(31,872
|
)
|
(32,605
|
)
|
(32,159
|
)
|
|
|
Income Before Partnership Income Taxes
|
|
$ 132,829
|
|
128,939
|
|
128,301
|
|
|
Income Tax Expense
|
|
(5,417
|
)
|
(5,503
|
)
|
|
|
|
|
Net Income
|
|
$ 127,412
|
|
123,436
|
|
128,301
|
|
|
|
Partners' Capital
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
$ 529,886
|
|
565,650
|
|
630,849
|
|
|
Net Income
|
|
127,412
|
|
123,436
|
|
128,301
|
|
|
Distributions to Partners
|
|
(156,000
|
)
|
(159,200
|
)
|
(193,500
|
)
|
|
|
Balance at End of Year
|
|
$ 501,298
|
|
529,886
|
|
565,650
|
|
|
|
See accompanying notes to consolidated financial statements.
2009 ANNUAL REPORT
F-19
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
As of December 31 (Thousands of Dollars)
|
|
2009
|
|
2008
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$ 125
|
|
1,637
|
|
|
|
Demand Loan Receivable from Affiliate
|
|
33,974
|
|
25,467
|
|
|
|
Accounts Receivable (Net of allowance of $250 in 2009 and 2008)
|
|
22,980
|
|
26,938
|
|
|
|
Receivable from Affiliates
|
|
12,922
|
|
12,739
|
|
|
|
Materials and Supplies
|
|
10,235
|
|
10,307
|
|
|
|
Prepayments
|
|
2,856
|
|
4,775
|
|
|
|
|
|
83,092
|
|
81,863
|
|
|
|
Gas Utility Plant
|
|
|
|
|
|
|
|
Property, Plant, and Equipment
|
|
2,054,308
|
|
2,049,160
|
|
|
|
Less Accumulated Depreciation
|
|
(1,181,042
|
)
|
(1,125,779
|
)
|
|
|
|
|
873,266
|
|
923,381
|
|
|
|
|
|
$ 956,358
|
|
1,005,244
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
Current Maturities of Long Term Debt
|
|
$ 19,000
|
|
19,000
|
|
|
|
Accounts Payable
|
|
14,355
|
|
17,646
|
|
|
|
Payable to Affiliates
|
|
6,561
|
|
4,467
|
|
|
|
Property Taxes
|
|
8,262
|
|
8,800
|
|
|
|
Other Non Income Taxes
|
|
2,279
|
|
2,963
|
|
|
|
Accrued Interest
|
|
8,690
|
|
8,998
|
|
|
|
Other
|
|
140
|
|
140
|
|
|
|
|
|
59,287
|
|
62,014
|
|
|
|
Long Term Debt
|
|
392,000
|
|
411,000
|
|
|
Deferred Partnership Income Taxes
|
|
3,337
|
|
1,927
|
|
|
Other Liabilities
|
|
436
|
|
417
|
|
|
Partners' Capital
|
|
501,298
|
|
529,886
|
|
|
|
|
|
$ 956,358
|
|
1,005,244
|
|
|
|
See accompanying notes to consolidated financial statements.
F-20
TC PIPELINES,
LP
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 (Thousands of Dollars)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Cash Flow Increase (Decrease) from:
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ 127,412
|
|
123,436
|
|
128,301
|
|
|
|
Adjustments to Reconcile Net Income to Operating Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
58,503
|
|
58,522
|
|
58,046
|
|
|
|
|
Deferred Income Taxes
|
|
1,410
|
|
1,927
|
|
|
|
|
|
|
Allowance for Funds Used During Construction
|
|
(129
|
)
|
(310
|
)
|
(438
|
)
|
|
|
|
Changes in Current Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
3,958
|
|
2,291
|
|
(12,902
|
)
|
|
|
|
|
Receivable from Affiliates
|
|
(183
|
)
|
(1,132
|
)
|
7,347
|
|
|
|
|
|
Accounts Payable
|
|
(3,291
|
)
|
(8,822
|
)
|
9,889
|
|
|
|
|
|
Payable to Affiliates
|
|
2,094
|
|
2,596
|
|
(491
|
)
|
|
|
|
|
Property and Other Non Income Taxes
|
|
(1,222
|
)
|
(1,182
|
)
|
(8,787
|
)
|
|
|
|
|
Other
|
|
1,702
|
|
(649
|
)
|
(5,342
|
)
|
|
|
|
|
190,254
|
|
176,677
|
|
175,623
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Investment in Utility Plant
|
|
(8,259
|
)
|
(12,333
|
)
|
(18,804
|
)
|
|
|
Increase in Demand Loan Receivable from Affiliate
|
|
(8,507
|
)
|
(25,467
|
)
|
|
|
|
|
|
|
(16,766
|
)
|
(37,800
|
)
|
(18,804
|
)
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Repayment of Long Term Debt
|
|
(19,000
|
)
|
(10,000
|
)
|
(10,000
|
)
|
|
|
Distribution to Partners
|
|
(156,000
|
)
|
(159,200
|
)
|
(193,500
|
)
|
|
|
|
|
(175,000
|
)
|
(169,200
|
)
|
(203,500
|
)
|
|
|
Change in Cash and Cash Equivalents
|
|
(1,512
|
)
|
(30,323
|
)
|
(46,681
|
)
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Beginning of Year
|
|
1,637
|
|
31,960
|
|
78,641
|
|
|
|
End of Year
|
|
$ 125
|
|
1,637
|
|
31,960
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year for:
|
|
|
|
|
|
|
|
|
|
|
Interest (Net of Amounts Capitalized of $51, $115
and $184, Respectively)
|
|
$ 33,159
|
|
34,440
|
|
35,294
|
|
|
|
|
Partnership Income Taxes
|
|
$
|
|
2,574
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
2009 ANNUAL REPORT
F-21
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
Great Lakes Gas Transmission Limited Partnership (Partnership) is a Delaware limited partnership that owns and operates an interstate natural gas pipeline system. The
Partnership transports natural gas for delivery to wholesale customers in the midwestern and northeastern United States and eastern Canada. The partners, their parent companies, and partnership
ownership percentages at December 31 are as follows:
|
|
Ownership %
|
|
Partner (Parent Company)
|
|
2009
|
|
2008
|
|
|
General Partners:
|
|
|
|
|
|
|
TransCanada GL, Inc. (TransCanada PipeLines Limited)
|
|
46.45
|
|
46.45
|
|
|
TC GL Intermediate Limited Partnership (TC PipeLines, LP)
|
|
46.45
|
|
46.45
|
|
Limited Partner:
|
|
|
|
|
|
|
Great Lakes Gas Transmission Company (TransCanada PipeLines Limited)
|
|
7.10
|
|
7.10
|
|
On
February 22, 2007 (acquisition date), TC PipeLines, LP and TransCanada PipeLines Limited (TransCanada) acquired El Paso Corporation's
(El Paso) 46.45% ownership interest in the Partnership and 50% interest in Great Lakes Gas Transmission Company (Company), respectively.
The
day-to-day operation of the Partnership activities is the responsibility of the Company pursuant to the Partnership's Operating Agreement with
the Company. The Partnership is charged for the salaries, benefits, and expenses of the Company and affiliates for services attributable to its operations.
TransCanada
has announced a reorganization of its U.S. Operations, which will include the closing of certain offices, relocation of employees and equipment, and some
severance costs. It is expected that the reorganization will be complete in 2010, with some activities completed in 2009. Costs borne by the Partnership in 2009 were approximately $1 million
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Partnership and GLGT Aviation Company, a wholly owned subsidiary until December 2009. GLGT Aviation
Company owned a fractional interest in a transport aircraft used principally for pipeline operations. In October 2009, GLGT Aviation Company sold its interest in the aircraft. In
December 2009, GLGT Aviation Company was liquidated. Intercompany amounts have been eliminated.
Cash and Cash Equivalents
The Partnership's short term investments with original maturities of three months or less are considered to be cash equivalents and are recorded at cost, which approximates
market value.
Demand Loan Receivable
Effective August 1, 2008, the Partnership entered into a Cash Management Agreement with its affiliate, TransCanada PipeLine USA Ltd. Monies advanced under the
agreement are considered to be a loan, accruing interest and repayable on demand.
Under
the Partnership's cash management system, the bank notifies the Partnership daily of checks presented for payment against its disbursement account. The Partnership
transfers funds from short-term investments or offsets its Demand Loan Receivable from Affiliates to cover the checks presented for payment. This system results in a book cash overdraft in
the disbursement account as a result of checks outstanding. The book overdraft, which was reclassified to accounts payable, was $3.6 million and $1.6 million at December 31, 2009
and 2008, respectively. The book overdraft is classified as operating cash flows on the Consolidated Statement of Cash Flows.
F-22
TC PIPELINES,
LP
Fair Value
The fair value of long term debt is discussed in footnote 4. All other financial instruments approximate fair value and are classified as Level I in the fair value
hierarchy due to the short maturity of these instruments.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Although management believes these estimates are reasonable, actual results could differ from those estimates.
Regulation
The Partnership is subject to the rules, regulations and accounting procedures of the Federal Energy Regulatory Commission (FERC). The Partnership's accounting policies conform
to Financial Accounting Standards Board Codification (ASC) 980,
Regulated Operations
. Accordingly, certain asset or liabilities that result from regulated
ratemaking process may be recorded that would not be recorded under GAAP for non-regulated entities. The Partnership regularly evaluates the continued applicability of ASC 980, considering
such factors as regulatory changes, the impact of competition, and the ability to recover regulatory assets. As of December 31, 2009 and 2008, there are no significant regulatory assets or
liabilities reflected in these consolidated financial statements.
On
November 19, 2009, the FERC instituted proceedings under Section 5 of the Natural Gas Act to review the tariff rates of the Partnership. As directed under
the FERC order, the Partnership filed a cost and revenue study on February 4, 2010. The proceeding is set on a Track II schedule, which among other things, calls for the presiding
Administrative Law Judge to issue an Initial Decision by mid-November 2010.
Revenue and Accounts Receivable
The Partnership generates transportation revenues based on transportation service contracts under a tariff regulated by the FERC. The tariff specifies maximum transportation
rates and the contracts' general terms and conditions of service. The majority of the service contracts are for firm service in which the customers pay a reservation fee for capacity on the pipeline
system regardless of whether they actually utilize their reserved capacity. The Partnership recognizes reservation revenues on firm contracted capacity ratably over the contract period regardless of
the amount of natural gas that is transported. In addition to the reservation fee, a utilization fee is charged and the related revenue is recognized based on the volume of natural gas transported.
Accounts
receivable are reported at the invoiced amount. The Partnership establishes an allowance for losses on accounts receivable if it is determined that collection of
all or a portion of the outstanding balance is not reasonably assured. The Partnership
also considers historical industry data and customer credit trends. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery
is considered remote.
Natural Gas Imbalances
Natural gas imbalances occur when the actual amount of natural gas delivered or received differs from the contractual amount of natural gas scheduled to be delivered or
received. The Partnership values these imbalances due to or from customers and interconnecting pipelines at an index price. Imbalances are made up in kind, in accordance with the terms of
the tariff.
Imbalances
due from others are reported on the consolidated balance sheet as either accounts receivable or receivable from affiliates. Imbalances owed to others are reported
on the consolidated balance sheet as either accounts payable or payable to affiliates. Imbalances are expected to settle within a year.
Materials and Supplies
Materials and supplies are valued at the lower of cost or market value with cost determined using the average cost method. The Partnership has an allowance for inventory
obsolescence based on the aging of the inventory and potential realizability.
2009 ANNUAL REPORT
F-23
Gas Utility Plant and Depreciation
Gas utility plant is stated at cost and includes certain administrative and general expenses, plus an allowance for funds used during construction. The Partnership capitalizes
major units of property replacements or improvements and expenses minor items. Planned major maintenance is accrued when an obligating event occurs, and is recorded using the direct expensing method
or the deferral method. The cost of plant retired is charged to accumulated depreciation net of salvage and cost of removal. Depreciation of gas utility plant is computed using the composite (group)
method. Under this method, assets with similar lives and characteristics are grouped and depreciated as one asset. The Partnership's principal operating assets, which comprise approximately 98% of
total property, plant and equipment, are depreciated at an annual rate of 2.75%. The remaining assets are depreciated at annual rates ranging from 4% to 20%.
The
allowance for funds used during construction represents the debt and equity costs of capital funds applicable to utility plant under construction, calculated in
accordance with a uniform formula prescribed by the FERC. The rates used were 10.36%, 10.49%, and 10.25% for years 2009, 2008, and 2007, respectively.
A
long-lived asset is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may exceed its fair value. Fair values
are based on the sum of undiscounted future cash flows expected to result from the use and eventual disposition of the assets.
Asset Retirement Obligations
The fair value of a liability for an asset retirement obligation is recorded during the period in which the liability is incurred, if a reasonable estimate of fair value can be
made. The Partnership has determined that asset retirement obligations exist for certain of our transmission assets; however, the fair value of the obligations cannot be determined because the end of
the transmission system life is not determinable with the degree of accuracy necessary to establish a liability for the obligations.
Income Taxes
The Michigan Business Tax (MBT), effective January 1, 2008, is an income tax levied at the partnership level. Income taxes, other than the MBT, are the responsibility of
our partners and are not reflected in these consolidated financial statements. The Partnership is required, for FERC regulatory purposes, to account for income taxes as if it were
a corporation.
3. AFFILIATED COMPANY TRANSACTIONS
Affiliated company amounts included in the Partnership's consolidated financial statements, not otherwise disclosed, are as follows:
(In Thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
Transportation Revenues:
|
|
|
|
|
|
|
|
|
TransCanada and affiliates
|
|
$142,364
|
|
144,137
|
|
135,629
|
|
|
El Paso and affiliates
|
|
|
|
|
|
1,537
|
|
Interest Income
|
|
449
|
|
453
|
|
|
|
Affiliated
transportation revenues are primarily provided under fixed priced contracts with remaining terms ranging from 1 to 8 years.
The
Partnership has 831 MDth/d of long haul capacity under contract expiring on October 31, 2010, with its largest shipper, TransCanada. On November 3,
2009, the Partnership and TransCanada renewed contracts for one year for 470 MDth/d of capacity, some at a slightly discounted rate, and agreed to provide other transportation services. The
remaining 361 MDth/d of capacity will expire October 31, 2010.
The
Partnership reimbursed the Company and affiliates for salaries, benefits, and other administrative and operating incurred expenses. Benefits include pension, defined
contribution plans, and other post-retirement benefits. The Partnership is charged for benefit plan expenses and other benefits by a TransCanada affiliate through a benefit rate on labor
costs. Operating expenses charged by the Company and affiliates in 2009, 2008, and 2007 were $33,765,000, $34,261,000, and $26,836,000, respectively.
F-24
TC PIPELINES,
LP
4. DEBT
(In Thousands)
|
|
2009
|
|
2008
|
|
|
Senior Notes, unsecured, interest due semiannually, principal due as follows:
|
|
|
|
|
|
8.74% series, due 2010 to 2011
|
|
$20,000
|
|
30,000
|
|
9.09% series, due 2012 to 2021
|
|
100,000
|
|
100,000
|
|
6.73% series, due 2010 to 2018
|
|
81,000
|
|
90,000
|
|
6.95% series, due 2019 to 2028
|
|
110,000
|
|
110,000
|
|
8.08% series, due 2021 to 2030
|
|
100,000
|
|
100,000
|
|
|
|
|
411,000
|
|
430,000
|
|
Less current maturities
|
|
19,000
|
|
19,000
|
|
|
Total long term debt less current maturities
|
|
$392,000
|
|
411,000
|
|
|
The
aggregate estimated fair value of long term debt was $491,692,000 and $413,148,000 for 2009 and 2008, respectively. The fair value is determined using discounted cash
flows based on the Partnership's estimated current interest rates for similar debt which is classified as Level II in the fair value hierarchy where the fair value is determined by using
valuation techniques that refer to observable market data or estimated market prices.
The
aggregate annual required repayments of Senior Notes is $19,000,000 for each year 2010 through 2014.
Under
the most restrictive covenants in the Senior Note Agreements, approximately $221,000,000 of partners' capital is restricted as to distributions as of
December 31, 2009.
5. CASH DISTRIBUTION POLICY
The Partnership's Management Committee determines the amount and timing of the distributions to partners. The Partnership's cash distribution policy generally results in
distribution equal to 100 percent of distributable cash flow based upon earnings before interest, taxes, and depreciation less debt repayments and capital expenditures. The resulting
distributions are subject to Management Committee approval and can be modified to ensure minimum cash balances, equity balances and ratios are maintained.
6. MICHIGAN BUSINESS TAX
The Partnership files the MBT return on a unitary basis with certain TransCanada affiliates. A tax payment agreement between the Partnership and TransCanada affiliates provides
that the Partnership's MBT liability is determined as if a separate return was filed. Under the agreement, the Partnership remits its current MBT liability to an affiliate, accordingly any liability
is included in payable to affiliates.
MBT
for the years ended December 31, 2009 and 2008 consists of:
(In Thousands)
|
|
2009
|
|
2008
|
|
|
Current
|
|
$4,007
|
|
3,576
|
|
Deferred
|
|
1,410
|
|
1,927
|
|
|
|
|
$5,417
|
|
5,503
|
|
|
The
deferred tax liabilities as of December 31, 2009 and 2008 are as follows:
(In Thousands)
|
|
2009
|
|
2008
|
|
|
|
Deferred tax liabilities non-regulated utility plant
|
|
$(2,753
|
)
|
(1,466
|
)
|
|
Deferred tax liabilities regulated utility plant
|
|
(527
|
)
|
(411
|
)
|
|
Deferred tax liabilities other
|
|
(57
|
)
|
(50
|
)
|
|
|
Net deferred tax liability
|
|
$(3,337
|
)
|
(1,927
|
)
|
|
|
As
of December 31, 2009 and 2008, no valuation allowance is required.
2009 ANNUAL REPORT
F-25
7. ENVIRONMENTAL
By letter dated December 28, 2009, the Environmental Protection Agency (EPA) required the Partnership to provide information regarding its natural gas compressor stations
in the states of Minnesota, Wisconsin and Michigan as part of the EPA's investigation of the Partnership's compliance with the Clean Air Act. The Partnership is in the process of preparing its
response and providing the information which is due by May 29, 2010. The results of this information request are not determinable at this time.
8. ACCOUNTING PRONOUNCEMENTS
The Partnership adopted the provisions of ASC 855
Subsequent Events
in the third quarter of
2009. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be
issued. The adoption of this standard has not had a material impact on the Partnership's disclosures.
The
Partnership adopted the provisions of ASC 105
Generally Accepted Accounting
Principles
during 2009. ASC 105 has become the source of authoritative GAAP recognized by the Financial Accounting Standards Board to be applied by nongovernmental
entities. The adoption of this standard has had no impact on disclosures or amounts recorded in the Partnership's financial statements.
9. SUBSEQUENT EVENTS
Management of the Partnership has reviewed subsequent events through February 11, 2010, the date the financial statements were issued, and concluded there were no events
or transactions during this period that would require recognition or disclosure in the financial statements other than those already reflected.
F-26
TC PIPELINES,
LP
NORTHERN BORDER PIPELINE COMPANY
INDEPENDENT AUDITORS' REPORT
Management Committee
Northern Border Pipeline Company:
We
have audited the accompanying balance sheets of Northern Border Pipeline Company (the Company) as of December 31, 2009 and 2008, and the related statements
of income, comprehensive income, cash flows, and changes in partners' equity for each of the years in the three-year period ended December 31, 2009. These financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northern Border Pipeline Company as of
December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with
U.S. generally accepted accounting principles.
/s/
KPMG LLP
Houston,
Texas
February 16, 2010
2009 ANNUAL REPORT
F-27
NORTHERN BORDER PIPELINE COMPANY
BALANCE SHEETS
December 31, (In thousands)
|
|
2009
|
|
2008
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ 16,864
|
|
$ 21,655
|
|
|
|
Accounts receivable
|
|
23,843
|
|
32,781
|
|
|
|
Related party receivables
|
|
391
|
|
386
|
|
|
|
Materials and supplies, at cost
|
|
4,471
|
|
4,562
|
|
|
|
Prepaid expenses and other
|
|
1,508
|
|
1,421
|
|
|
|
|
|
Total current assets
|
|
47,077
|
|
60,805
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
In service natural gas transmission plant
|
|
2,513,825
|
|
2,491,977
|
|
|
|
Construction work in progress
|
|
813
|
|
12,366
|
|
|
|
|
Total property, plant and equipment
|
|
2,514,638
|
|
2,504,343
|
|
|
|
Less: Accumulated provision for depreciation and amortization
|
|
1,171,544
|
|
1,113,582
|
|
|
|
|
|
Property, plant and equipment, net
|
|
1,343,094
|
|
1,390,761
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Regulatory assets (Note 2)
|
|
20,091
|
|
21,678
|
|
|
|
Unamortized debt expense
|
|
2,791
|
|
2,311
|
|
|
|
Other
|
|
1,339
|
|
484
|
|
|
|
|
|
Total other assets
|
|
24,221
|
|
24,473
|
|
|
|
|
|
|
Total assets
|
|
$1,414,392
|
|
$1,476,039
|
|
|
|
LIABILITIES AND PARTNERS' EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Current maturities of long-term debt (Note 5)
|
|
$
|
|
$200,000
|
|
|
|
Accounts payable
|
|
3,409
|
|
6,096
|
|
|
|
Related party payables
|
|
3,390
|
|
3,852
|
|
|
|
Accrued taxes other than income
|
|
22,713
|
|
26,280
|
|
|
|
Accrued interest
|
|
7,058
|
|
11,060
|
|
|
|
Other
|
|
1,389
|
|
1,455
|
|
|
|
|
|
Total current liabilities
|
|
37,959
|
|
248,743
|
|
|
|
Long-term debt, net of current maturities (Note 5)
|
|
564,549
|
|
430,435
|
|
|
|
Deferred credits and other liabilities
|
|
|
|
|
|
|
|
Related party payables
|
|
753
|
|
1,507
|
|
|
|
Regulatory liabilities (Note 2)
|
|
7,189
|
|
4,741
|
|
|
|
Derivative financial instruments (Note 6)
|
|
|
|
3,633
|
|
|
|
Other
|
|
396
|
|
1,312
|
|
|
|
|
|
Total deferred credits and other liabilities
|
|
8,338
|
|
11,193
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
Partners' equity:
|
|
|
|
|
|
|
|
Partners' capital
|
|
806,600
|
|
791,376
|
|
|
|
Accumulated other comprehensive loss
|
|
(3,054
|
)
|
(5,708
|
)
|
|
|
|
|
Total partners' equity
|
|
803,546
|
|
785,668
|
|
|
|
|
|
|
Total liabilities and partners' equity
|
|
$1,414,392
|
|
$1,476,039
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-28
TC PIPELINES,
LP
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF INCOME
Years Ended December 31, (In thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Operating revenue
|
|
$249,217
|
|
$293,105
|
|
$309,376
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
48,695
|
|
51,260
|
|
54,057
|
|
|
|
Depreciation and amortization
|
|
61,870
|
|
61,081
|
|
60,733
|
|
|
|
Taxes other than income
|
|
22,103
|
|
26,765
|
|
29,379
|
|
|
|
|
|
Operating expenses
|
|
132,668
|
|
139,106
|
|
144,169
|
|
|
|
Operating income
|
|
116,549
|
|
153,999
|
|
165,207
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
36,750
|
|
40,974
|
|
43,082
|
|
|
|
Interest expense capitalized
|
|
(137
|
)
|
(182
|
)
|
(11
|
)
|
|
|
|
|
Interest expense, net
|
|
36,613
|
|
40,792
|
|
43,071
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction
|
|
235
|
|
323
|
|
30
|
|
|
|
Gain on sale of assets (Note 10)
|
|
|
|
16,166
|
|
|
|
|
|
Other income
|
|
2,309
|
|
2,932
|
|
2,427
|
|
|
|
Other expense
|
|
(348
|
)
|
(426
|
)
|
(488
|
)
|
|
|
|
|
Other income, net
|
|
2,196
|
|
18,995
|
|
1,969
|
|
|
|
Net income to partners
|
|
$ 82,132
|
|
$132,202
|
|
$124,105
|
|
|
|
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, (In thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Net income to partners
|
|
$82,132
|
|
$132,202
|
|
$124,105
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Changes associated with hedging transactions
|
|
2,654
|
|
(3,267
|
)
|
(3,419
|
)
|
|
|
Total comprehensive income
|
|
$84,786
|
|
$128,935
|
|
$120,686
|
|
|
|
The accompanying notes are an integral part of these financial statements.
2009 ANNUAL REPORT
F-29
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, (In thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
CASH FLOW FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income to partners
|
|
$ 82,132
|
|
$ 132,202
|
|
$ 124,105
|
|
|
|
|
Adjustments to reconcile net income to partners to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
62,218
|
|
61,464
|
|
61,115
|
|
|
|
|
|
Allowance for equity funds used during construction
|
|
(235
|
)
|
(323
|
)
|
(30
|
)
|
|
|
|
|
Changes in components of working capital
|
|
(1,847
|
)
|
(4,062
|
)
|
1,457
|
|
|
|
|
|
Gain on sale of assets
|
|
|
|
(16,166
|
)
|
|
|
|
|
|
|
Other
|
|
(2,262
|
)
|
(3,705
|
)
|
(2,146
|
)
|
|
|
|
|
|
|
Total adjustments
|
|
57,874
|
|
37,208
|
|
60,396
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
140,006
|
|
169,410
|
|
184,501
|
|
|
|
CASH FLOW FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment, net
|
|
(11,090
|
)
|
(20,538
|
)
|
(10,636
|
)
|
|
|
Investments in other assets
|
|
|
|
(3,834
|
)
|
|
|
|
|
Proceeds from sale of assets
|
|
|
|
20,000
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(11,090
|
)
|
(4,372
|
)
|
(10,636
|
)
|
|
|
CASH FLOW FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Equity contributions from partners
|
|
84,550
|
|
|
|
15,000
|
|
|
|
Distributions to partners
|
|
(151,458
|
)
|
(181,320
|
)
|
(172,668
|
)
|
|
|
Issuance of debt
|
|
214,000
|
|
145,000
|
|
269,000
|
|
|
|
Retirement of debt
|
|
(280,000
|
)
|
(130,000
|
)
|
(273,000
|
)
|
|
|
Debt financing costs
|
|
(799
|
)
|
|
|
(257
|
)
|
|
|
|
|
Net cash used in financing activities
|
|
(133,707
|
)
|
(166,320
|
)
|
(161,925
|
)
|
|
|
Net change in cash and cash equivalents
|
|
(4,791
|
)
|
(1,282
|
)
|
11,940
|
|
|
Cash and cash equivalents at beginning of year
|
|
21,655
|
|
22,937
|
|
10,997
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ 16,864
|
|
$ 21,655
|
|
$ 22,937
|
|
|
|
Supplemental disclosures for cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amount capitalized
|
|
$ 40,987
|
|
$ 41,868
|
|
$ 44,481
|
|
|
|
Changes in components of working capital:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$ 8,938
|
|
$ (1,474
|
)
|
$ (1,234
|
)
|
|
|
Related party receivables
|
|
(5
|
)
|
2,368
|
|
(2,399
|
)
|
|
|
Materials and supplies
|
|
91
|
|
(357
|
)
|
(235
|
)
|
|
|
Prepaid expenses and other
|
|
(87
|
)
|
85
|
|
(388
|
)
|
|
|
Accounts payable
|
|
(2,687
|
)
|
(1,084
|
)
|
2,602
|
|
|
|
Related party payables
|
|
(462
|
)
|
(2,000
|
)
|
3,313
|
|
|
|
Accrued taxes other than income
|
|
(3,567
|
)
|
(1,345
|
)
|
54
|
|
|
|
Accrued interest
|
|
(4,002
|
)
|
(223
|
)
|
(232
|
)
|
|
|
Other current liabilities
|
|
(66
|
)
|
(32
|
)
|
(24
|
)
|
|
|
|
|
Total
|
|
$ (1,847
|
)
|
$ (4,062
|
)
|
$ 1,457
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-30
TC PIPELINES,
LP
NORTHERN BORDER PIPELINE COMPANY
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
(In thousands)
|
TC PipeLines
Intermediate
Limited
Partnership
|
|
ONEOK
Partners
Intermediate
Limited
Partnership
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total Partners'
Equity
|
|
|
|
Partners' equity at December 31, 2006
|
$437,029
|
|
$437,028
|
|
$ 978
|
|
$ 875,035
|
|
|
|
Net income to partners
|
62,052
|
|
62,053
|
|
|
|
124,105
|
|
|
|
Changes associated with hedging transactions
|
|
|
|
|
(3,419
|
)
|
(3,419
|
)
|
|
|
Equity contributions received
|
7,500
|
|
7,500
|
|
|
|
15,000
|
|
|
|
Distributions paid
|
(86,334
|
)
|
(86,334
|
)
|
|
|
(172,668
|
)
|
|
|
Partners' equity at December 31, 2007
|
420,247
|
|
420,247
|
|
(2,441
|
)
|
838,053
|
|
|
|
Net income to partners
|
66,101
|
|
66,101
|
|
|
|
132,202
|
|
|
|
Changes associated with hedging transactions
|
|
|
|
|
(3,267
|
)
|
(3,267
|
)
|
|
|
Distributions paid
|
(90,660
|
)
|
(90,660
|
)
|
|
|
(181,320
|
)
|
|
|
Partners' equity at December 31, 2008
|
395,688
|
|
395,688
|
|
(5,708
|
)
|
785,668
|
|
|
|
Net income to partners
|
41,066
|
|
41,066
|
|
|
|
82,132
|
|
|
|
Changes associated with hedging transactions
|
|
|
|
|
2,654
|
|
2,654
|
|
|
|
Equity contributions received
|
42,275
|
|
42,275
|
|
|
|
84,550
|
|
|
|
Distributions paid
|
(75,729
|
)
|
(75,729
|
)
|
|
|
(151,458
|
)
|
|
|
Partners' equity at December 31, 2009
|
$403,300
|
|
$403,300
|
|
$(3,054
|
)
|
$ 803,546
|
|
|
|
The accompanying notes are an integral part of these financial statements.
2009 ANNUAL REPORT
F-31
NORTHERN BORDER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND MANAGEMENT
In this report, references to "we", "us" or "our" collectively refer to Northern Border Pipeline Company.
We
are a Texas general partnership formed in 1978. We own a 1,249-mile natural gas transmission pipeline system extending from the United States-Canadian
border near Port of Morgan, Montana, to a terminus near North Hayden, Indiana.
The
ownership and voting percentages of our partners at December 31, 2009 and 2008 are as follows:
Partner
|
|
Ownership
|
|
|
ONEOK Partners Intermediate Limited Partnership (ONEOK Partners)
|
|
50%
|
|
TC PipeLines Intermediate Limited Partnership (TC PipeLines)
|
|
50%
|
|
We
are managed by a Management Committee that consists of four members. Each partner designates two members, and TC PipeLines designates one of its members as
chairman. The Management Committee designates the members of the Audit Committee, which consists of three members. One member is selected by the members of the Management Committee designated by the
partner whose affiliate is the operator and two members are selected by the members of the Management Committee designated by the other partner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make assumptions and use estimates that
affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities during the reporting period. Actual results could differ from
these estimates if the underlying assumptions are incorrect.
Government Regulation
We are subject to regulation by the Federal Energy Regulatory Commission (FERC). Our accounting policies conform to Financial Accounting Standards Board Accounting Standards
Codification (ASC) 980,
Regulated Operations
. Accordingly, certain assets and liabilities that result from the regulated ratemaking process are reflected
on the balance sheets as regulatory assets and regulatory liabilities.
The
following table presents a summary of regulatory assets, net of amortization, at December 31, 2009 and 2008.
|
|
December 31,
|
|
|
|
|
|
Remaining
recovery/
settlement
period
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
(In thousands)
|
|
(Years)
|
|
Fort Peck lease option
|
|
$
|
13,273
|
|
$
|
12,052
|
|
41
|
|
Pipeline extension project
|
|
|
5,536
|
|
|
5,998
|
|
12
|
|
Unamortized loss on reacquired debt
|
|
|
44
|
|
|
176
|
|
Less than 1
|
|
Deferred rate case expenditures
|
|
|
1,174
|
|
|
1,566
|
|
3
|
|
Compressor usage surcharge tracker
|
|
|
64
|
|
|
1,886
|
|
1 to 2
|
|
|
|
Total regulatory assets
|
|
$
|
20,091
|
|
$
|
21,678
|
|
|
|
|
At
December 31, 2009 and 2008, respectively, we have reflected a regulatory liability of $7.2 million and $4.7 million on the balance sheets, related to
negative salvage accrued for estimated net costs of removal of transmission plant. See the Property, Plant and Equipment and Related Depreciation and Amortization policy in this note for further
discussion of negative salvage.
F-32
TC PIPELINES,
LP
We
assess the recoverability of costs recognized as regulatory assets and liabilities and the ability to continue to account for our activities based on the criteria set
forth in ASC 980, which includes such factors as regulatory changes and the impact of competition. Our review of these criteria currently supports the continuing application of ASC 980. If we cease to
meet the criteria of ASC 980, a write-off of related regulatory assets and liabilities could be required.
Revenue Recognition
We transport gas for shippers under a tariff regulated by the FERC. The tariff specifies the maximum rates we may charge shippers and the general terms and conditions of
transportation service on our pipeline system. We recognize revenue according to each transportation contract for transportation service that is provided to our customers. Customers with firm service
transportation agreements pay a reservation fee for capacity on the pipeline system known as a reservation charge regardless of whether they actually utilize their reserved capacity. Firm service
transportation customers also pay a fee known as a commodity charge that is based on the mileage and the volume of natural gas they transport. Under the capacity release provisions of our FERC tariff,
shippers under firm contracts are allowed to release all or part of their capacity either permanently for the full term of the contract or temporarily. 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. Customers with interruptible service transportation
agreements may utilize available capacity on our pipeline after firm service transportation requests are
satisfied. Interruptible service customers are assessed commodity charges based on mileage and the volume of natural gas they transport. An allowance for doubtful accounts is recorded in situations
where collectibility is not reasonably assured. At December 31, 2008, we have reflected an allowance for doubtful accounts of approximately $0.6 million on the balance sheets. We do not
own the gas that we transport, and therefore we do not assume the related natural gas commodity price risk.
Income Taxes
Income taxes are the responsibility of our partners and are not reflected in these financial statements.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Materials and Supplies
Materials and supplies are valued at cost with cost determined using the average cost method.
Property, Plant and Equipment and Related Depreciation and Amortization
Property, plant and equipment is stated at original cost. During periods of construction, we are permitted to capitalize an allowance for funds used during construction, which
represents the estimated costs of funds used for construction purposes. The original cost of property retired is charged to accumulated depreciation and amortization. No retirement gain or loss is
included in income except in the case of retirements or sales of entire regulated operating units or systems.
Maintenance
and repairs are charged to operations in the period incurred. The provision for depreciation and amortization of the transmission line is an integral part of our
FERC tariff. As a result of the settlement of our 2005 rate case, the effective depreciation rate applied to our transmission plant in 2009, 2008 and 2007 is 2.40 percent. The transmission
plant depreciation rate of 2.40 percent is comprised of two components: one based on economic service life or capital recovery and one based on cost of removal, net of salvage value received,
or negative salvage. We accrue the estimated net costs of removal of transmission plant as a regulatory liability, which does not represent an existing legal obligation. The net cost of removal
incurred on retirements of transmission plant is recorded as a reduction to the regulatory liability. Composite rates are applied to all other functional groups of property having similar economic
characteristics.
Asset Retirement Obligation
The fair value of a liability for an asset retirement obligation is recorded during the period in which the liability is incurred, if a reasonable estimate of fair value can be
made. We have determined that asset retirement obligations exist for certain of our transmission assets; however, the fair value of the obligations cannot be determined because the end of the
transmission system life is not determinable with the degree of accuracy necessary to currently establish a liability for the obligations.
2009 ANNUAL REPORT
F-33
Natural Gas Imbalances
Natural gas imbalances occur when the actual amount of natural gas delivered or received by a pipeline system or storage facility differs from the contractual amount of natural
gas scheduled to be delivered or received. We value these imbalances due to or from shippers and interconnecting parties at an appropriate index price. Imbalances are made up in-kind,
subject to the terms of our tariff.
Imbalances
due from others are reported on the balance sheets as accounts receivable. Imbalances owed to others are reported on the balance sheets as accounts payable. All
imbalances are classified as current.
Risk Management
We utilize financial instruments to reduce our market risk exposure to interest rate fluctuations and achieve a more predictable cash flow. We follow established policies and
procedures to assess risk and approve, monitor and report our financial instrument activities. We do not use these instruments for trading purposes. All derivative instruments (including certain
derivative instruments embedded in other contracts) are recorded on the balance sheets as either an asset or liability measured at their fair value (see Note 7). We record changes in the
derivative's fair value currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires us to formally document, designate and assess the effectiveness of transactions that receive hedge accounting (see Note 6).
Unamortized Debt Premium, Discount and Expense
We amortize premiums, discounts and expenses incurred in connection with the issuance of debt consistent with the terms of the respective debt instrument.
Operating Leases
We have non-cancelable operating leases for office space and rights-of-way. We record rent expense over the lease term as it becomes payable.
Impairment of Long-Lived Assets
We assess our long-lived assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In step one of
the impairment test, an impairment is indicated if the carrying amount of a long-lived asset exceeds the sum of the undiscounted future cash flows expected to result from the use and
eventual disposition of the assets. An impairment loss would be recorded equal to the difference between the carrying value and the fair value of the long-lived asset. This type of
analysis requires us to make assumptions and estimates regarding industry economic factors and the profitability of future business strategies. We determined that there were no asset impairments in
2009 or 2008.
Contingencies
Our accounting for contingencies covers a variety of business activities including contingencies for legal exposures and environmental exposures. We accrue these contingencies
when our assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered and an amount can be reasonably estimated. We base our estimates on currently
available facts and our estimates of the ultimate outcome or resolution. Actual results may differ from our estimates resulting in an impact, positive or negative, on earnings.
Recent Accounting Pronouncements
We adopted the provision of ASC 820-10-65,
Fair Value Measurements and Disclosures
for all
non-financial assets and liabilities measured on a non-recurring basis subsequent to initial recognition, effective January 1, 2009. The adoption of ASC
820-10-65 had no material impact on our results of operations or financial position.
ASC
105,
Generally Accepted Accounting Principles
("GAAP") has become the source of authoritative GAAP recognized by the
Financial Accounting Standards Board to be applied by nongovernmental entities. This standard is effective for our interim reporting period ending after September 15, 2009. The adoption of this
standard has had no impact on disclosures or amounts recorded in our financial statements.
F-34
TC PIPELINES,
LP
ASC
855,
Subsequent Events
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. This standard has been effective for our interim reporting since June 30, 2009 and has not had a
material impact on disclosures or amounts recorded in our financial statements.
3. RATES AND REGULATORY ISSUES
The FERC regulates the rates and charges for transportation of natural gas in interstate commerce. Natural gas companies may not charge rates that have been determined to be
unjust and unreasonable by the FERC. Generally, rates for interstate pipelines are based on the cost of service, including recovery of and a return on the pipeline's actual prudent historical cost
investment. The rates and terms and conditions for service are found in each pipeline's FERC-approved tariff. Under its tariff, an interstate pipeline is allowed to charge for its services
on the basis of stated transportation rates. Transportation rates are established periodically in FERC proceedings known as rate cases. The tariff also allows the interstate pipeline to provide
services under negotiated and discounted rates.
Effective
January 1, 2007, we implemented new rates as a result of the settlement of our 2005 rate case. For the full transportation route from Port of Morgan,
Montana to the Chicago area, our transportation rate is approximately $0.44 per Dekatherm (Dth), which is comprised of a reservation rate, commodity rate and a compressor usage surcharge. The
settlement also provided for seasonal rates for short-term transportation services. Seasonal maximum rates vary on a monthly basis from approximately $0.54 per Dth to approximately $0.29
per Dth for the full transportation route from Port of Morgan, Montana to the Chicago area. The settlement included a three-year moratorium on filing rate cases and participants
challenging these rates, and requires that we file a rate case within six years from the date the new rates went into effect.
The
compressor usage surcharge rate is designed to recover the actual costs of electricity at our electric compressors and any compressor fuel use taxes imposed on our
pipeline system. Any difference between the compressor usage surcharge collected and the actual costs for electricity and compressor fuel use taxes is recorded as either an increase to expense for an
over recovery of actual costs or as a decrease to expense for an under recovery of actual costs, and is included in operations and maintenance expense on the income statement and as either a
regulatory liability or a regulatory asset, respectively, on the balance sheets. The compressor usage surcharge rate is adjusted annually. The regulatory liability or regulatory asset will reflect the
net over or under recovery of actual compressor usage related costs at the date of the balance sheets. As of December 31, 2009 and 2008, we had recorded $0.1 million and
$1.9 million, respectively, as a regulatory asset on the accompanying balance sheets for the net under recovery of compressor usage related costs.
In
February 2008, we filed an application for the Des Plaines Project with the FERC to construct own and operate interconnect facilities including a
1,600 horsepower compressor facility near Joliet, Illinois. The Des Plaines Project cost approximately $17 million and was financed with a combination of debt and equity. A certificate
order issued by the FERC authorizing the construction of the Des Plaines Project was received in July 2008 and construction commenced in September. The facilities were placed in service in
March 2009.
4. MAJOR CUSTOMERS
For the year ended December 31, 2009, shippers providing significant operating revenues were BP Canada Energy Marketing Corp. (BP Canada) and Tenaska Marketing
Ventures with revenues of $41.9 million and $26.7 million, respectively. For the year ended December 31, 2008, shippers providing significant operating revenues were BP Canada and
Cargill Inc. (Cargill) with revenues of $38.8 million and $32.4 million, respectively. For the year ended December 31, 2007, shippers providing significant operating
revenues were BP Canada, Nexen Marketing U.S.A. Inc. and Cargill with revenues of $49.7 million, $44.1 million, and $42.0 million, respectively.
5. CREDIT FACILITIES AND LONG-TERM DEBT
Detailed information on long-term debt is as follows:
December 31, (In thousands)
|
|
2009
|
|
2008
|
|
|
|
2007 Credit Agreement average interest rate of 0.52% and 3.36%
at December 31, 2009 and 2008, respectively, due 2012
|
|
$215,000
|
|
$181,000
|
|
|
1999 Senior Notes 7.75%, due 2009
|
|
|
|
200,000
|
|
|
2001 Senior Notes 7.50%, due 2021
|
|
250,000
|
|
250,000
|
|
|
2009 Senior Notes 6.24%, due 2016
|
|
100,000
|
|
|
|
|
Unamortized debt discount
|
|
(451
|
)
|
(565
|
)
|
|
|
|
Subtotal
|
|
564,549
|
|
630,435
|
|
|
Current maturities
|
|
|
|
(200,000
|
)
|
|
|
|
Long-term debt
|
|
$564,549
|
|
$430,435
|
|
|
|
2009 ANNUAL REPORT
F-35
On
August 26, 2009, we issued $100 million of 6.24 percent Senior Notes due August 26, 2016. The proceeds of the 6.24 percent Senior Notes
along with equity contributions, borrowings under the revolving credit agreement and cash generated by operating activity was used to repay $200 million of 7.75 percent Senior Notes due
September 1, 2009.
On
April 27, 2007, we entered into a $250 million amended and restated revolving credit agreement (2007 Credit Agreement) with certain financial institutions.
The 2007 Credit Agreement was used to refinance the outstanding indebtedness under our $175 million revolving credit agreement dated as of May 16, 2005 and was used to repay all of the
$150 million of our 6.25 percent Senior Notes due May 1, 2007. The 2007 Credit Agreement can also be used to finance permitted acquisitions, pay related fees and expenses, issue
letters of credit and provide for ongoing working capital needs and for other general business purposes, including capital expenditures.
At
December 31, 2009, based on the principal commitment amount of $250 million, available capacity under the 2007 Credit Agreement was $35 million. We
may, at our option, so long as no default or event of default has occurred and is continuing, elect to increase the capacity under our 2007 Credit Agreement by an aggregate amount not to exceed
$100 million, provided that lenders are willing to commit additional amounts. At our option, the interest rate on the outstanding borrowings may be the lenders' base rate or the London
Interbank Offered Rate plus an applicable margin that is based on our long-term unsecured credit ratings. The 2007 Credit Agreement permits us to specify the portion of the borrowings to
be covered by specific interest rate options and to specify the interest rate period. We are required to pay a facility fee of 0.05 percent based on the principal amount of the commitment of
$250 million. The term of the agreement is five years, with options for two one-year extensions.
Certain
of our long-term debt arrangements contain covenants that restrict the incurrence of secured indebtedness or liens upon property by us. Under the 2007
Credit Agreement, we are required to comply with certain financial, operational and legal covenants. Among other things, we are required to maintain a leverage ratio (total debt to EBITDA
(net income plus interest expense, income taxes, depreciation and amortization and all other non-cash charges)) of no more than 4.75 to 1. Pursuant to the 2007 Credit Agreement, if
one or more specified material acquisitions are consummated, the permitted leverage ratio is increased to 5.50 to 1 for the first three full calendar quarters following the acquisition. Upon
any breach of these covenants, amounts outstanding under the 2007 Credit Agreement may become immediately due and payable. Under the 2009 Senior Notes, we may not at any time permit debt secured by
liens to exceed 20 percent of partners capital and may not permit total debt, at any time, to exceed 70 percent of total capitalization. At December 31, 2009, we were in
compliance with all of our financial covenants.
Aggregate
required repayments of long-term debt for the next five years is $215 million in 2012. Aggregate required repayments of long-term
debt thereafter total $350 million. There are no required repayment obligations for 2010, 2011, 2013 or 2014.
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We record in long-term debt amounts received or paid related to terminated interest rate swap agreements for fair value hedges and amortize these amounts to interest
expense over the remaining original term of the interest rate swap agreements. During the year ended December 31, 2007, we amortized approximately $0.7 million as a reduction to interest
expense. Amounts received or paid related to terminated interest rate swap agreements for fair value hedges were fully amortized at June 30, 2007.
In
August 2007, we entered into a zero cost interest rate collar agreement (the "Collar Agreement") to limit the variability of the interest rate on
$140 million of variable-rate borrowings during the period from October 30, 2007 through October 30, 2009 to a range between a floor of 4.35 percent and a cap
of 5.36 percent. We have designated the Collar Agreement as a cash flow hedge. No amounts were recognized in income due to hedge ineffectiveness of the Collar Agreement.
The
following table represents the unrealized (gains) losses recorded in accumulated other comprehensive income (loss) on the statements of changes in partners' equity.
|
|
Years Ended December 31,
|
|
Derivatives under Cash Flow Hedging Relationships
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
Cash flow hedges
|
|
$
|
(3,633
|
)
|
$
|
1,781
|
|
$
|
1,852
|
|
We
record in accumulated other comprehensive income (loss) amounts received or paid related to terminated interest rate swap agreements for cash flow hedges and amortize
these amounts to interest expense. The following tables represents the effective portion of realized gains, net of realized losses, that have been reclassified from accumulated other comprehensive
income (loss) and recognized as a reduction to interest expense on the statements of income.
F-36
TC PIPELINES,
LP
|
|
|
|
Years Ended December 31,
|
|
Net Gain Reclassified from AOCI into Income (Effective Portion)
|
|
Statements of Income Caption
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cash flow hedges
|
|
Interest expense
|
|
$
|
979
|
|
$
|
1,486
|
|
1,567
|
|
At
December 31, 2009, we have realized losses recorded in accumulated other comprehensive loss of approximately $3.1 million. We expect to reclassify approximately
$0.2 million from accumulated other comprehensive loss as an increase to interest expense in 2010.
The
following table represents the location and fair value of our derivative instruments in the balance sheets.
|
|
|
|
|
|
December 31,
|
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheets Caption
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cash flow hedges
|
|
Derivative financial instruments
|
|
|
|
$
|
|
|
$
|
3,633
|
|
7. FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments at December 31, 2009 and 2008. The fair value of a financial
instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
|
|
2009
|
|
2008
|
|
(In thousands)
|
|
Carrying
amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$16,864
|
|
$16,864
|
|
$21,655
|
|
$21,655
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$564,549
|
|
$612,009
|
|
$630,435
|
|
$627,855
|
|
|
Derivative financial instruments
|
|
$
|
|
$
|
|
$3,633
|
|
$3,633
|
|
The
following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash
and cash equivalents The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these
investments.
Long-term
debt The fair value of our senior notes is determined using level 2 inputs as discussed in "Fair Value
Hierarchy." We presently intend to maintain the current schedule of maturities for the 2001 and 2009 Senior Notes, which will result in no gains or losses on their respective repayments. The fair
value of the 2007 Credit Agreement approximates the carrying value since the interest rates are periodically adjusted to reflect current market conditions.
Derivative
financial instruments The fair value of derivative financial instruments is determined using level 2 inputs as
discussed in "Fair Value Hierarchy."
Fair Value Hierarchy
We adopted the provision ASC 820, Fair Value Measurements and Disclosures (ASC 820) on January 1, 2008. Under ASC 820, fair value measurements are characterized in
one of three levels based upon the input used to arrive at the measurement. The three levels of the fair value hierarchy are as follows:
-
-
Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the
measurement date.
-
-
Level 2
inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly.
2009 ANNUAL REPORT
F-37
-
-
Level 3
inputs are unobservable inputs for the asset or liability.
When
appropriate, valuations are adjusted for various factors including credit considerations. Such adjustments are generally based on available market evidence. In the
absence of such evidence, management's best estimate is used.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
We make lease payments under non-cancelable operating leases on office space and rights-of-way. Expenses incurred related to these lease
obligations for the years ended December 31, 2009, 2008 and 2007 were $1.4 million, $2.5 million, and $1.5 million, respectively. Our future minimum lease payments, which
assume we exercise the option to renew a pipeline right-of-way lease in April 2011 for a term of 25 years (discussed below), are as follows:
Year ending December 31, (In thousands)
|
|
|
|
|
2010
|
|
$2,214
|
|
2011
|
|
1,917
|
|
2012
|
|
1,918
|
|
2013
|
|
1,896
|
|
2014
|
|
1,889
|
|
Thereafter
|
|
57,295
|
|
|
|
|
$67,129
|
|
|
In
August 2004, we signed an Option Agreement and Expanded Facilities Lease (Option Agreement) with the Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation. The Option Agreement grants to us, among other things: (i) an option to renew the pipeline right-of-way lease upon agreed terms and conditions on or before
April 1, 2011, for a term of 25 years with a renewal right for an additional 25 years; (ii) a right to use additional tribal lands for expanded facilities; and
(iii) release and satisfaction of all tribal taxes against us. In consideration of this option and other benefits, we paid a lump sum amount of $7.4 million and will make additional
annual option payments of approximately $1.5 million through March 31, 2011.
Transition Related Costs
We are required to pay $3.6 million over a five year period under a transition services agreement between ONEOK Partners GP and TransCanada Northern Border,
related to the reimbursement for shared equipment and furnishings acquired by ONEOK Partners and previously used or currently in use for our operations. During 2007, a charge of $2.3 million
was recorded in operations and maintenance expense and $1.3 million was recorded as natural gas transmission plant for the shared equipment and furnishings previously used or currently in use
by us, respectively. Amounts related to this obligation are included in related party payables on the balance sheets. Future remaining payments for this obligation are as follows:
Year ending December 31, (In thousands)
|
|
|
|
|
2010
|
|
$753
|
|
2011
|
|
753
|
|
|
|
|
$1,506
|
|
|
Environmental Matters
We received a Notice of Violation (NOV) from the United States Environmental Protection Agency (EPA) dated February 2, 2009 alleging that we were in violation of
certain regulations pursuant to the Clean Air Act regarding a compressor station on our system. We dispute the NOV. At this time, we are unable to reasonably estimate the cost of any associated
corrective action or the possibility or amount of any penalty, but do not expect such amounts to be material to our financial condition.
Other
Various legal actions that have arisen in the ordinary course of business are pending. We believe that the resolution of these issues will not have a material adverse impact on
our results of operations or financial position.
F-38
TC PIPELINES,
LP
9. CASH DISTRIBUTION POLICY
Our General Partnership Agreement provides that distributions to our partners are to be made on a pro rata basis according to each partner's capital account balance. Our
Management Committee determines the amount and timing of the distributions to our partners including equity contributions and the funding of growth capital expenditures. In addition, any inability to
refinance maturing debt will be funded by equity contributions. Any changes to, or suspension of, our cash distribution policy requires the unanimous approval of the Management Committee. Our cash
distributions are equal to 100 percent of our distributable cash flow as determined from our financial statements based upon earnings before interest, taxes, depreciation and amortization less
interest expense and maintenance capital expenditures.
For
the years ended December 31, 2009, 2008 and 2007, we paid distributions to our general partners of $151.5 million, $181.3 million and
$172.7 million, respectively. In 2009, we received contributions from our general partners in the amount of $84.6 million. During the first quarter of 2009, we received
$8.6 million, which was used to fund 50 percent of the costs of construction of the Des Plaines Project. During the third quarter of 2009, we received $76 million, which was used
for the retirement of the 7.75 percent Senior Notes due September 1, 2009. In 2007, we issued an equity cash call to our general partners in the amount of $15.0 million for the
previously approved 2007 equity cash call. The proceeds were used to repay indebtedness.
10. RELATED PARTY TRANSACTIONS
The day-to-day management of our affairs is the responsibility of TransCanada Northern Border, Inc., (TransCanada Northern Border) pursuant to an
operating agreement between TransCanada Northern Border and us effective April 1, 2007. TransCanada Northern Border utilizes the services of TransCanada Corporation (TransCanada) and its
affiliates for management services related to us. We are charged for the salaries, benefits and expenses of TransCanada and its affiliates attributable to our operations. For the years ended
December 31, 2009, 2008 and 2007, our charges from TransCanada and its affiliates totaled approximately $25.5 million, $28.6 million and $22.5 million, respectively.
Prior
to April 1, 2007, the day-to-day management of our affairs was the responsibility of ONEOK Partners GP, L.L.C. (ONEOK
Partner GP) pursuant to an operating agreement between ONEOK Partners GP and us. ONEOK Partners GP also utilized ONEOK Inc. (ONEOK) and its affiliates for management
services related to us. We were charged for the salaries, benefits and expenses of ONEOK Partners GP, ONEOK and its affiliates attributable to our operations. For the year ended
December 31, 2007, our charges from ONEOK Partners GP and its current and former affiliates totaled approximately $9.3 million. Our 2007 charges include $3.6 million for
transition related costs. See Note 8 for discussion of transition related costs.
For
the years ended December 31, 2009, 2008 and 2007, we had contracted firm capacity held by one shipper affiliated with one of our general partners. Revenue from
ONEOK Energy Services Company, LP (ONEOK Energy), a subsidiary of ONEOK, for 2009, 2008 and 2007 was $4.2 million, $5.0 million and $5.1 million, respectively. At
December 31, 2009 and 2008, we had outstanding receivables from ONEOK Energy of $0.4 million and $0.4 million, respectively.
In
March 2008, we formed a wholly-owned subsidiary, Bison Pipeline LLC (Bison) to develop the Bison Project. The Bison Project is a proposed pipeline system
that would extend from natural gas gathering facilities located in the Powder River Basin in Wyoming to a point of interconnection with our pipeline system in Morton County, North Dakota.
In
August 2008, we sold Bison to TransCanada Pipeline USA Ltd., a wholly-owned subsidiary of TransCanada, for $20.0 million. In connection with this
transaction, we recorded a gain on sale of $16.2 million. Through the effective date of the sale, Bison received services from TransCanada and its affiliates totaling approximately
$2.0 million in 2008.
In
June 2008, in connection with the Des Plaines Project, we entered into an interconnect agreement with ANR Pipeline Company (ANR), a wholly-owned subsidiary of
TransCanada. The interconnect agreement provides that we will reimburse ANR for the cost of certain of the interconnect facilities to be owned by ANR. In 2008, we paid ANR $0.5 million.
11. SUBSEQUENT EVENTS
We make distributions to our general partners approximately one month following the end of the quarter. A cash distribution of approximately $32.8 million was declared
and paid on February 1, 2010 for the fourth quarter of 2009.
We
have evaluated subsequent events through February 16, 2010, which represents the date the financial statements were issued and concluded there were no events or
transactions during this period that would require recognition or disclosure in the financial statements other than those already reflected.
2009 ANNUAL REPORT
F-39
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